The Impact Of Foreign Direct Investment On Economic Growth In Nigeria

Project and Seminar Material for Economics

Abstract

This study is on impact of foreign direct investment on the economic growth in Nigeria. The total population for the study is 200 staff of national bureaus of statistics, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made statisticians, accountants cadre, programme analysts and administrative officers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

Chapter One

Introduction

1.1 Background of the Study

Various classifications have been made on Foreign Direct Investment (FDI). For instance, FDI has been described as investment made so as to acquire a lasting management interest (for example, 10 percent of voting stock) and at least 10 percent of equity shares in an enterprise operating in another country other than that of the investor’s country (Mwillima, 2003). Policy makers believe that FDI produces positive effects on host economies. Some of these benefits are in the form of externalities and the adoption of foreign technology (Alfaro et. al, 2006). According Alfaro et. al, 2006, multinational enterprises (MNEs) diffuse technology and management know-how to domestic firms. When FDI is undertaken in high risk areas or new industries, economic rents are created accruing to old technologies and additional management styles. It has been theorized by development economists that the integration of developing countries with the global economy increased sharply in the 1990s with changes in their economic policies and lowering of barriers to trade and investment. Most countries strive to attract foreign direct investment (FDI) because of its acknowledged advantages as a tool of economic development. Africa and Nigeria in particular joined the rest of the world in seeking FDI as evidenced by the formation of the New Partnership for Africa’s Development (NEPAD), which ahs the attraction of foreign investment to Africa as a major component. FDI is assumed to benefit a poor country like Nigeria, not only by supplementary domestic investment, but also in terms of employment creation, transfer of technology, increased domestic competition and other positive externalities (Ayanwale, 2007). Nigeria is one of the economies with great demand for goods and services and has attracted some FDI over the years. The amount of FDI inflow into Nigeria was estimated at US$2.23 billion in 2003 and the rose to US$5.31 billion in 2004 representing an increase of 138 percent. The figure rose again to US$9.92 billion or 87 percent increase in 2005. The figure, however, slightly declined to US$9.44 billion in 2010/11. The question that comes to mind is, does FDI actually contribute to economic growth in Nigeria? If FDI actually contributes to growth, then the sustainability of FDI is a worthwhile activity, and a way of achieving its sustainability is by identifying the factors contributing to its growth with a view to ensuring its enhancement.

This is even more so as Africa and indeed Nigeria is undoubtedly facing an economic crisis situation featured by inadequate resources for long-term development, low capacity utilization, high level of unemployment, high poverty rate, high state of insecurity and Millennium Development Goals (MDGs) increasingly becoming difficult to achieve by 2020.

In fact, one of the pillars on which the New Partnership for Africa’s Development (NEPAD) was launched was to increase available capital to US$64 billion through a combination of reforms, resource mobilization and a conducive environment for FDI (Funke and Nsouli, 2003). Nigeria as a country, given her natural resource base and large market size, qualifies to be a major recipient of FDI in Africa and indeed is one of the top three leading African countries that consistently received FDI in the past decade. Despite in the enormous amount of literature in this field of study, the empirical linkage between FDI and economic growth in Nigeria is yet unclear (Akinlo, 2004). The results of studies carried out on the linkage between FDI and economic growth in Nigeria are not unanimous in their submissions. A closer examination of these previous studies revealed that conscious effort was not made to take care of the fact that more than 60 percent of the FDI inflows into Nigeria is made into the extractive industry (oil). Hence this study actually modeled the influence of natural resources on Nigeria’s economic growth. There is also the problem of endogeneity, which has not been consciously tackled in previous studies in Nigeria. Again, most of the studies on FDI and growth are cross-country studies, however; FDI and growth debates are country specific. Earlier studies, for example, Otepola (2002), Oyejide (2005) etc, examine the impacts of FDI on growth and the channels through which it may be benefiting the economy. The concerned of this study, therefore, is to examine the long run impact of FDI on Nigeria’s economic growth, hence addressing the country’s specific dimension to the FDI growth debate.Foreign Direct Investment in Nigeria increased by 673.95 USD Million in the second quarter of 2016. Foreign Direct Investment in Nigeria averaged 1348.23 USD Million from 2007 until 2016, reaching an all-time high of 3084.90 USD Million in the fourth quarter of 2012 and a record low of 501.83 USD Million in the fourth quarter of 2015. The study is different from previous studies, even as the effect of the major components of FDI on economic growth will be examined thereby offering the opportunity to assess the differential impact of oil FDI and non-oil FDI on Nigeria’s economic growth.

1.2 Statement of the Problem

In view of our weak economy structure, unemployment, budget deficit, weak currency, high taste for foreign goods and consistence unfavorable balance of trade, foreign direct investment, thus, became imperative for Nigeria to sustain her economy and remain relevant in the committee of nations. Unlike Ghana, South Africa, Benin Republic and some other African countries that enjoy and felt the impact of foreign direct investment steady, Nigeria is not, due to her socio-political challenges which in-turns affected her economic policies. Hence the need for this study is to ascertain the impact of FDI in the Nigerian economy and its obstacles.

1.3 Objective of the Study

The general objective of this is to assess the impact of FDI on the economic growth of Nigeria. Other specific objectives are:

To ascertain the impact of FDI on sector of Nigerian economy.
To determine the impact of FDI on non-oil sector in the economy.
To suggest measures for facilitating the steady flow of FDI into the Nigerian economy.

1.4 Research Hypotheses

Hypothesis is a tentative statement put forward to test the validity of a given phenomenon, (Osuala 2007). Thus, our hypotheses for this study are:

HO1: FDI does not have impact on Nigerian economy sector
H11: FDI has an impact on the Nigerian economy sector
HO2: FDI does not have any significant impact on non-oil sector
H12: FDI has a significant impact on non oil sector

1.5 Significance of the Study

The study will broaden the knowledge of the researcher as well contribute to the existing literature on the subject matter by providing an expository analysis of the pattern of FDI in the Nigerian economy. This would enhance policy formulation in the economic policy and as well address our economic challenges in general. It would also be an invaluable tool for students, academic, institutions and individuals that want to know more about the link between FDI and economic growth.

1.6 Scope and Limitation of the Study

The scope of the study is to assess the impact of FDI in the economic growth of Nigeria (1980-2015). Thus, the research is limited to the above stated title alone. The study will review useful literature and theoretical framework that are directly and indirectly related to the subject matter. The researcher encounters some constrain which limited 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 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.

Economic Growth:

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

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 ascertain the impact of foreign direct investment on the economic growth in Nigeria. In the preceding chapter, the 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 foreign direct investment on economic growth in Nigeria

5.2 Summary

This study was on the impact of foreign direct investment on economic growth in Nigeria. Three objectives were raised which included:To ascertain the impact of FDI on sector of Nigerian economy, to determine the impact of FDI on non-oil sector in the economy, to suggest measures for facilitating the steady flow of FDI into the Nigerian economy. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of national bureaus of statistics, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made statisticians, accountants cadre, programme analysts and administrative officers were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies

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 Recommendation

The Nigerian government should establish favorable economic and political policies. Economic policies will thus encourage a continuous flow of foreign direct investment and exportation of goods and services in Nigeria. Political policies should address the political environment of the country. It is widely noted that political instability exposes an economy to varying forms of economic deprivation in the form of reduced investment by foreign Multinationals, a situation that would also adversely affect the level of FDI in the country.