The Impact of Foreign Direct Investment on Nigerian Economy (2000-2006)
With the advent of the third millennium the
pace of globalization has continued to accelerate. One important economic
consequence of globalization for developing countries has been the massive and
unprecedented inflows of Foreign Direct Investment during the final decades of
the last 20th century. Indeed, during the last decades of the last century;
private capital flows wrested primacy of place from public flows; seizing the
pre-eminent position as the source of foreign investment and development
finance for developing countries. However, the Nigerian Economy has been
experiencing epileptic foreign Direct investment flow in the form of investment
beginning from the dawn of globalization which has over the years not able to
fill saving and foreign exchange gap as expected. This study examines the
empirical relationship of the main impact of foreign Direct investment in
Nigeria. A simple ordinary least square Regression method is specified for the
project with scope 2000-2006. This shall be analyzed and relevant conclusion
drawn from the result. Theoretical framework was laid down for evaluating
expected result of regression. The empirical evidence strongly reveals that one
period lagged foreign Direct investment, Gross Domestic products, inflation
rate, openness of the Economy and lending interest rate are the key variables
of FDI in the period 2000-2006. By and large, the later part of the study
involves detail empirical analysis of the econometric method of estimation viz;
The Ordinary least Square Regression method, following as well as policy
recommendation and conclusion of the entire study.
BACKGROUND TO THE STUDY
The progressiveness or retiredness of any
economy of the world is anchored on the attainment of sustainable economic
growth and development which invariably and undoubtedly depends greatly on the
level of foreign investment inflows. Foreign direct investment inflows are the
main engine of growth in mostly newly industrialized economics (NIES) of the
world. At the turn of the present century, privates foreign capital mostly
flowed in the form of indirect investments from Europe to the underdeveloped
countries. Such capital flowed to low income countries in the 1920s in the form
of direct investment mainly into production for export, very little of it went
to manufacturing for the home market. But since the Second World War, over half
the private investment has been foreign direct investment but has been
concentrated mainly in the coppers electric, energy etc. Only a small
percentage has gone to manufacturing and distribution.
The indispensability of foreign Direct
investment to the growth and development of both the developing and developed
countries cannot be over emphasized indeed, the massive and unprecedented inflow
of foreign direct investment in the last decades of the 20th century is an
important economic consequence of globalization and liberation during the
period, the penetration, breaking and dismantling of barriers to trade, capital
flows across national frontiers have been ubiquitous. Hence, the growing
integration of markets and financial institutions coupled with increased
economic integration has indeed been the magnet for foreign direct investment.
According to GIWA (1997) in Obardan (2004)
investment to a depressed economy is just like a blood transfusion to an
anaemic patient. As Giwa further stressed without investment, Income generation
will be the decline as old assets and industries wear out not replaced or
renewed. Investment therefore in every economy can be classified into domestic
savings of households, retained profits of business firms and budget surplus of
government and foreign direct investment that is financed from external source.
The above classificatory will not be complete without further splitting of
foreign private investment into three major components which are: Foreign
portfolio investment Official foreign investment. Foreign direct investment
Empirical studies have shown that the fast growth rate f the newly developed
countries of Asian and Latin America is as a result of their hosting of about
90% of the world’s foreign direct investment in 1997, for instance, developing
Asian countries received 20% Latin America and the Caribbean 14% and Africa 1%,
unfortunately, there is a skewness of the flow of foreign investment such as
that of Sub-Sahara Africa countries, North Africa and the middle East have been
the last recipients.
In the case of Nigeria, although the
countries possesses a high potential for attracting foreign direct investment,
she has not been able to attract the required amount phi’s ugly trend is not
unconnected with economic instability evidenced by using inflation, interest
and exchange rate volatility arising from fiscal dominance (Central Bank of
Nigeria). Other notable constraints on foreign direct investment inflows to the
country include poor infrastructural facilities and the high external debt
burden similarly, the incessant social and political instability insecurity of
life is and properties tend to undermine Nigeria’s effort in attracting foreign
direct investment. The country however has had to rely upon term loans,
especially bilateral and multilateral loans in order to accelerate her
development. This has led to adverse consequences of sharp deterioration and
the external debt servicing problems which have surfaced since the mid 1980’s.
It should be noted that for a developing
country such as Nigeria, the flow of foreign direct investment will not only be
significant in rising the productivity but will also reduce unemployment due to
the labour force that will be employed by foreign direct investors. Moreover
foreign direct investment provides access to foreign knowledge helps overcome
the exists between the capital importing and capital exporting countries
Nigeria’s quest for foreign direct investment was informed by the need to
augment the nation’s local capacity and of course, bridge the savings, foreign
exchange and still gaps so as to reposition Nigeria in the community of
nations. In Nigeria is more efficient and has stronger effect.
Foreign Direct investment (FDI) has been
defined by the United Nations as investment in an enterprise located in one
country by effectively controlled by residents of another country. Accordingly
FDI refers to investment made to acquire lasting interest in an enterprise
operating in an economy other than that of the investment is the distinctive
feature of multinational enterprise hence a theory of the foreign Direct
investment is also a theory of multinational enterprise as an actor in the
world economy (Hennart, 1982). Foreign Direct Investment close not only mean
the transfer of capital, but as a result of the extension of enterprise there
is also the flow of technology and entrepreneurial skills and in more recent
cases, management practices from the income country to the host country.
Foreign Direct Investment is growing faster
than world GDP and world trade, thus showing the rising importance of FDI, (New
York United Nations 1991).The report by the United Nations (1991) also states
that since the early 1980’s FDI Outflow have grown three times faster than
export and four times faster than export and four times faster than world
output. According to Feldstein (2000). Several factors reflect the rising
importance of FDI in the international economy. These are: International flow
of capital reduces the risk faced by owners of capital by allowing them
diversify their lending and investment.
The global interaction of capital can
contribute to the spread of best practices in corporate governance accounting
rules and legal traditions. Foreign Direct investment ‘’FDI’’ allows for
transfer of technology. In addition to the above, FDI also promotes competition
in the domestic markets of the host country. It also provides finance to bridge
the savings gap. Umare (1981) also states several benefits of foreign Direct
Investment to include: Supplementing domestic entrepreneurship and expands it
by example and association of domestic individuals with local affiliates of
foreign firm. Foreign Direct Investment also aids the development of a nation
labour force through training. Domestic consumers also benefit from foreign
direct investment. When the incoming investment is reducing in a particular
industry, consumers may gain through lower product price. If the investment is
product improving or product innovating, consumers benefit from better quality
products or new products. One of the greatest benefits of FDI to recipient
countries is the access to foreign knowledge that private foreign investment
provides. This knowledge helps to overcome managerial and technological gap
between the developed (industrialized) and developing countries.
The United Nations Conference on Trade and
Development (UNCTAD, 1999), findings reveal that FDI continues to increase at a
global level as multinational corporations (MNC) integrates their business
operations through out the world.
Nigeria, which is the focus of this study, is
no exception to developing countries that desire
FDI. A country richly blessed in both natural
and human resources She has been identified as having great potentials for
attracting foreign investment. These potentials include a large size of market
due to its population (over 140 million people) natural resources and also a
variety of mineral resources which include tantalite, kaolin mica, barley
bitumen and a number of others. Nigeria has been identified as the second largest
foreign direct investment recipient among low income countries. The major
source of foreign investment into Nigeria has been from the Western Europe,
United States and the United Kingdom. In spite of the obvious significance of
FDI to the Nigerian economy particularly the industrial sector only a small
contribution has made by concerned scholar. It is believed that the empirical
analysis of FDI in the various sectors of the economy will bring out clearly
their nature, pattern and important determinant thus permitting adequate policy
measures to increase the inflow of foreign investment. Consequently the need
for this study is to ascertain the impact of foreign Direct investment FDI on
Nigeria economic growth.
OF THE RESEARCH PROBLEM
In spite of the myriad of incentives created
by the government over the years, the performance of foreign direct investment
in Nigeria has not been encouraging in terms of the in-flow rate. The crux of
this is to find out the main impact of FDI on Nigeria economy. The statement of
the research problem for this study therefore arises from questions such as
what is foreign direct investment flows; what is the nature of foreign direct
investment; what are the available strategies and measures to promote foreign
direct investment in Nigeria. There is the issue of volatility of foreign
direct investment in many of the open developing countries including Nigeria.
The concern is that government is handicap as regards the policies responses
and adjustment to those booms and burst pattern of foreign direct investment
inflows. Surprisingly, there is limited research study on the impact and
policies responses to volatility. Again, governments efforts aimed at
attracting foreign capital have not been successful. Despite the plethora of
incentives the performance of foreign direct investment is still unimpressive
and indeed disappointing. Hence, the general level of foreign direct investment
in Nigeria is still low.
The problem now is that there is no clear
understanding of the problem of low and declining foreign direct investment
“FDI” inflows and the constraints on the country’s investment climate. In other
words what are the main factors that influence foreign direct investment in a
country like Nigeria? Identifying the various factors determining capital
inflows is a prerequisites for designing effective polices and the diagnosis of
these problems facing Foreign Direct investment inflows is the first step
towards finding a lasting solution to Nigeria’s poor economic performance,
hence the statement of the research problem cannot be downplayed
OBJECTIVE OF THE STUDY
The key objectives behind this our study is
Find the relationship between foreign direct
investment and Nigeria economic growth. Find the impediments of foreign Direct
investment The causes of instability of Nigeria foreign Direct investment their
determinants and impacts on the economy. The necessary recommendations on the
steps the government and policy makers would take towards rekindling and
sustaining the growth of foreign Direct investment in Nigeria will be
proffered. To empirically examine the role of foreign direct investors on
In the light of the introduction, the
following hypothesis are formulated. Its important we know that hypotheses are
logical speculations based on the available information. We hypothesize in the
null and alternative hypotheses format Ho and H1 respectively.
(a) Ho: b1 = 0 foreign Direct Investment has no
significant contribution to the growth in Nigeria.
H1: b1 /0 Foreign Direct Investment
contribute significantly to the growth in Nigeria.
(b) Ho: b2 = 0 High inflation rates would not
reduce inflow of Foreign Direct Investment.
H1: b2 /0 High inflation rate would reduce
inflow of FDI into the economy.
(c) Ho: b3 = 0 low interest rates does not
encourage FDI and hence retards Economy.
H1: b3 / 0 low interest rates encourages FDI
and therefore spur up the growth of the economy.
Ho: b4 = 0 fair exchange rate does not allow
the inflow of FDI.
H1: b4 /0 fair exchange rate does not allow
the inflow of FDI.
(e) Ho: b5 =0 Openness of Economy does not
affect the contribution of FDI to the economy.
H1:b5 /0 Openness of Economy have influence
on the contribution of FDI to the economy.
(f) Ho: b6 =0 Gross Domestic product is not a
function of Foreign Direct Investment in Nigeria Economy.
H1: b6 /0 Gross Domestic product is a
function of Foreign Direct Investment in Nigeria. The bs (b1 to b6) represent
the different parameters associated with the different variables that would be
addressed or considered and the above hypotheses are designed to facilitate
investigation into the problem and are subject to testing as used below:
SIGNIFICANCE / RELEVANCE OF THE STUDY
The importance of knowing the major impacts
of foreign direct investment in Nigeria cannot be over-emphasized. In this
study, it is very important as it would enable policy maker, to examine to what
extent certain explanatory variables explained what happens to foreign direct
investment in Nigeria and hence forth policy makers will have the foresight to
better cushion the unpleasant effects of fluctuations in foreign direct
investment inflows in Nigeria. This study will add to the tools used by
economists in making decision on how to influence foreign direct investment
inflows in Nigeria even students are not left out since it helps them to
broaden their knowledge about the nexus of foreign direct investment and it’s
impact. In addition, given the unprepossessing growing rate of Nigeria economy
coupled with myriad of problems in the country the study is particularly
important in discovering if the levels of Foreign Direct investment inflows have
any bearing on the poor state of the economy. This also charts a new course of
the inflation and the implementation of the appropriate and necessary policies
that will act as inventories to foreign investors and hence accelerate economic
growth in Nigeria.
1.6 SCOPE OF
This study will cover Nigeria. It would
concentrate on the geographical domain of Nigeria though some comparative
studies of some developing countries of Asia, North America and Africa would be
briefly looked at. The study will deal with the impact of foreign direct
investment on Nigeria economy examined with reference made to other component
of foreign investment when necessary. To capture the major impacts of foreign
direct investment inflows in Nigeria substantially and make statements that are
unbiased, a period of 7 years encompassing January 2000 to December 2006 will
be considered and will subsequently serve as the time horizon for the study.
Data will be sourced from Central Bank of Nigeria statistical Bulletin, National
Bureau of statistic (NBS) publications, the Nigeria economic society (NBS)
publications financial and economic reviews, textbooks, International
publications by eminent scholars and International Monetary Fund (IMF).
LIMITATIONS OF THE STUDY
Due to the projection of this study and the
disappointing nature of Nigeria foreign direct investment inflow profile, the
study basically intend to have an overview analysis on the main impacts of
foreign direct investment on Nigeria economic growth. No study is devoid of
limitations and this is not an exception. In the course of carrying out this
study, there is the inability to source for primary data or verify the data
used and this is occasioned by time and resources constraints. Thus, the study
will rely on secondary sources of data from publications of different national
organizations (like central banks of Nigeria, National planning commission) and
international organizations (like international monetary found “IMF”). The data
and information are not consistent with the researcher other academic
obligations which further exerted pressure on the financial and extra-time,
which are invariably limited to carry out an effective review of data and
information necessary for the study. In spite the travail, the researcher went
through, the positive impact cannot be wiped out in creating fast growth in the
DEFINITION OF TERMS
For the sake of clarity, concepts that will
be commonly used in the study are briefly examined below:
INVESTMENT: Investment is a key component of
aggregate demand and National product of a country. It is defined as real gross
aggregate capital information as well as the act of producing goods that are
for immediate consumption. In other words, investment refers to capital
expenditures of real tangible.
DOMESTIC INVESTMENT: It refers to real gross
domestic capital formation. In this regard, investment is viewed as being
financed from internal resources in domestic savings. This is what makes it
different from foreign investment or specifically Foreign Direct Investment
ECONOMIC GROWTH: According to kindle Berger,
Economic growth means more output, while economic development implies both more
output and changes in the technical and institutional arrangement by which it
is produced. It is a linked concept that relate to the quantitative sustained
increased in the country’s per capital or income, accompanied by expansion in
labour force consumption capital and volume of trade.
ECONOMIC DEVELOPMENT: This is a broader
concept as it is taken to mean growth plus change. It is a multidimensional
process involving Social Structures, popular attitudes and national
institutions as well as the acceleration of economic growth.
FOREIGN INVESTMENT VOLATILITY: This refers to
functions in foreign investment inflows. This term reflect the cumulative on
external capital inflows, which seems to feed upon themselves during booms and
STRUCTURE OF THE STUDY
The study comprises five (5) chapters:
Chapter one (1).
Chapter two (2).
Chapter three (3).
Chapter four (4).
Chapter five (5)
Chapter one (1) harp on the introduction of
the project topic i.e. the impact of FDI on Nigerian economy, chapter two (2)
talk on the literature as regards to finding what previous authors have raised
about the impacts of foreign direct investment on Nigeria economic growth,
chapter three (3) dwells on the theoretical framework and methodology while
chapter four (4) deal on the empirical analysis of the study, and lastly
chapter 5 packaged the work with summary, recommendations and conclusion.