The Impact of Foreign Direct Investment on the Nigerian Economy (2000-2006)
Chapter One
Objectives of the Study
The main objective of this study is to examine the impact of FDI on economic growth in Nigeria
The specific objectives include:
- To determine the impact of Foreign Direct Investment on economic growth in Nigeria
- To establish whether there is any kind of relationship between economic growth and Foreign Direct Investments in Nigeria.
CHAPTER TWO:
RELATED LITERATURE
Introduction
Foreign direct investment is a very principle engine for economic growth especially in developing countries. This chapter studies the related literature under conceptual framework, a brief background of FDI in Nigeria, theoretical framework and the empirical literature review.
Conceptual Review
Foreign Direct Investment
According to various authors, FDI as a concept has many comprehensive definitions and basic characteristics. The impacts of FDI on both positive and negative spillover effects in developing countries have been examined, and a portion of researchers’ opinions regarding its meaning and characteristics will be evaluated. It is simply described as a country’s official move to acquire ownership of assets in another country for various business objectives such as production, distribution, and advertisement.
FDI is simply defined as an investment involving a long-term relationship and reflecting a lasting interest and control of a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than the foreign direct investor’s (FDI enterprise, affiliate enterprise) according to the United Nations 1999 World Investment Report (UNCTAD, 1999). Foreign Direct Investment (FDI), which refers to the transfer of financial and human capital from one country to another, is an essential component of international capital flows, according to Montiel and Reinhart (2001).
According to the World Bank, FDI is defined as an investment intended to acquire long-term ownership and control stake (at least one-tenth of the equity) in a company that operates outside of the investor’s home country. The investment of resources in commercial operations outside a firm’s native nation is known as foreign direct investment (FDI) (Hill, 2003). Caves (1996) believes that attracting more FDI is predicated on the idea that FDI has a beneficial influence on host economies’ developmental difficulties.
FDI is defined by Mallampally and Sauvant (1999) as investments in other nations by multinational firms with the goal of controlling assets and managing production operations in such countries. Ayanwale (2000) goes into further detail about the operational meaning.
FDI is defined as the ownership of at least 10% of the ordinary shares or voting stock of a foreign company. Thus, holding of 10% ordinary shares establishes a direct investment relationship, but ownership of less than 10% establishes a portfolio investment relationship.
FDI has been categorized into several kinds by different writers. It may be divided into two categories: inward FDI and outward FDI. The Inward refers to the attempts of developed multinational corporations in developed countries to invest in developing countries, whereas the Outward refers to the efforts of developing economies to expand their investments outside of their country to developed countries. According to Dunning, there are four forms of FDI developed from the ownership location and internalization (OLI) hypothesis. Market-seeking FDI, resource-seeking FDI, efficiency-seeking FDI, and strategic asset-seeking FDI are the four types of FDI.
Market-seeking FDI’s major goal is to enter host nations’ local markets in terms of market size and per capita income, market growth, access to regional and global markets, consumer preferences, and domestic market structure. Natural resources, such as raw materials, lower unit labor costs of unskilled labor and the pool of skilled labor, physical infrastructure (ports, roads, power, and telecommunication), and the degree of technology are all sought after by resource-asset seeking FDI. Efficiency-seeking FDI is driven by the desire to provide a source of competitiveness for businesses, and it goes where production costs are lowest.
Finally, strategic asset seeking FDI attempts to help businesses advance their global or regional strategies for operating in the internalizational market.
FDI and international capital flows, according to Harunadanja (2012), are narrowing the savings gap in developing nations. Foreign direct investment (FDI) is often considered as one of the world’s fastest expanding economic activity. FDI flows throughout the world have grown rapidly, from an annual average of US$142 billion between 1985 and 1990 to over US$385 billion in 1996, and then to a new high of US$1.9 trillion in 2000. (UNCTAD, 2009)
CHAPTER THREE
RESEARCH MEHODOLOGY
Research Design
The research involved an econometric study. The variables for the study and their relationships are defined thus: Foreign Direct Investment (FDI) – FDI/GDP ratio; Gross Domestic product (GDP) – InGDP (natural logarithm of GDP). All data for the research were obtained from secondary source comprised mainly of books, journals buttletins, unpublished books, articles et cetera. The Data was analysed using the Ordinary Least Square method of Regression analysis and denoted as GDP = f (FDI); GDP = FDI + e further designate as YI = b0 + b1 x1 + eI.
Method of Data Collection
Data was collected for this project using secondary source. This was collected from Central Bank of Nigeria Annual Reports and Statement of Accounts for various years, CBN Statistical bulletins for various years; Journals, Books unpublished paper et cetera.
Model Specification
The specification of model involves the expression of the relationship between variables in mathematical form. That is, to specify the model with which the economic phenomenon will be explored empirically. It involves the determination of the following:
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
DATA PRESENTATION
Data for our analysis were collection from CBN Annual Reports and Statistical Bulletin and National Bureau of Statistics (1992- 2000) and are depicted in the table below.
CHAPTER FIVE
SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUTION
SUMMARY OF FINDINGS
The summary of our findings are as follows:
- The analysis showed that the inflow of Foreign Direct Investment is a major determinant of economic growth and development in Nigeria for the period under review.
ii The study revealed that the variables (GDP, FDI, EXRATE and INFRATE) that were used for the study were cointegrated and have a stable relationship in the long-run. The presence of cointegration between GDP, FDI, EXRATE and INFRATE based on Johansen cointegration test, allowed the use of Granger Causality test to determine the causal direction between the variables.
- From the result of the Granger causality test, it was ascertained that the causality runs form FDI to GDP and not from GDP to The positive relationship implies that Foreign Direct Investment stimulates economic growth in Nigeria. The result can be put forward as a guide for policy makers to take the advantage of Foreign Direct Investment spillover effects. The positive relationship also indicates that Foreign Direct Investment has really contributed to the growth of the Nigerian economy for the period under review.
- Strong evidence emerging from this study shows that economic growth as measured by GDP in Nigeria is Granger caused by FDI, which shows that Nigeria’s capacity to progress on economic growth will depend on the country’s performance in attracting Foreign Direct Investment. This study supports the impact of FDI on GDP growth in These findings confirm the relevance of the economic reform programmes in Nigeria to reduce macro-economic instability, remove economic distortions, promote exports and restore sustainable domestic investment for economic growth.
- The study also showed that there is no significant positive spillover from Foreign Direct Investment and exchange rate (FDI – EXRATE) and Foreign Direct Investment and inflation rate (FDI – INFRATE). This implies that they do not have a direct effect on each other, no causality exist between
- Finally from the findings of this study, the conservative views that the direction of causality runs from FDI to economic growth was confirmed in the case of Nigeria. This supports the validity of policy guidelines which stipulates the importance of Foreign Direct Investment for the growth and stability of developing countries under the assumption of FDI led growth.
CONCLUSION
As one of the empirical studies on the analysis of Foreign Direct Investment and economic growth in Nigeria, this study has made an attempt to understanding the relationship and interaction between them. The proxy for economic growth used in this study was gross domestic product. It focused on the period 1991 to 2000 and used time series data obtained from the CBN, World Bank and Federal Office of Statistics. Some statistical methods; Ordinary Least Squares, Unit root, Cointegration and the Granger causality test were used to test for correlation and direction of causality. The result arising from this study shows that there is a long run relationship between the variable and that the direction of flow is from FDI to growth, which implies that the growth which has been experienced in the country for the past years has been partly due to the inflow of Foreign Direct Investment into the country.
Undoubtedly, the findings of this report go a long way in bridging the existing information gap and also enabling policy makers to plan and formulate both short and long term policies from an informed perspective. For a third world and a country like Nigeria, attracting FDI is of paramount importance if the country needs to grow, given its positive benefits. However, countries ought to be aware of the risks such as destabilisation of exchange rates and other macroeconomic fundamentals associated with accumulating too much Foreign Direct Investment beyond their absorptive capacity.
The Nigerian economy was reformed and became more outward looking with the structural adjustment program launched in the 1980’s. The main objectives of this program can be summarized as: i) minimizing state intervention; ii) establishing a free market economy iii) integrating the economy with the global economic system. This liberalization process through liberalized import regime, new foreign investment and export promotion policies have enabled Nigeria to take its place in the global economy.
RECOMMENDATIONS
In our concluding remarks, we recall that data used in the study were from secondary source. We may not guarantee their source, accuracy and consistency. The circumstances surrounding their generation when put side by side to the circumstances surrounding this study may not agree actually in all aspects. Suffice the above, to say based on previous publications in this area of study, this study does not agree with the existing literature for further reference. We can therefore conclude as follows:
There is a need for domestic actions which involve actions to be taken by policy makers in the country. These include image building (re-branding Nigeria), domestic regulatory reforms, and marketing of investment opportunities.
Image building: Improving the currently bad image of the country is the key to reversing the dismal FDI trend of the country and Africa at large. This requires an increase in Political stability, Macroeconomic stability and the protection of property rights as well as the rule of law.
Supporting existing investors: Improving the investment climate for existing domestic and foreign investors through infrastructure development; provision of services and changes in the regulatory framework by relaxing laws on profit repatriation etc, will encourage them to increase their investments and also attract new investors. In the case of domestic investors, an improvement in the investment climate will also encourage them to keep their wealth in the region and reduce capital flight.
Marketing investment opportunities: Creating awareness of investment opportunities through the use of existing investors and information communication technologies such as the internet. Experience has shown that over- reliance on IPAs for investment promotion has not been very effective in the African region, so there is the need for a shift of emphasis from IPAs to existing investors. This is also relevant because studies have shown that existing investors play a very important role in attracting new investors to new investment locations. For example, in a recent study of foreign direct investor perceptions conducted by the United Nations Industrial Development Organisation (UNIDO) in four African countries, namely Ethiopia, Uganda, Nigeria, and Tanzania, existing investors were found to be responsible for roughly 50% of foreign investor awareness of domestic investment opportunities (UNIDO, 2002). There is also the need for the country to adopt a more targeted investment promotion strategy. In other words, she should identify sectors where they have comparative and competitive advantages and then promote FDI into those sectors. This would make investment promotion less costly and more effective.
Diversification of the economy: Several African countries rely on the export of a few primary commodities for foreign exchange earnings. This exposes them to significant terms of trade shocks. Diversification of the economy will enable them to cushion the effects of these shocks and reduce country risk. The reduction in country risk will increase the attractiveness of the economy to FDI in the secondary and tertiary sectors.
Trade liberalization: Openness to trade will signal commitment to outward- looking, market-oriented policies and enhance trading opportunities thereby attracting foreign investors intent on taking advantage of the new trading opportunities.
Privatization: The privatization of inefficient state-owned enterprises will boost foreign investment. African countries and Nigeria in particular have now recognized that the privatization of public corporations is necessary to reduce government fiscal deficits and several countries have instituted privatization programmes. However, progress in the privatization of enterprises has been slow in several countries because of domestic political pressure by powerful interest groups that are against the process.
Also to spread and sustain growth in Nigeria, the evidence here points to three key objectives: avoiding collapses in growth, accelerating productivity growth, and increasing private investment. This can be accomplished by increasing the number and variety of firms and farms that can compete in the global economy. This implies pushing for more exports, increasing connectivity to regional and global markets through deeper regional integration. These in turn require adopting the four sets of policies proposed in Challenges of African Growth (Ndulu et al, 2000), published by the World Bank’s Africa Region. These include:
Improving the investment climate: This requires reducing indirect costs to firms, with energy and transportation topping the list of major impediments. It also requires reducing and mitigating risks, particularly those relating to crime, property security, political instability, and macroeconomic instability. Although individual countries are the focal point of action, their efforts could be pooled to coordinate policy, promote investment, improve security, and increase connectivity.
Improving infrastructure: This is essential to reducing the transaction costs in producing goods and services. Transportation and energy make up the largest part of indirect costs for businesses, weighing heavily on the competitiveness of firms in most African countries. The focus would be on reducing the high costs associated with the remoteness of landlocked countries to facilitate their trade with neighbours and the rest of the world. Again, there will be a clear need to look beyond country borders and adopt a regional approach to coordinating cross border infrastructure investment, maintenance, management, and use to lower costs.
Spurring innovation: This will require investment in information technology and skill formation (higher education) to enhance productivity and competitiveness. The potential comparative advantage of low wages in Africa is too often nullified by low productivity. Surveys of investors show that labour is not cheap where productivity is low. Information and communication technologies can be the main driver of productivity growth. And there is strong empirical evidence showing that investment in information and communication technologies and in higher education boosts competitiveness, making both key parts of the growth agenda. African countries can make a huge leap forward over antiquated technology by exploiting the technological advantages of information and communication technologies as late starters.
Building institutional capacity: The World Bank’s Investment Climate Assessment surveys and analysis for World Development Report 2005 (World Bank, 2004) spotlight costs associated with contract enforcement difficulties, crime, corruption, and regulation as among those weighing most heavily on the profitability of enterprises. The main focus here would be to strengthen the capacity of relevant public institutions for protecting property rights and the scrutiny of, and accountability for, public action. Action on these four fronts can accelerate growth in Africa and Nigeria in particular and help countries break out of the boom-bust-stagnate cycles. The patterns described in this essay provide a guide for public policy, not a formula for success. Each country faces its own challenges and opportunities, and each country has to work within its own historical and geographical resources and constraints. Sustained faster growth in Africa is possible, if Africa’s economies can meet the challenges of avoiding growth collapses, raising productivity, and boosting private investment.
Nigerian leaders should make sure that the principles enshrined in the New Partnership for Africa’s Development (NEPAD) documents are taken seriously and implemented in the country, because there is the distinct possibility that this may change the quality of economic policy-making in the country and improve the investment climate.
REFERENCES
- Anyanwu, J. C. (1998). An Econometric Investigation of Determinants of Foreign Direct Investment in Nigeria. In Investment in the Growth of Process: The Nigerian Economic Society Conference.219-241. Ibadan, Nigeria
- Aremu J.A. (1997). Foreign Private Investment: Determinants, Performance and Promotion.
- CBNBulletin. 108-112.
- Aremu, J. A. (2003). National Centre for Economic Management and Administration, Macro-economic Policy Analysis and Management Program, designed for Research Staff of the Central Bank of Nigeria.
- Arene, C.J, Okpukpara, B.C. (2006). Economics of Agricultural Production, Resource Use and Development, Nsukka: Prie publishers.
- Ayorinde, F.O. (2005). Prices, quality, and demand for modern health care facilities in Oyo state, Nigeria.Ibadan Journal of the Social Sciences, 3(1), 42-51.
- Babawale, T., Odukoya, A. (2005). Continuity and change in urban politics and governance in Nigeria. Ibadan Journal of the Social Sciences, 3 (1), 17-28.
- Balasubramanyan, V.N. (2001). Foreign Direct Investment in Developing Countries: Determinants and Impact. OECD Global Forum on International Investment.
- Barro, R. J. (1991). Economic Growth in a Cross Section of Countries. Quarterly Journal of Economics. 106 (2), 407 – 443
