1.0 Background of the Study
The focus of this project is to study the effects of
FDI on the Nigerian economy, identifying factors and conditions that promote or
retard development. Developing countries are in a dilemma arising from the
desire for foreign capital for internal economic development, yet there is the
fear that foreign investors (which are already said to be at commanding heights
of some sectors of the economy) may wrest complete control of the international
economy and render it an appendage of the western economic hegemony.
However, most of the economic blueprints that have
been recommended for developing economics are in agreement on the need for
foreign capital. Thus, a developing country may have to determine the actual
sectors which have to attract foreign private investment and also determine the
optimum level of foreign investment that is necessary in order to supplement
its internal resources. Thereby, maintaining a balance between economic
development and economic independence. (IMF, 2009).
The impact of foreign direct investment has never
been as important as it is now in the early 21st century, nations
are more linked through trade in goods and services flow of money and
investment. Owing to the enormous benefit accrued, most countries strive to
attract foreign direct investment (FDI) as it is a proven tool of economic
development. African 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 has the attraction of foreign investment to Africa
as a major component (Funke and Nsouli 2003).
literature of Caves (1996), it was observed that the rationale for increased
efforts to attract more FDI stems from the belief that FDI has several positive
effects. Among these are productivity gains, technology introduction of new
processes, managerial skills and know- how in the domestic market, employee
training, international production networks and access to markets.
framework definition of foreign direct investment (FDI) exists in the
literature, that is, FDI refers to the net inflows of investment to acquire a
lasting management interest (10percent) or more of voting stock) in an
enterprise operating in an economy other than that of the investor. It is the
sum of equity capital, reinvestment of equity, other long- term capital, and short-term
capital as shown in the balance of payments. It usually involves participation
in management, joint- venture, transfer of technology and expertise. There are
two types of FDI: Inward foreign direct investment and Outward foreign direct
investment; resulting in a net FDI inflow (positive or negative) and
"stock of foreign direct investment”, which the cumulative number for a
indispensable factor to the economic growth of an economy is evident in the
United States which is the world's largest recipient of FDI and is consequently
the world's strongest economy. In the last 6 years America has benefited from
the FDI through the establishment of over 4000 new projects and 630,000 new
jobs have been created by foreign companies, resulting in .close to $314
billion in investment. Foreign companies has in the past supported an annual US
payroll of billion with an average annual compensation of $68,000 per employee (UNCTAD,
Africa as a region now has to depend very much on FDI for so many reasons, some
of which is amplified by Asiedu (2001). The preference for FDI stems from its
acknowledged advantages (Sjoholm, 1999; Obwonba, 2001, 2004). The effort by
several African countries to improve their business climate stems from the
desire to attract FDI. 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$64billion through a combination of reforms, resource mobilization and a
conducive environment for FDI (Funke and Nsouli 2003).
Recently, TNCs from developed and
transition economies have increasingly been investing in Africa over the past
few years. They accounted for 22 percent of flows to the region over the
2005-2008 period, compared to 18 percent in 1995-1999 investors from China.
Malaysia India and the Gulf Cooperation Council (GCC) are among the most
active-although Africa still makes up only a fraction of their FDI. Investors
from Southern Africa and North Africa have also raised their profile in the
region. These new sources of Investment not only provide additional development
opportunities, but are also expected to be more resilient than traditional
ones, providing a potential buffer against crises (UNCTAD, 2009).
Nigeria receives the largest amount of
FDI in Africa. FDI inflows have been on the increase over the course of the
last decade; from USD$1.14billion in 2001 and USD$2.1billion in 2004, Nigeria’s
FDI reached USD11billion in 2009 according to UNCTAD, making the country the
nineteenth greatest recipient of FDI in the world.
Hence, since FDI is seen a promising
device for driving the economy to desired heights, it is only rationale for
Nigeria to increase her revenues by increasing her efforts in attracting more
1.1 STATEMENT OF PROBLEM
the efforts of most countries in Africa to attract FDI have been futile. This
is in spite of the perceived and obvious need for FDI in the continent, the
development is disturbing, sending very little hope of economic development and
growth for these countries. Nigeria as a nation has not been able to fully tap
from her resources.
report has shown that Nigeria due to her over-dependency on oil is fast loosing
its leading role in terms of attracting FDI in Africa to Egypt and South
Africa, which were successful in attracting FDI in diverse sectors of their
economies (UNCTAD, 2009).
Nigeria’s poor FDI record can be further adduced due
to the following reasons:
One of the reasons why foreign investors are reluctant to invest in Nigeria,
despite its enormous profitable opportunities, is the relatively high degree of
uncertainty in the region, which exposes firms to significant risks.
Uncertainty in the Nigeria manifests itself in three different ways:
Political instability: The region is politically unstable because of the high
incidence of wars, frequent military interventions in politics, and religious
and ethnic conflicts. Sachs and Sievers (1998) have also argued that political
stability is one of the most important determinants of FDI in Africa. Example
is the Bokoharam and Niger Delta menace which have been reported to scare away
investors (World Bank 2011).
Macroeconomic instability: Instability in macroeconomic variables as evidenced
by the high incidence of currency crashes, double digit inflation, and
excessive budget deficits, has also limited the regions ability to attract
foreign investment. Recent evidence based on African data suggests that
countries with high inflation tend to attract less FDI (Onyeiwu and Shrestha,
Lack of policy transparency: In Nigeria it is often difficult to tell what
specific aspects of government policies are in operation. This is due in part
to the high frequency of government as well as policy changes in the region and
the lack of transparency in macroeconomic policy. The lack of transparency in
economic policy is of concern because it increases transaction costs thereby
reducing the incentives for foreign investment.
regulatory environment: The lack of a favourable investment climate also
contributed to the low FDI trend observed in the region. In the past, domestic
investment policies––for example on profit repatriation as well as on entry
into some sectors of the economy––were not conducive to the attraction of FDI
(Basu and Srinivasan, 2002).
growth and market size: Relative to several regions of the world, growth rates
of real per capital output in Africa are low and domestic markets are quite
small. This makes it difficult for foreign firms to
economies of scale and so discourages entry. (Elbadawi and Mwega ,1997), show
that economic growth is an important determinant of FDI flows to the region.
infrastructure: The absence of adequate supporting infrastructure: telecommunication;
transport; power supply; skilled labour, discourage foreign investment because
it increases transaction costs.
poor infrastructure reduces the productivity of investments thereby
discouraging inflows. Asiedu (2002b) and Morrisset (2000) provide evidence that
good infrastructure has a positive impact on FDI flows to Africa.
factors that account for the low FDI flows to the region but are rarely
included in empirical studies––presumably due to data limitations–– include:
dependence on commodities: Several African countries rely on the export of a
few primary commodities for foreign exchange earnings. Because the prices of
these commodities are highly volatile, they are highly vulnerable to terms of
trade shocks, which results in high country risk thereby discouraging foreign
and weak governance: Weak law enforcement stemming from corruption and the lack
of a credible mechanism for the protection of property rights are possible
deterrents to FDI in the region.
investors prefer to make investments in countries with very good legal and
judicial systems to guarantee the security of their investments.
and ineffective marketing strategy: In the past, African governments set up
agencies to promote foreign investment without taking adequate steps to lift
the constraints on foreign direct investment in the region. It is therefore not
surprising that investment promotion activities in the region have not been as
successful as expected. For example, in Nigeria, FDI promotion in the 1990s was
accompanied by increased political risk: frequent and abrupt changes in
government; religious and ethnic conflicts and border disputes. Also, FDI flows to Nigeria fell to
$6.1billion (N933.3billion) in 2010, a decline of 29% from the $8.65billion
(N1.33trillion) recorded in 2009 due to security treat in Niger Delta (World
from the idea that promotion activities in Africa started earlier than
necessary, there is also the problem that Investment Promotion Agencies (IPA)
created by domestic governments were highly bureaucratic, expensive to
maintain, and have not been successful in reversing the declining trend in FDI
flows to Nigeria.
OF THE STUDY
The broad objective is to examine the
effect of FDI on economic growth in Nigeria.
The specific objectives are to :
1. Examine the nature and trend of FDI in
relation to the Nigerian economy.
2. Examine the impact of FDI on the
economic growth in Nigeria.
3. Investigate the effect of
some macro-economic indicators on
4. Identify the constraints inhibiting the
flow of FDI, and how to alleviate these problems.
is the nature and trend of FDI in Nigeria?
2. Has there been a positive or negative
impact of FDI on economic growth in Nigeria?
3. How has the macroeconomic indicators affected the level of FDI?
4. What are the factors inhibiting the flow
of FDI in Nigeria?
quantitative technique that will be adopted in analyzing the data collected is
ordinary least square (OLS) method using economic view package (E-View) to
analyze the impact of Foreign Direct Investment on Economic Growth in Nigeria.
Multiple regression equations will also be adopted because multiple equations
provide a better representation of the real world which is relatively richer
than a single equation model.
analysis, will in this research work also be adopted in analyzing the trend of
the different variables mentioned above over the time period specified.
1.5 MODEL SPECIFICATION
following model would be adapted.
GDP = µ0 + µ1 INV + µ2 EXP + µ3 FDI + µ4 INF + U1t . . .
FDI = bo + b1 GDP + b2
EXR + b3 EXD + b4 PI + U2t . . . (II)
GDP = Growth Rate of GDP
INV = Domestic Investment Growth (Proxy for Domestic Capital Stock)
EXP = Exports Growth
FDI = Foreign Direct Investment Growth
INF = Inflation Rate
EXR = Exchange rate
EXD = External debt
PI = Political Instability (dummy
variable: 1 for democratic rule, 0
for militarily rule)
U1t = Error term for model 1
U2t = Error term for model 2
a priori expectation patterns of the behaviour of the independent variables in
terms of their parameters to be estimated are:
µ3>0 and µ4<0
b2<0, b3>0 and b4<0
1.6 STATEMENT OF HYPOTHESIS
H0: There is no significant relationship
between Foreign Direct Investment and Economic Growth in Nigeria.
H1: There is a significant relationship
between Foreign Direct Investment and Economic Growth in Nigeria.
1.7 SOURCES OF DATA
used in the course of this work will majorly be sourced from secondary sources
of varied organizations and individuals. Some of the sources include:
The Central Bank of Nigeria, which is the apex
bank in the country, relevant information will be gathered here.
OECD and IMF publications.
1.8 JUSTIFICATION OF STUDY
observation of dwindling Foreign Direct Investments and its impact on the
economy over the years are the major reasons why this study is pertinent and
therefore a justification for embarking on it.
reasons are as follows:
Policy makers will know the level of damage done
will then know the importance of effective policy making, knowing that lack of
it is what has led us to where we are today.
awareness that the need for conducive environment for FDI to thrive in, helps
to bring about development.
the realization that development often comes through the diversification of the
productive capacity of the economy.
1.9 SCOPE OF THE STUDY
project will have as its scope and time period, the years between 1970-2010
because 1970 marks the beginning of the oil boom period (Anyanwu 1998) which
had a serious impact on the Nigerian economy. For the years 1970-2010, we will
be looking at the development plans, policies, programmes and reforms that have
been in place and how the economy has responded in these varying times.
1.10 LIMITATIONS OF THE STUDY
of the major constraints is the problem of consistent and accurate data.
Another, is the problem of making assumptions which are necessary building
blocks for any model to derive logical conclusions but may not conform to
reality, example is the dummy variable assigned to political instability in the
1.11 PLAN OF THE STUDY
plan of the study shall be organized into five chapters for easy presentations:
chapter one contains the introduction of the study which deals with the
background of the study, the problems that have hindered FDI impact to growth
of the Nigerian Economy from 1980-2010, the objectives on why the study is
being carried out, the research questions looks at various important
questions this study will be attempting
to answer on the level of the impact of FDI on the Nigerian Economy, the
methodology that is the quantitative and descriptive technique that would be
used in analyzing data collected, the statement of hypothesis to ascertain
whether there is any significant relationship between Foreign Direct Investment
and Economic growth, the areas from where the data will be sourced, a
justifications on why the research is being carried out, the scope and time
period that the project would cover.
two is the literature review that looks at the various scholars and schooling
articles that have contributed immensely to the subject in question, Review of theories and trends of
FDI that reflect the need for FDI.
chapter three contains the Methodology and theoretical framework which gives a
descriptive and quantitative analysis of the data collected.
chapter four involves the Empirical Results and Discussions that explains the
various data results and their implications.
chapter five gives a brief summary and general conclusion of the results
explained in chapter four and introduces some recommendations for policy