THE EFFECT OF FOREIGN DIRECT INVESTMENT ON THE ECONOMIC GROWTH OF NIGERIA


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THE EFFECT OF FOREIGN DIRECT INVESTMENT ON THE ECONOMIC GROWTH OF NIGERIA

ABSTRACT:               

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 has the attraction of foreign investment to Africa as a major component. This study investigated the empirical relationship between FDI and Nigeria’s economic improvement and also the determinants of FDI into the Nigerian economy. The secondary data were sourced from various publications of the Central Bank of Nigeria, such as CBN Statistical Bulletin, CBN Statement of Accounts and Annual Reports, and Bureau of Statistics publications. The period analysis covered thirty (30) years (1989 – 2019). Based on the findings revealed by the study, it is recommended that Nigerian economy should improve the investment climate for existing domestic and foreign investors through infrastructure development. Moreover, provide services and changes in the regulatory framework relaxing laws on profit repatriation which will encourage investors to increase their investments and also attract new investors.

TABLE OF CONTENTS

TITLE PAGE. i

DECLARATION iv

CERTIFICATION. v

DEDICATION. vi

ACKNOWLEDGMENT vii

TABLE OF CONTENTS viii

ABSTRACT. xii

CHAPTER ONE: INTRODUCTION

1.1 Background to the Study.................................................................. 1

1.2 Statement of the Problem................................................................. 3

1.3 Objectives of the Study.......................................................................... 3

1.4 Research Questions.......................................................................... 4

1.5 Research Hypotheses........................................................................ 4

1.6 Scope of the Study.................................................................................. 4

1.7 Significance of the Study……………………….…………………….…. 4

CHAPTER TWO: LITERATURE REVIEW AND THEORETICAL FRAMEWORK

2.1 Introduction……………………………………………………… 5

2.2 Conceptual Framework ………………………..………………… 5

2.3 Theoretical Framework........ …………………………………………… 8

2.4 Empirical Literature Review …………………………………………… 15

2.5 Gap(s) Identified in the literature ……………………………………… 18

CHAPTER THREE: RESEARCH METHODOLOGY

3.1 Nature and Sources of Data ..................................................................... 20

3.2 Model Specification ............................................................................... 20

3.3 Method of Data Analysis .......................................................................... 22

3.4 Diagnostic Tests ....................................................................................... 23

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS OF RESULTS

4.1 Data Presentation ....................................................................................... 24

4.2 Unit Root Test …………………………………………………………. 24

4.3 Bound Cointegration Test ……………………………………………… 26

4.4 Auto Regressive Distributed Lag Estimates …………………………. 27

4.5 Residual Diagnostics …………………………………………………… 31

4.6 Coefficient Diagnostic …………………………………………………. 33

CHAPTER FIVE: SUMMARY, CONCLUSION, AND RECOMMENDATIONS

5.1 Summary of Findings 34

5.2 Conclusion ………………………………………………………. 34

5.3 Recommendations 36

REFERENCES 37

APPENDICES 40

CHAPTER ONE 

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The role of Foreign Direct Investment on economic growth has been vigorously debated in the literature. Some studies are of the view that Foreign Direct Investment (FDI) contributes positively to the growth of the economy (Adegbite and Ayadi, 2011; Koojaroenprasit, 2012; Onu, 2012; Adeleke, Olowe and Fasesin, 2014; John, 2016; and Ali and Hussain, 2017), while some are of the view that FDI only contributes small and it is not significant (Akinlo, 2004; Louzi and Abadi, 2011). However, the attributes of FDI in any economy of the world cannot be over-emphasized. FDI refers to an investment made by an investor either corporate bodies or individuals in a country other than the domestic country of origin of the investor in creating business or buying an asset in the country. (John, 2016) posits that foreign direct investment is seen as a process of moving technology and capital from a nation either developed or developing countries to another nation. (Farrell, 2018) posits that foreign direct investment refers to the package of technology, capital, management, and entrepreneurship that firm uses to operate and provide goods and services in a foreign market. In Africa, Nigeria is the third host economy for FDI, behind Egypt and Ethiopia. Some of the investing countries in Nigeria are the USA, United Kingdom, China, the Netherlands and France (UNCTAD, 2018). Nigeria FDI flows in 2017 dropped by 21% to reach 3.5 billion USD which could be as a result of political instability, lack of transparency widespread corruption and poor quality of infrastructure (UNCTAD, 2018). However, this study tends to re-examine the effect of foreign direct investment on economic growth in Nigeria.

The relevance of FDI cannot be overemphasized. Its significant influence on the provision of new technologies, products, management skills and competitive business environment, overtime has been a strong impetus for economic growth. Many countries of the world,

especially emerging economies favor policies that encourages the inflow of FDI because of it positive spillover associated with the provision of funds and expertise that could help smaller companies to expand and increase international sales and transfer of technology thus, forming new varieties of capital input (i.e. flow of services available for production from the stock of capital goods e.g. equipment, structures, inventories etc.) that cannot be achieved through financial investments or trade in goods and services alone.

Nigeria is one of the economies with great demand for goods and services and has attracted many FDI over the years since the discovery of crude oil. According to the World Bank, from 1970 to 1979, Nigeria recorded an average ratio of FDI net inflow of about 1.579 to GDP while from 1980 to 1989, the average ratio of FDI net inflow to GDP recorded stood at 1.947. Thus, in 1994 and 1993, the country made a remarkable record of 8.28 and 6.3 respectively. Since 1993 and 1994, the record was not an issue to contend with. To the greatest dismay, from 1995 to 2010, FDI, net inflow as % of GDP in Nigeria has not gone beyond 4.0 except in 1996, 1997, 2005 and 2009 the country made a record of 4.51, 4.25, 4.44 and 5.08 respectively. World Bank research contained in global development finance 2008 shows that Thailand attracted $9.6 billion in 2007 while Nigeria attracted just about $6.03 billion. Also, CBN (2010) annual report also indicated that total FDI inflow into the Nigerian in 2010 was about $5.99 billion. The breakdown of the amount according to the report shows that FDI portion was just 12.2 percent or $668 million. This represents a 78.1 percent drop from $3.31 billion in 2009. In light of the above, many Nigerians are lost in guesses of the likely causes of the insignificant inflow of FDI into the country. This has been a source of worry to both policy makers and government authorities. Amidst, (Asiedu, 2005) asserted that the level of FDI attracted by Nigeria is indifferent compared with the resource based and potential need, taken into cognizance of the fact that Nigeria is the 8th ranked most populous nation and 32nd biggest economy in the world

(CIA World fact book) with the endowment to do better than its counterpart South Africa as the Africa biggest economy following the statement of investment giant Morgan Stanley.

STATEMENT OF THE PROBLEM

The Nigerian economy has long been in existence, it is as old as the nation itself. The value and quality of productive investments, especially since the early 1980s, raise concern, (Garba, 1958). As such, several governments in Nigeria have at one time or the other put forth different economic policies aimed at gaining economic independence through improved production capacity. Such policies include: Industrial Inspectorate Act 1970, National Industrial Property Act 1979, National office for technology Acquisition and Promotion (NOTAP) 1992 and so on.

In order for the government to achieve her aim of economic independence, the government thought it wish to encourage FDI into the country, although it has often been alleged that FDI brings along possible balance of payment (BOP) problem but their great potential for accelerating the pace of economic progress of developing countries (Nigeria included) cannot be over emphasized. For instance, FDI brings about capital, technological know-how and foreign exchange which this country lacks so much. However, among economists and policy makes a likes, there are disagreements as to the benefit of FDI in the developing countries while some fashion attest to its developmental role others see it otherwise.

OBJECTIVES OF THE STUDY

The broad objective of the study is to examine the effect of FDI in Nigeria on economic growth in Nigeria. The specific objectives are to

a) To examine the effect of Foreign Direct investment on economic growth in Nigeria.

b) To investigate the effect of Domestic Investment on economic growth in Nigeria.

c) To make recommendation regarding relevant policy options where possible.

RESEARCH QUESTIONS

The following questions are asked in guidance to the attainment of this research.

a) Does FDI contribute to the growth of Nigeria?

b) What are the effect of Domestic Investment on the economic growth in Nigeria?

c) What are the necessary policies options to attract foreign direct investment in Nigeria to the economy?

RESEARCH HYPOTHESES

The hypothesis of the study will be tested as follows:

H1: There is a significant relationship between FDI and economic growth in Nigeria. H2: Domestic investment has no significant effect on Nigerian economic growth.

H3: Foreign Direct investment and Domestic investment has no long run significant relationship on economic growth in Nigeria.

SCOPE OF THE STUDY

The study will center on the contribution that has been made to economic growth of Nigeria by the way of gross domestic product (GDP) through FDI engulfing the period from 1989- 2019. Annual time series data will be engaged using GDP as a proxy for economic growth and other variables such as FDI, exports, foreign exchange and interest rate in Nigeria.

SIGNIFICANCE OF THE STUDY

The finding of the study will increase knowledge of policy makers on how to boost the effect of FDI on economic growth. The research will also contribute to the literature of FDI and growth in the economy of developing countries. It will therefore serve as a reference material to both researcher and academicians on FDI and its effect on the economy of Nigeria.

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