IMPACT OF FOREIGN DIRECT INVESTMENT ON THE ECONOMIC GROWTH OF NIGERIA ( 1986-2010)


IMPACT OF FOREIGN DIRECT INVESTMENT ON THE ECONOMIC GROWTH OF NIGERIA ( 1986-2010) 

 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 Objectives 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: 

1. To ascertain the impact of FDI on sector of Nigerian economy. 

2. To determine the impact of FDI on non-oil sector in the economy. 

3. To suggest measures for facilitating the steady flow of FDI into the Nigerian economy. 

1.4 Research Questions

The research intends to ask the following questions: 

1. What is the impact of FDI on oil sector in the economy? 

2. What is the influence of FDI on non-oil sector in the economy?

3. What are the measures that could facilitate the steady flow of FDI into the Nigerian economy? 

1.5 Statement of Hypothesis 

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

1.6 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. 

1.7    Scope 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.

1.8  Structure of the study

Concept of Foreign Direct Investment in Nigeria  

An agreed framework definition of foreign direct investment (FDI) exists in theliterature. That is, FDI is an investment made to acquire a lasting managementinterest (normally 10% of voting stock) in a business enterprise operating in acountry other than that of the investor defined according to residency (World Bank, 1996). Such investments may take the form of either “greenfield” investment (also called “mortar and brick” investment) or merger and acquisition (M&A), which entails the acquisition of existing interest rather than new investment. In corporate governance, ownership of at least 10% of the ordinary shares or voting stock is the criterion for the existence of a direct investment relationship. Ownership of less than 10% is recorded as portfolio investment. FDI comprises not only merger and acquisition and new investment, but also reinvested earnings and loans and similar capital transfer between parent companies and their affiliates. Countries could be both host to FDI projects in their own country and a participant in investment projects in other counties. A country’s inward FDI position is made up of the hosted FDI projects, while outward FDI comprises those investment projects owned abroad. One of the most salient features of today’s globalization drive is conscious  encouragement of cross-border investments, especially by transnational corporations and firms (TNCs). Many countries and continents (especially developing) now see attracting FDI as an important element in their strategy for economic development. This is most probably because FDI is seen as an amalgamation of capital, technology, marketing and management. Sub-Saharan Africa as a region now has to depend very much on FDI for so many reasons, some of which are amplified by Asiedu (2001). The preference for FDI stems from its acknowledged advantages (Sjoholm, 1999; Obwona, 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$64 billion through a combination of reforms, resource mobilization and a conducive environment for FDI (Funke and Nsouli, 2003). Unfortunately, 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. Further, the pattern of the FDI that does exist is often skewed towards extractive industries, meaning that the differential rate of FDI inflow into sub-Saharan African countries has been adduced to be due to natural resources, although the size of the local market may also be a consideration (Morriset 2000; Asiedu, 2001). 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. However, the level of FDI attracted by Nigeria is mediocre (Asiedu, 2003) compared with the resource base and potential need. Further, the empirical linkage between FDI and economic growth in Nigeria is yet unclear, despite numerous studies that have examined the influence of  FDI on Nigeria’s economic growth with varying outcomes (Oseghale and Amonkhienan, 1987; Odozi, 1995; Oyinlola, 1995; Adelegan, 2000; Akinlo, 2004). Most of the previous influential studies on FDI and growth in sub-Saharan Africa are multi-country studies. However, recent evidence affirms that the relationship between FDI and growth may be country and period specific. Asiedu (2001) submits that the determinants of FDI in one region may not be the same for other regions. In the same vein, the determinants of FDI in countries within a region may be different from one another, and from one period to another. Foreign direct investment (FDI) is an investment made to acquire a lasting management interest (normally 10% of voting stock) in a business enterprise operating in a country other than that of the investor defined according to residency (World Bank, 1996). Such investments may take the form of either “greenfield” investment (also called “mortar and brick” investment) or merger and acquisition (M&A), which entails the acquisition of existing interest rather than new investment. One of the most noticeable features of today’s globalization drive is conscious encouragement of cross-border investments, especially by transnational corporations and firms (TNCs). Many countries (especially developing) now see attracting FDI as an important element in their strategy for economic development. This is most probably because FDI is seen as an amalgamation of capital, technology, marketing and management. Africa as a region now has to depend very much on FDI for so many reasons, some of which are amplified by Asiedu (2001). The preference for FDI stems from its acknowledged advantages (Sjoholm, 1999; Obwona, 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 numerous studies that have examined the influence of  FDI on Nigeria’s economic growth with varying outcomes (Oseghale and Amonkhienan, 1987; Odozi, 1995; Oyinlola, 1995; Adelegan, 2000; Akinlo, 2004). Most of the previous influential studies on FDI and growth in sub-Saharan Africa are multi-country studies. However, recent evidence affirms that the relationship between FDI and growth may be country and period specific. Asiedu (2001) submits that the determinants of FDI in one region may not be the same for other regions. In the same vein, the determinants of FDI in countries within a region may be different from one another and from one period to another (Kolawole and Henry, 2009). Studies on FDI and economic growth in Nigeria are not complete in agreement in their submissions. A closer examination of these previous studies reveals that conscious effort was not made to take care of the fact that more than 60% of the FDI inflows into Nigeria is made into the extractive (oil) industry. Nigeria is a country endowed with arable land and abundant natural resources. Government policies have been directed towards ensuring that what nature has provided is harnessed and utilized to the fullest for the benefit of the citizenry. Thus, Government policies and strategies towards foreign investments in Nigeria are usually shaped by two principal objectives: the desire for economic independence and the demand for economic development (Garba, 1998). Todaro (1994) notes that the primary factors which stimulate economic growth are investments that improve the quality of existing physical and human resources, that increase the quantity of these same productive resources and that raise the productivity of all or specific resources through invention, innovation and technological progress. FDI contributes to GDP growth rates and is seen as a vital tool for economic progress. Osaghale and Amenkhieman (1987) conducted an investigation to determine whether foreign capital inflows, oil revenues, and foreign borrowing had any positive impact on the economic growth of Nigeria. They found that Nigeria’s revenue from oil export increased between 1970 and 1982 and that there was substantial growth in her total foreign debts and FDI. The study also showed that there was a positive relationship between FDI and Gross Domestic Product (GDP). The study concluded that the economy would perform better with greater inflow of FDI; and recommended that less developed countries (LDCs) should create more conducive environments for FDI. Edozien (1968) stresses the linkages generated by foreign investment and its impact on the economic growth of Nigeria. He contends that FDI induces the inflow of capital, technical know-how and managerial capacity which accelerate the pace of economic growth. He also observed the pains and uncertainties that come with FDI. Specifically, he noted that foreign investment could be counter productive if the linkages it spurs are neither needed nor affordable by the host country; and concluded that a good test of the impact of FDI on Nigeria’s economic growth is how rapidly and effectively it fosters, innovates or modernizes local enterprises. Aremu (2003) observes that foreign firms can raise the level of capital formation, promote exports and generate foreign exchange. Indeed, the role of FDI in capital formation in Nigeria has been increasing over the years. FDI/GCF (Gross Capital Formation) rose from 7.3% in 1974 to about 17% in 1985, although it was generally low in the late 1970s and early 1980s. For example, FDI only contributed 1.5% to GDP growth in 1976 and 0.5% in 1982. The relatively low level of FDI in total capital formation in these periods was similar to that of Korea and Taiwan, which had emphasized minimal levels of reliance on foreign investment. In contrast to this, were some South East Asian countries that had the policy of attracting FDI, for example, Indonesia. Nigeria retarded the contribution of FDI to gross capital formation during this period using infant industry protection, local content rules, FDI restrictions and other restrictive policies. The relative rise in the share of FDI in capital formation since 1993 has been due to rapid loosening of controls and regulations on the activities of multinational corporations in Nigeria. As a result, FDI/GCF ratio rose from 6.4% in 1986 to 32% in 1993 and 49% in 1998 (Fabayo, 2003). The linkage between investment and growth does not mean that capital accumulation is the sole determination of economic growth in Nigeria. FDI may also influence investment by domestic firms and by other foreign affiliates. An IMF study based on 69 countries over the period 1970–1989 found that FDI from developed countries stimulated domestic investment (Borensztein et al, 1998). Thus, Odozi (1995) posits that FDI appears to be the most crucial component of capital inflow Nigeria should seek to attract in light of her current economic circumstances. Many studies, however, indicate that the impact of FDI is limited or even negative sometimes. In a study of Nigeria, Onimode et al (1983) found that where FDI was directed at import-substituting firms, the value of imports was observed to be greater than the value-added produced. This type of FDI would give rise to outflows of investment income and high cost of imported inputs which adversely affect growth. Ohiorheman (1993) asserts that with the research and development (R&D) concentrated in the head offices of multinational corporations (MNCs), technology transfer was limited. He added that even though the MNCs provided local training programs, Nigerians were intricacies of machinery construction or installation. Consequently, their innovative ability was not enhanced. He concluded that, to the extent the MNCs dominated the manufacturing sector, their activities generated little multiplier effects and the linkage effects were generally low in the (manufacturing) sector. Using indices of dependence and development as a mirror of Nigeria’s economic performance, Oyaide (1977) concluded that FDI engineers both economic dependence and growth. In his opinion, FDI causes and catalyzes a level of growth that would have been impossible without such investment. This is, however, at the cost of economic dependence. Although a lot of studies indicate that there exists a positive relationship between FDI and economic growth in Nigeria, there is a consensus among economists that the country’s growth rate would have a positive impact on FDI. The prospect that FDI will be profitable is brighter if the nation’s economic health is better and the growth rate of GDP is higher.

 

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IMPACT OF FOREIGN DIRECT INVESTMENT ON THE ECONOMIC GROWTH OF NIGERIA ( 1986-2010)



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