Foreign Direct Investment And The Development Of Small And Medium Enterprises

Project and Seminar Material for Political Science

Foreign Direct Investment And The Development Of Small And Medium Enterprises


Abstract


The research examined the effect of foreign direct investment on SMEs in Nigeria. The secondary data were gathered from the Nigerian Bureau of Statistics and the Central Bank of Nigeria (CBN) annual report. This study adopted ordinary least square method of data analyses. The finding revealed that trade openness as a measure of competitiveness and FDI has no significant effect on SMEs growth in Nigeria. It was also revealed that the exchange rate has a significant effect on SMEs growth in Nigeria, and the level at which exchange rate affects SMEs growth is relatively high. It was further showed that the ex- change rate has a negative coefficient indicating that, as the exchange rate reduces SMEs growth increases. It is concluded that trade competitiveness had no significant effect on SMEs growth in Nigeria. It is therefore recommended that government should formulate policies, which will encourage the reduction of exchange rate in the country in order to enhance competition and improve business activities across the country, and improve the growth of SMEs across the country, as well as encouraging entrepreneurship spirit in the country.


Chapter One


Introduction

1.1 Background of the Study

While in theory the nexus between FDI and growth (in terms of output and productivity) is in general positive, the empirical literature is far less conclusive. Some studies find positive effects from outward FDI for the investing country (Van Pottelsberghe and Lichtenberg, 2001; Nachum et al., 2000), but suggest a potential negative impact from inward FDI on the host country. This results from a possible decrease in indigenous innovative capacity or crowding out of domestic firms or domestic investment. Thus, in their view and in line with the standard literature on the determinants of FDI (i.e. Dunning’s OLI paradigm, see Dunning 1988) inward FDI is intended to take advantage of host country (locational) characteristics instead of disseminating new technologies originating in the sending country. Other studies report more positive findings: Nadiri (1993) finds positive and significant effects from US sourced capital on productivity growth ofmanufacturing inductries in France, Germany, Japan and the UK. Also Borensztein et al. (1998) finds a positive influence of FDI flows from industrial countries on developing countries’ growth. However, they report also a minimum threshold level of human capital for the productivity enhancing impact of FDI, emphasizing the role of absorptive capacity. Absorptive capacity or minimum threshold levels in a country’s ability to profit from inward FDI is often mentioned in the literature (see also Blomström et al. 1996). Consequently the effect of FDI depends among other things to a large extent on the characteristics of the country that receives FDI.

Given the critical role of entrepreneurship in economic growth of any nation and considering the absence of adequate technology in developing countries, it is essential to seek for technology transfer. More so, market and access to expertise are crucial to the survival and growth of small and medium enterprises (SMEs) in developing countries. Access to expertise allows SMEs to undertake productive investments efficiently and to acquire the latest technologies, thus ensuring their competitiveness and that of the nation as a whole. As opined by Dutse (2008), these latest technologies can be attained through the spill-over effects of FDI. This is because FDI is one of the major channels for transferring new scientific knowledge and related technological innovations. From a priori FDI is therefore an essential impetus to small and medium scale entrepreneurship development in the country. In this regard, FDI facilitates access to markets, access to expertise and most of all access to technology. However the willingness of Multinational Corporations to open their global value chains to local firms has not really metamorphosed into meaningful SMEs development. This therefore raises the question of why the abysmal performance of the SMEs in Nigeria? Furthermore, the pattern of the FDI inflow is often skewed towards extractive industries, meaning that the monumental rate of FDI inflow into Nigeria has been adduced to natural resources, although the size of the local market may also be a consideration (Asiedu, 2001). Invariably there is very little hope of economic development and growth for the country due to problems of socio-economic, political and religious factors. Historically Nigeria is one of the economies in Africa with enormous demand for goods and services and has attracted some FDI over the years. The amount of FDI inflow into Nigeria has reached US$2.23 billion in 2003 and it rose to US$5.31 billion in 2004, this figure rose again to US$9.92 billion in 2005. The volume however turns down vaguely to US$9.44 billion in 2006 (CBN, 2009). The question that comes to mind is do these FDIs essentially contribute to small and medium scale business development in Nigeria? If FDI effectively contributes to growth, then the sustainability of FDI is a worthwhile action and a way of achieving its sustainability is by identifying those factors contributing to its growth with a view to ensuring its enhancement.

Again, most studies on FDI and growth are cross-country studies. However, FDI and growth debates are country specific. Earlier studies (for instance, Otepola, 2002; Oyejide, 2005; Akinlo, 2004) examine only the importance of FDI on growth and the channels through which it may be benefiting the economy. This study however examines the contributions of FDI to Small and Medium scale businesses with much emphasis on agriculture and transportation sector from 1981 to 2009.

“The Federal Government’s economic diversification programme may have recorded a head-start as investment groups gather for the ground breaking ceremony of the Enpower Free Trade Zone (ENPOWER FTZ) scheduled by the end of this month with a target to attract N240 billion Foreign Direct Investment (FDI) and 20,000 jobs Governor Ifeanyi Ugwuanyi who consolidates on foundation efforts of former Governor Sullivan Chime on the project, was quoted as saying in a statement at the weekend that the ground breaking ceremony for the facility would bear the first set of investment fruits which will give highly needed momentum to his government’s economic diversification programme. According to him, “Enpower FTZ has put in substantial efforts into attracting specific, targeted high-profile investors right from the outset. These anchor investors play an important signaling role to other potential investors, and we expect them to attract a network of suppliers and partners.”The ceremony which holds at the Akanu Ibiam Airport site of the Free Zone is expected to attract up to $500 million (N240 billion) worth of foreign direct investments (FDI) from leading global manufacturing companies. Activities of the industrial clusters hosted in the free zone are also expected to create over 20,000 jobs across three major regions in the country. Licensed by the federal government to operate as a free trade zone in December, 2015, ENPOWER FTZ is a Public-Private initiative with the Enugu State government offering international and domestic investors the benefits of connecting to business opportunities from the South-Eastern cluster, which according to Canback & Company and the McKinsey Global Institute, is the second largest economic cluster in Nigeria, outside of the Lagos Cluster”.

In the world today, it becomes difficult for business to survive without a form of exchange or another which involves money, ideas, product and technology. As a result, every economy is affected either positively or negatively. Trade can be drawn from the need to exchange, which developed from the barter arrangement to the currency method. Trade in Nigeria, nevertheless, became general with the introduction of the imposing regulation, which brought in their merchandises and made Nigerians their middle men. The implication of this is that Nigerians came to comprehend the necessity for trade both domestically and internationally. International business has remained an area of concern to policy makers. Its significance lies on the capacity to acquire goods which cannot be manufactured in a country or which can only be manufactured at a higher cost. Similarly, it allows a nation to trade its locally produced goods to other countries of the world. The performance of a given economy in terms of growth rates of output and per capita income has not only been based on the domestic production and consumption activities but also on international transaction of goods and services (Jhingan 2006). Small and Medium-scale Enterprises (SMEs) play very important roles in the process of industrialization and sustainable economic growth (Aremu & Adeyemi, 2011; Terungwa, 2012). Since the 1960s to date, SMEs are being given due recognitions especially in the developed nations for playing very important roles towards fostering accelerated economic growth, development and stability within several economies (Gunu, 2004; Onugu, 2005; Aremu, 2010). They make up the largest proportion of business all over the world and play tremendous roles in employment generation, provisions of goods and services, creating a better standard of living as well as immensely contributing to the Gross Domestic Products (GDP) of many countries (Paul, 2010; Ojeka&Mukoro, 2011).

In Nigeria, SMEs account for fifty percent to employment on average and also fifty percent of its industrial output. SMEs represent about ninety percent of the industrial sector in terms of number of enterprises or firms, and, however, they contribute a meager one percent of GDP (Ariyo, 2004). Industrial and economic developments are flourished by SMEs in the country through efficient utilization of local resources; production of intermediate goods and services; transformation of rural technology. SMEs are the backbone, and they play a significant role in the business landscape of any country, but there are also faced with a lot of obstacles that make the sector not to contribute optimally to the economy. In this regard, Aregbeyen (1999) argues that the industrial development of Nigeria depends, to a large extent, on the growth and development of SME potentials.


1.2 Statement of the Problem

The underdeveloped/developing nature of the Nigerian economy that essentially hindered the pace of her economic development has necessitated the demand for Foreign Direct Investment into the country. Aremu (2007), noted that Nigeria as one of the developing countries of the world, has adopted a number of measures aimed at accelerating growth and development in the domestic economy, one of which is attracting foreign direct investment (FDI) into the country. According to World Bank (2006), FDI is an investment made to acquire a lasting management interest (normally 10% of voting stock) in a firm or an enterprise operating in a country other than that of the investor defined according to residency. However, Foreign Direct Investment (FDI) is often seen as an important catalyst for economic growth in the developing countries because it affects the economic growth by stimulating domestic investment, increase in capital formation and also, facilitating the technology transfer in the host countries. (Falki, 2009) It is in view of the above that the researcher intends to investigate influence of foreign direct investment and the development of small and medium scale enterprise in Enugu state, Nigeria.


1.3 Objective of the Study

The main objective of this study is to examine foreign direct investment and the development of SMEs in Enugu state. But to aid the effective completion of the study, the researcher intends to achieve the following specific objective;

  1. To examine whether Foreign Direct Investment undermined the development of SMEs in Enugu state, 2007-2017.
  2. To examine whether the Enugu state government provided an enabling environment for the development of SMEs in the state, 2007-2017.

1.4 Research Hypotheses

H1: Trade openness does not significantly affect SMEs growth in Nigeria.

H2: Foreign Direct Investment (FDI) has no significant influence on SMEs growth in Ni- geria.

H3: Exchange rate has no significant effect on SMEs growth in Nigeria.

H4: Foreign direct investment does not have an overall effect on SMEs growth in Nigeria.


1.5 Significance of the Study

It is believed that at the completion of the study, the findings will be of great importance to the Enugu state economic planning committee as the study seek to explore the merit of FDI and the merit if any on the growth of SMEs in the state, the study will also be useful to the management of Enugu state investment and development committee as the study will help them formulate policies that will attract FDI to the state. The study will also be useful to researchers who intend to embark on a study in a similar topic as the findings of the study will serve as a reference point for further study. Finally, the study will also be useful to academia’s, researchers, students, teachers and the general public as the study will contribute to knowledge and the pool of existing literature.


1.6 Scope and Limitation of the Study

The scope of the study covers foreign direct investment and the development of small and medium scale enterprise in Enugu state, 2007-2017, but in the cause of the study, there were some factors which militate against the scope of the study;

a) Availability of Research Material:

The research material available to the researcher is insufficient, thereby limiting the study.

b) Time:

The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.


1.7 Definition of Terms

Foreign Direct Investment

A foreign direct investment is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control.

Productivity

Productivity is an economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in revenues and other gross domestic product (GDP) components such as business inventories.

Small Medium Enterprises

The Central Bank of Nigeria defines small and medium enterprises in Nigeria according to asset base and number of staff employed.


Chapter Five


Recommendation and Conclusion

The findings of the analysis revealed that international business does not have a significant effect on SMEs growth. It can therefore be said that international business has no overall significant effect on SMEs growth in Nigeria. Thus, the null hypothesis, which says that international business has no overall significant effect on SMEs growth, should be accepted. The finding further revealed that trade openness has no significant effect on SMEs growth in Nigeria, and the level at which it affects SMEs growth is relatively low. Thus, the null hypothesis, which says that trade openness, does not significantly affect SMEs growth in Nigeria should be accepted while rejecting the alternate hypothesis.

More so, the finding revealed that FDI has no significant effect on SMEs growth in Nigeria, and the level at which it affects SMEs growth is relatively low. Thus, the null hypothesis, which says that Foreign Direct Investment (FDI) has no significant influence on SMEs growth in Nigeria should be accepted while rejecting the alternate hypothesis. Finally, it was discovered that the exchange rate has a significant effect on SMEs growth in Nigeria, and the level at which the ex- change rate affects SMEs growth is relatively high. It can further be revealed that the coefficient of exchange rate -4.134642 is negative which implies that as the exchange rate reduces, SMEs growth increases, which follows the normal theory and follows the rule of theory.

The study examines the individual and composite effect of international business on SMEs growth. The study does not record a significant effect of each of the international business variables on SMEs growth. This implies that not all the variables significantly affect SMEs growth in Nigeria. To this effect, more attention should be paid to the exchange rate because it significantly determines the level of SMEs growth in Nigeria.

Based on the findings, it is recommended that the government should formulate policies, which will encourage the reduction of exchange rate in the country in order to improve business activities across the country, and improve the growth of SMEs across the country, as well as encouraging entrepreneurship spirit in the country.


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