Good Or Bad? – The Influence Of FDI On Productivity Growth An Industry-Level Analysis

Project and Seminar Material for Economics

Good Or Bad? – The Influence Of FDI On Productivity Growth An Industry-Level Analysis


Abstract


This paper attempts to reconcile the often inconclusive evidence on the impact of FDI on growth by taking two into account the heterogeneity both among industries and among countries. Using a comparable database at the industry level for 35 countries in OECD, Asia and Eastern Europe from 1987 to 2002, we test both stage of development and FDI industrial pattern for the economic impact of FDI on growth. In certain industries and for the catching-up countries, a significant and positive relationship emerges when FDI interacts with investment or export orientation.


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 of manufacturing industries in France, Germany, Japan and the UK. Also Borensztein et al. (1998) find 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. However, the resulting issue of cross-country heterogeneity has largely been neglected in the literature so far with few exceptions. Blonigen and Wang (2005) stress explicitly cross-country heterogeneity as the crucial factor which determines the effect of FDI on growth. Further, Nair-Reichert and Weinhold (2001) and Mayer-Foulkes and Nunnenkamp (2005) explicitly take up this aspect in their analysis. Our paper will follow their direction and introduce two forms of heterogeneity, differences between countries and differences between receiving industries.

We argue that since host country heterogeneity plays a role, it is equally likely that the impact of FDI on the host economy differs greatly according to the receiving industry. FDI in constant returns to scale industries will have different effects than FDI in increasing returns to scale industries. Likewise, the effect of FDI may be related to the technology and human capital intensity of the industry and other factors. As a very intuitive example, heavy FDI in the extractive sector in Nigeria has not improved the country’s growth performance (Akinlo, 2004). Consequently, the potential for positive spillovers does not solely depend on a country’s overall absorptive capacity, but also on which sectors or industries in the economy receive FDI. Thus, the impact of FDI differs depending on country specific absorptive capacity or stage of development as well as on the sectoral and industrial structure and allocation of FDI. Since the two are in general related, this implies a relationship between the industrial pattern of inward FDI and its effect on the host country. The economy wide effect of industry specific FDI inflows will then further depend on the extent of intra-industry versus inter-industry spillovers.In this paper we use a unique panel data set at the industrial level for a range of industrialized and catching-up countries to investigate the magnitude of all these factors for the role played by FDI in different manufacturing industries in the economic development of the host economy. Due to measurement issues, interdependencies between various types of spillovers and their complexity, it is difficult to distinguish between different theoretically possible channels of technology transmission in empirical research. Therefore, we will focus on the overall effect of foreign sourced capital on manufacturing productivity growth in addition to the effects of traditional factors (domestic capital and labour) and controlling for other factors. What is new in our analysis is the focus on the industry-level of the economy. To our knowledge, there is very little empirical research on FDI at this level of disaggregation. Disaggregated data on FDI for a large and heterogeneous set of countries rarely exist in a comprehensive and comparable form. If these data exist, they are often plagued with two kinds of problems: On the one hand, the coverage of firms and flows which are recorded as FDI can differ between countries (problems are often caused by the exclusion of reinvested profits in some countries). On the other hand, the classification into industrial activities may differ between countries. We therefore established a comprehensive new data set in order to address adequately the role of industrial FDI patterns.

FDI is an investor’s acquisition of “long-term influence” in the management of a firm in another country. (See the next section for a more complete definition.) In the developed world, countries that export capital and countries that import capital both raise concerns about FDI: The former are concerned that capital leaving their countries might be detrimental to domestic investment; the latter’s politicians and workers fear foreign ownership of domestic firms. Emerging, transition, and developing countries (and at times local governments) usually welcome FDI, assuming that investment through this multinational activity will bring additional capital, managerial expertise, and technology. In economics, multinational activity (essentially foreign firms with U.S. production units and U.S. firms with foreign production units, described in more detail later) is also viewed as a positive contribution to the technological progress of the host economies. An established literature that dates back to Findlay (1978) develops models in which multinational firms own and transfer technology—which may not be available in the host country—that allows them to be more productive and profit able than firms that are not multinational in nature. Because such a transfer is assumed to contribute to the technical progress of the host economies, it is also assumed to contribute ultimately to their growth. Rivera-Batiz and Rivera-Batiz (1991) develop a formal model that allows for increasing returns due to specialization as a result of FDI. Borensztein, De Gregorio, and Lee (1998) stress the interaction between FDI and investment in human capital. Helpman, Melitz, and Yeaple (2004) and Yeaple (2008) show that only the most productive firms in a country become multinationals, whereas progressively less productive firms enter progressively more attractive countries.


1.2 Statement of the Problem

The underdeveloped 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 (1997), 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 (1996), 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 the influence of FDI on the productivity and growth of Nigeria economy.


1.3 Objective of the Study

The main objective of the study is to ascertain the influence of FDI on productivity growth of Nigeria industries, but to aid the successful completion of the study, the researcher intend to achieve the following specific objective;

  1. To ascertain the impact of FDI on the economic growth of Nigeria economy
  2. To examine the role of FDI on the productivity of Nigeria economy
  3. To examine the relationship between FDI and economic productivity
  4. To examine the influence of FDI on the growth of Nigeria industries.

1.4 Research Hypotheses

To aid the successful completion of the study, the following research hypotheses were formulated by the researcher

  1. H0: FDI does not have any significant impact on the growth of Nigerian economy
    H1: FDI does have a significant impact on the growth of Nigerian economy
  2. H02: There is no significant relationship between FDI and economic productivity in Nigeria
    H2: There is a significant relationship between FDI and economic productivity 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 national economic planning committee as the study seek to explore the merit of FDI and the merit if any on the growth of Nigerian economy, the study will also be useful to the management of national investment and development committee as the study will help them formulate policies that will attract FDI to the country. 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 good or bad- the influence of FDI on productivity, growth on industry, 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.

c) Organizational Privacy:

Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities


1.7 Operational Definition of Terms

FDI

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

Economic Growth

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time.


1.8 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows

  • Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
  • Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
  • Chapter three deals on the research design and methodology adopted in the study.
  • Chapter four concentrate on the data collection and analysis and presentation of finding.
  • Chapter five gives summary, conclusion, and recommendations made of the study

Chapter Five


Summary, Conclusion and Recommendation

5.1 Introduction

It is important to ascertain that the objective of this study was to investigate the influence of FDI on productivity growth on industry; good or bad

In the preceding chapters, relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of FDI on economic productivity.


5.2 Summary

The contributions that multinational firms make toward economic growth of the host economies have been studied extensively, but little consensus has emerged as to whether FDI is boon or bane for a country as a whole. Quite simply, the evidence is as mixed now as it was when Rodrik (1999) wrote the line quoted at the beginning of this article. Lacking unambiguous empirical evidence, it is difficult to formulate solid expectations on how proposed FDI policies will affect the entry of foreign firms. Current empirical evidence provides little guidance as to whether one should support or oppose policies. As we have discussed in this article, studies that use a growth regression approach and aggregate data are not likely to help researchers sort out the growth effect of FDI because of methodological problems and huge heterogeneity hidden by the data.


5.3 Conclusion

In conclusion, the empirical results show that there is positive relationship between economic growth (GDP) and FDI. The result was positive but statistically insignificant contrary to some findings. This insignificant relationship could be as a result of insufficient FDI fund invested into the Nigerian economy which has not been able to significantly impact on the economic growth. The result of our study also portrays that domestic investment was also responsible for the growth witnessed in Nigeria’s economy over the period under review. This provides an understanding that domestic investment is a major factor that contributes to the growth of the Nigerian economy. And so, more emphasis should be geared towards encouraging domestic investment to drive the economy to the desired level of growth. Despite the insignificant relationship between GDP and FDI, it is important to note that FDI contributes positively to economic growth in Nigeria.


5.4 Recommendations

Haven completed the study, the researcher recommends that government and the monetary authorities should design policies and programs that will encourage investors to invest in Nigeria. The problem of insecurity in this country should be addressed squarely by the government and other stakeholders if Nigeria will continue to compete favourably in the globe fund market. More so, an investment friendly environment: Enhancing foreign investor legal protection, Streamlining procedures for business visas and entry of foreign workers, Reforming land policy and administration, Speeding up and deepening tax reforms, should be created by the government so as to increase the inflow of FDI in to the economy.


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