Domestic Investment And Foreign Direct Investment In Nigeria

Project and Seminar Material for Economics

Domestic Investment And Foreign Direct Investment In Nigeria


In the heat of the scramble of externally injected fund- Foreign Direct Investment- especially among developing economies, a mound body of literature has sprung up to investigate and unravel the theoretical plausibility of the rationale behind FDI; the traditional, or contemporary, determinants of FDI; and, of recent, the causative pattern of FDI and some core macro-variable. This paper took an interesting turn to investigate the impact of domestic investment on FDI inflows in Nigeria. Adopting a decomposed, single-linear econometric model estimated by the OLS methodology within four decade {1970-2009}, and after subjecting the data set through series of preliminary tests, the findings were robust: private and public domestic investments as well as human capital and market size are negatively related to FDI inflows, while trade openness and natural resource are positively linked to FDI. Thus, being proponents advocating for more FDI, the policy implications engendered by these findings, in a peculiar manner of writing, is summarized in the triple-recommendation letters FDI.

Keywords: FDI, Private Domestic Investment, Public Domestic Investment, Cost-Reducing and Heighten Competition hypothesis, Nigeria.

Table of Content

Chapter One:


  • 1.1 Background of the Study
  • 1.2 Statement of the Problem
  • 1.3 Objective of the Study
  • 1.4 Research Questions
  • 1.5 Research Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope of the Study
  • 1.8 Limitation of the Study
  • 1.9 Definition of Terms
  • 1.10 Organization of the Study

Chapter Two:

Review of Literature

  • 2.1 Conceptual Framework
  • 2.2 Theoretical Framework
  • 2.3 Empirical Review

Chapter Three:

Research Methodology

  • 3.1 Introduction
  • 3.2 Research Design
  • 3.3 The Empirical Modelling
  • 3.4 Econometric Methodology
  • 3.5 Scope and Data Source

Chapter Four:

Results and Discussion

  • 4.1 Data Analysis and Presentation of Result

Chapter Five:

Summary, Conclusion and Recommendation

  • 5.1 Summary
  • 5.2 Conclusion
  • 5.3 Recommendation
  • References

Chapter One


1.1 Background of the Study

Since the publication of Schumpeter (1911) on the role of capital in fostering real and sustainable development, the literature has been seismically proliferated with extensive empirical studies carried out, mostly in developing economies, to trace the capital-growth nexus, with much accentuation paid to foreign capital. Partly, these studies have been motivated in order to explain empirically the quest among developing nations in continuously attracting foreign capital into their economies, as this form of capital has been deduced as an engine and a vital catalyst of economic growth and development. This economic preference for foreign capital is based on the underlying assumption that foreign capital helps to augment domestic investment capital-gap, improves productivity and enhances competition, as well as managerial and technology spillovers in the host country.

The world economy has experienced soaring foreign direct investment (hereafter FDI) flows since the early 1980s. In spite its vicissitudes and asymmetrical distribution, FDI has grown faster than either world trade or world output. During 1980–98, global FDI outflows increased at an average rate of about 13 percent a year, compared with average rates of 7 percent both for world exports of goods and nonfactor services and for world GDP at current prices (Padma and Karl, 1999).

This increase in FDI, according to economic historians, is attributed to structural liberalization of domestic economy and financial markets, as well as the change of attitude by most national governments from hostility to FDI-friendly dispositions (Anyanwu: 2011).

However, despite the increasing flow of FDI, its distribution has been uneven. Most of the world FDI has been concentrated in industrially developed countries, with developing countries receiving, relatively, a small portion of total FDI as a group (See UNCTAD World Investment Report). Decomposing developing economies into regional blocs, the asymmetric distribution of FDI is more glaring and loud. FDI among developing nations skewed in favor of Asia, while Africa’s share remains relatively insignificant. Asia has experienced the fastest rate of growth in FDI flows, with China gulping one fifth of the continent’s FDI flows, approximately 30 percent of foreign direct investment going to developing economies, and 12 percent of world total FDI flows (UNCTAD report, 2010).

Table 1: FDI Inflows to Developing Bloc (Percentage of world total in US $)

Region/Economy1980     1985     1980     1995200020032004-2008
Africa2.8        3.1        2.2      2.8
Latin America and Caribbean9.9     10.2        7.1   11.1
Southern Europe0.1        0.1                   0.1                         0.1
Asia9.5       14.3    11.1      20.819.115.6                    25.3
Central and Eastern Europe….                       0.1                   1.3            ….1.93.7               5.6
Source: UNCTAD World Annual Investment Report (Various Issues)

Table 1 reveals FDI inflows to developing countries as a percentage of world total on aggregate basis. It reveals that Asia and Latin America regions have been successful in attracting the bulk of foreign direct investments flowing to developing bloc, with Southern Europe being the most disadvantaged.

Africa, sub-Saharan Africa (SSA) in particular, has not particularly benefited from the FDI boom. For most of the time since 1970, FDI flows into Africa have increased only modestly (Adeolu, 2007). In spite this meager windfall, some countries in Africa have been the continent’s FDI hot spots and have been successful in attracting FDI based on their comparative advantages, mostly the existence of natural resources and market size. This assertion is in tandem with UNCTAD world investment report data (2006) that reveals that the three largest recipients of FDI are South Africa, Nigeria and Angola, which are endowed with natural resources and account for about 30 percent of the continent’s FDI inflow.

FDI flow into Nigeria is perceptibly small compared to most economies in Asia, Europe and America. However, in absolute terms, FDI constitutes a significant share of total investment in the country, with illuminating and excellent scores in the nation’s energy, manufacturing, and telecommunication sectors. The country accounts for above 70 percent of foreign direct investment into West African sub-regional and receive, on the average, 11 percent of the Africa’s total (UNCTAD, 2006). During the first decade of independence, conscious and deliberate strides were not taken to encourage FDI flows. The import substitution strategy (ISS) and indigenization policy adopted in the 60s and early 70s was FDI inhibiting. These policies restricted foreign participation and dictated sectorial allocation of foreign capital and Greenfield ownership in the economy. These policies were sustained by the windfall of oil revenues, thus investment capital (private and public) was believed to be in excess.

Due to the over reliance of the Nigerian economy on oil, the oil market crash of late 70s led to serious shortage of investment capital, with most of the social investment projects of the third and fourth development plans (1975-1985) abandoned. As pointed out by Anyanwu (2011), this malady influenced the Nigerian government to embark on a swift and extensive search for alternative capital, and a scheme of policy-attracting- FDI was implemented, such as liberalizing the financial market and further opening up of the economy by the implementing the SAP thrusts, privatization and abandoning the ISS policy, granting tax relief and concessions of local material development. Also, FDI-inducing institutions were established to sustain its continuous flows and boast foreign investors’ confidence in the economy. These include Export Processing zones (1991); the Nigerian Export-Import Bank (1991); the Industrial Development Coordinating Committee (IDDC, 1988), which was replaced by the Nigerian Investment Promotion Commission in 1995 (Anyanwu, 2011).The impact of these policies and programmes collectively was overwhelming. FDI inflows more than quadrupled, increasing from N2.3 million in 1975 to N10.4 million in 1990, and thereafter, FDI inflows have been rosy and increasing at a modest rate. Presently, the country is the most favored destination of foreign capital in Africa, gulping more than 15% of total FDI flows into the continent (UNCTAD, 2012).

Given the plausibility of the theoretically potential gains emanating from FDI, world economies, developing economies in particular, have been at a logger-heads in trying to attract a significant portion of global FDI flows, hence making the market for FDI highly competitive. This is in cognizance of the fact that FDI should be attracted first, after which its gains could be tapped. The body of empirical evidence, however, reveals that FDI flows to a particular country is influenced by a gamut of determining factors, without which a country would be unsuccessful. Although with unanimity lacking in the empirical literature on which factor significantly influencing FDI flows (this is attributed to varying area specifics), most determinants of FDI flows have been empirically explored(Anyanwu, 2011; Obida and Abu, 2010; Dinda, 2009; Asiedu, 2005; Laura, 2003; Padma et al 1999; Borensztein, 1998; Anyanwu 1998).However, in the literature, less prominence has been given to the effect of domestic investment, especially in Nigeria. RecallingDe-Mello (1999), he finds that the extent to which FDI is growth-enhancing depends on the degree of complementarity or substitution between FDI and domestic investment. Buttressing this, Ekpo (1997)observed that public investment directly influences private investment. As such the public (government) should invest in infrastructures which give an enabling environment for private investors; consequently, helping in attracting foreign direct investment to Nigeria.

1.2 Statement of the Problem

Nigerian government has invested a lot in trying to create an enabling, least-cost environment that promotes investment opportunities through infrastructure development, market-friendly policies, and establishment of complementary ventures to augment local resources needed by firms; but public investment only constitutes part of total investment. Most studies on domestic investment as a determinant of FDI look at it as composite variable, without decomposing domestic investment into its constituents-private and public, thus knowing the individual influence on FDI. Similar studies have been carried out on FDI and private domestic investment. Most of these studies are summarized under a title like the impact of FDI on domestic firms or entrepreneur formation. These studies implicitly assumed that FDI granger causes domestic firms’ productivity. However, there could bi-causality between the variables. This study deviates from earlier studies in Nigeria (Ekpo, 1997; Anyanwu, 1998; Ndikumana and Verick, 2008)by empirically exploring the individual effect of domestic investment on FDI flows through dichotomizing it into its parts- private and public investment.

1.3 Objectives of the Study

This study aim at analyzing and examining domestic investment and foreign direct investment in Nigeria. In order to achieve the aim, the following objectives shall be adopted.

  1. Find out the relationship between public and private domestic investments with foreign direct investment flows.
  2. Find out the relationship between foreign direct investment and domestic firms.
  3. Find out whether natural resource and economic openness are positively related to foreign direct investment.
  4. Find out whether human capital development are positively related to foreign direct investment.

1.4 Research Questions

The study will be guided by the following questions;

  1. What is the relationship between public and private domestic investments with foreign direct investment flows?
  2. What is the relationship between foreign direct investment and domestic firms?
  3. Does natural resource and economic openness have a positively relationship with foreign direct investment.
  4. Does human capital development have a positively relationship with foreign direct investment.

1.5 Research Hypothesis

  • Ho: Domestic investment has not significant correlation with foreign direct investment in Nigeria.
  • Ha: Domestic investment has a significant correlation with foreign direct investment in Nigeria.

1.6 Significance of the Study

Although this study will be statistically and explanatorily assess the relationship between domestic investment and foreign direct investment. Additionally, subsequent researchers will use it as literature review. This means that, other students who may decide to conduct studies in this area will have the opportunity to use this study as available literature that can be subjected to critical review. Invariably, the result of the study contributes immensely to the body of academic knowledge with regards to the domestic investment and foreign direct investment in Nigeria.

1.7 Scope of the Study

This study will focus on domestic investment and foreign direct investment in Nigeria. The study will cover the period of 39years starting from 1980-2019.

1.8 Limitation of the Study

In carrying out this project work, the research is faced with certain limitations among which are:

Time Limit:

This is as a result of the short semester and tight academic schedule for lecture free period and weekends.

Finance Limit:

Because of the economic situation of the country and many expenses which has been met, the researcher is faced with limited finance, also the high cost of transportation, which is the reason why one cannot reach all the possible sources of information required for the project but nevertheless, enough information or data were collected.

Chapter Five

Summary, Conclusions and Recommendations:

5.1 Introduction

This chapter summarizes the findings on domestic investment and foreign direct investment in Nigeria. The chapter consists of summary of the study, conclusions, and recommendations.

5.2 Summary of the Study

In this study, our focus was on domestic investment and foreign direct investment in Nigeria. The study is was specifically set to find out the relationship between public and private domestic investments with foreign direct investment flows; find out the relationship between foreign direct investment and domestic firms; find out whether natural resource and economic openness are positively related to foreign direct investment, and find out whether human capital development are positively related to foreign direct investment.

The panel data used in this study were obtained from CBN bulletin. The study made use of Ex-post facto.

5.3 Conclusion

It has become patent- both in theory and practice -that capital is at the crux of national development, and the consequences of a dearth of this essential resource are near incomprehensible. This adduces for the hotly contest among world economies, developing economies of worthy note, over foreign capital. However, becoming a hot spot is not achievable by fluke; certain criteria must be met by the host economy.

Undeniably, seismic nominal financial expenses have been injected in the Nigerian economy by successive administration and government at all levels towards improving the state of infrastructure and other investment-friendly facilities. However given the shabby result that could not match the proportion of this nominal outlay, it becomes highly imperative to distinguish qualitative expense from quantitative (nominal) expense, as well as divorce the issue of rent-seeking and political consideration in the process. For over five (5) decades the country is yet to achieve the least energy requirement both for industrial and residential use; boast of a state-of-the-art transportation system; impeccable quality and enviable standard in her educational and health sector, inter alia, which are highly needed to drive investment-foreign and domestic private investment included. A classic example is the Nigerian energy sector, a sector at the heart of developmental process and an activator of investment. The epileptic state of the power sector has discouraged the inflow of FDI; inhibit the start-up of most domestic investment, and drove away already established firms to neighboring countries with sufficient energy for a least-cost production. The synergy of all these maladies culminates to the uncompetitive look of the Nigerian investible clime, hence serving as a detour to FDI inflows.

Furthermore, though the premise regarding private domestic investment and FDI is moot in the literature, the scenario surrounding this negative relationship between these variables in Nigeria is more explained practically than in theory. Generically, the Nigerian private sector is still at its embryonic state, partly due to lack of proper inducement from the public and the financial sectors to dispense the much needed capital, and partly from the rudimentary technology and uncultivated habit of entrepreneur development. Recalling what the literature says with respect to FDI-domestic firms nexus: FDI has a positive, backward relationship with domestic firms. If the host economy has a well-developed local material sourcing sector, the presence of a multinational firm in the sector tends to rekindle activities in the sector. Unfortunately, Nigeria is at the opposite end; this sector is not only nascent but also crude and informal. This partly underscore why most FDI inflows go to the extracting sector, and giving the absence of any deliberate effort by MNCs to develop the informal sector, these products are exported out and imported in as manufactured products.

Natural resource and economic openness are positively related to FDI. We expected the latter to be positively related to FDI because FDI does not flow into an economy in a state of autarky. For natural resource, this finding is akin with earlier studies (Anyanwu, 2011; UNCTAD, 2007; Dinda, 2007). We were not expecting the least from this variable given that the country is richly endowed. This supports why the primary sector receives the largest share in FDI flows in Nigeria.

Finally, human capital development and market size are negatively related with FDI, with both coefficients statistically significant. In relation to human capital and FDI inflows, the negativity seems plausible. MNCs most times require the competence of highly skilled and specialized workers, which are in shortfall in the country, therefore informing their choice of location. However, for market size, previous studies -Anyanwu, 2011; Asiedu, 2005; Anyanwu 1998-affirmed a positive relationship between the variables. Maybe our choice of proxy might have affected such finding. Thus, it is a call for further researches, adopting a better criterion of its measurement, to investigate on this.

5.4 Recommendations

Based on the findings of this study, the following recommendations were made:

It is in our firmly held conviction that FDI is an important spoke on the wheel of national development, thus its attraction should been given domestic policy prominence. But for this to be achievable, the necessary requirements must be met. Therefore, the policy implication of these findings, acting as a pragmatic step in boosting FDI flows in Nigeria, is in an acronym format- FDI. They are:

  1. Fostering qualitative domestic expenditure in upgrading the nation’s infrastructure facilities in all sectors;
  2. Demonstrating quality political and economic administrations, especially in the areas of financial development, internal security, and intensify the fight towards reducing corrupt practices; and
  3. Instituting a supportive rampart (the social system) for the domestic private sector to grow in an unfathomable proportion.

Domestic Investment And Foreign Direct Investment In Nigeria

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