An Analysis of the Trends of Foreign Direct Investment Inflows in the Nigerian Construction Sector
Chapter One
Aim and Objectives of the Study
The study aims to analyze the trends of FDI inflows in the Nigerian construction industry to study the pattern of flow and assess the resultant effect or impact of increased flow of FDI on construction projects in Nigeria. The following objectives were the premise for achieving this aim:
- To study and assess the flow of foreign direct investment into the construction sector in Nigeria.
- To examine the effect of flow of foreign direct investment on the Nigerian construction sector.
CHAPTER TWO
LITERATURE REVIEW
Relevance of the Construction Industry and the Nigerian Scenario
Some refer to it as the built environment industry while many others call it the construction industry (Akindoyeni, 2011). The construction industry has the responsibility for physical infrastructure development which is required by all sectors of the economy. It is therefore, a critical factor or variable of progress in the drive for economic advancement of nations, especially Less Developed Countries (LDCs) such as Nigeria (Ekpo, 2010).
The industry has a 3% contribution to the national Gross Domestic Product (GDP), compared to manufacturing of 4% (Anyanwu, 2007). According to Dutse (2008), in the developed world, the construction industry is the highest employer of labour, but in a developing country such as Nigeria, it is expected to be the second highest employer of labour after the agriculture industry. Akindoyeni (2011) also asserted that in the conduct of economic activities, construction industry is always used by government as the stimulus for the buoyancy of the economy
Overview of Infrastructural Development Issues in Nigeria
Infrastructure development has been identified as critical to the achievement of national development goals (Efem, 2009). In recognition of this, the Nigerian government is proposing to source for resources worth Nine Billion Dollars ($9b) annually into the development of infrastructure. World Bank (2010) opines that U.S.$31Billion is needed by Africa from foreign investors to develop infrastructure needed for development. To corroborate this view, Kolapo (2010) asserted that infrastructural facilities is the pillar of development, the government should therefore evolve a policy to induce foreign investment into Nigeria’s economy; because foreign investment is desperately needed for essential infrastructure.
Despite all lofty initiatives and programmes by government and private sector, actual physical achievements in infrastructural development in Nigeria still remain a mirage. A survey of households by World Bank (2010) revealed that:
The vast majority of Nigerians have little access to basic public services.
In urban areas, there is lack of pipe borne water, irregular electricity supply and lack of good roads.
According to Mogbo (2004), the infrastructure in Nigeria is generally inadequate and of poor quality when compared to Europe, North America and Japan. The infrastructural base of the Nigerian economy has remained weak in the past decades, and further characterized by uneven distribution, unreliability and decay, arising from several years of neglect. In 1999, Nigerian government responded to the problem by expressing determination to improve basic infrastructure as a means of promoting economic development (Orji, 2004).
A number of studies corroborate this. For instance, Power supply in the country has been grossly inadequate as only 30 percent of the population had access to electricity (Ekpo, 2010).World Bank (2010) assessment showed that more than one hundred million Nigerian’s do not have access to electricity supply. Mustapha (2009) and Makunike (2008) also asserted that the state of transport infrastructure has been generally poor, as road, rail, air and water transport systems have for several years been characterized by deplorable conditions, such that most rural areas cannot link up with the rest of the country. In addition to this, communication infrastructure before now remained government monopoly, and the cost of providing services is one of the highest in the world, due to inefficiency. This has however changed with the influx of private communications investors.
Dutse (2008) opined that there is currently a serious need for a sustained planned approach towards the development of the nation’s water resources. Despite the abundant latent water resources, about 30% of Nigerians have access to safe water. This problem can easily be traced to inadequate budgetary provision. Experts reckon that the country currently needs 16 million homes. In a report by Shelter Rights Initiative (SRI) submitted to the United Nations Committee on Economic, Social and Cultural Rights, there is need for the production of over 8 million housing units in Nigeria between now and year 2015 at a minimum rate of 800,000 units annually (Okomoh, 2004).
Manufacturing and processing facilities in the construction sector on the other hand, has been characterized by low capacity utilization that averaged 30 percent in the last decade. Low and declining contribution to national output that averaged 6 percent in 1997 – 1999 (Todero, 2001). These features clearly identify Nigeria as a country characterized by the phenomenon of de-industrialization. According to Omagbeme (2010), despite the high level of investment in petroleum industry by government and private enterprises, its performance in the last eight years been unimpressive and characterized by product shortages occasioned mainly by communal strife, pipeline vandalization, and failure to carryout proper Turn-Around-Maintenance (TAM) of refineries and pipeline systems as and when due.
According to Oyinloye (2011) Nigeria’s infrastructural deficit is estimated to be in excess of $200billion (more than N30trillion). It is essential for infrastructural investors to access the nation’s N2trillion plus pension fund pot. Therefore, it is no longer news that the extent of financing required to bridge the country’s infrastructure deficit surpasses the supply of capital available from government.
CHAPTER THREE
RESEARCH METHODOLOGY
Data Collection
Evidence from literature served as the basis for data generation. Sequel to this, archival materials from the Central Bank of Nigeria (CBN) and the National Bureau of Statistics (NBS) – Annual Abstract of Statistics from 1989 to 2008 were used. This is because as at December, 2010, published Statistical Bulletin shows that data for 2009 is still reflected as provisional.
Data for the study were presented in tabulated format and graphs to ensure pictorial elucidation. The impact or extent of effect of FDI on construction sector was established with the aid of regression analysis. The archival data collected were analyzed electronically with the use of statistical software (Microsoft excel and SPSS Version 16.0). The Microsoft excel conducted the trend analysis and charts. The Duncan Multiple Range Test of the Post Hoc Analysis was used to compute and arrange mean foreign investment to the various sectors. Also, statistical software Gretl Version 9.1.1 was employed to perform the Granger Test. The reliability of the research data was conducted descriptively via SPSS Version 16.0 to determine the coefficient of the reliability of the data.
CHAPTER FOUR
DATA PRESENTATION, ANALYSIS AND DISCUSSIONS
Flow of Foreign Direct Investment into the Nigerian Construction Sector
To assess the flow of foreign direct investment into construction sector in Nigeria. An analysis of the extract from tables 1 and 2 yielded table 3, which also addressed the first objective of the study.
CHAPTER FIVE
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION
Summary of Findings
This study analyzed foreign direct investment inflows in the Nigerian economy and its construction industry. Sequel to this, it explored the trends of this flow and the impact of FDI on the construction sector in Nigeria within the years under review. Based on the analysis and the hypotheses tested, the major findings of the study are summarized as follows:
The Nigerian construction sector has a poor flow compared to manufacturing and processing, mining and quarrying and other miscellaneous sectors of the economy. This is not good for a country like Nigeria, knowing full well that the pillar of any economy is the presence of infrastructural facilities. This sector ought to be the second largest employer of labour in any developing country, such as Nigeria.
Moreover, investments in these sectors: manufacturing and processing, mining and quarrying, and miscellaneous were significantly greater than that of the construction sector. The investment in trading and business services was also greater than that of the construction sector but insignificantly. The minimum foreign investment of FDI to construction sector is N71.2, the maximum was N12,702.5 and the mean was N4,129.6. Although, the investment in construction sector was greater than that of the transport and communication and agriculture sector, but comparatively insignificant to them.
The study also succeeded in establishing, from the ‘Johansen Cointegration Test’ conducted, that FDI and construction sector are significantly cointegrated, indicating a valid relationship at 0.05 or 5%. The study also revealed that according to Granger sense, the Granger Causality Test at lagged of 2 and 4 (both in level form and first differences), indicated that the causality is bi-directional, that is FDI < = > construction sector. Hence, construction sector Granger-Cause FDI inflow as well as FDI inflow Granger-Cause construction sector in Nigeria. The implication of this is that infrastructural facilities on ground through construction activities can attract FDI inflow according to Granger sense. Also, FDI inflow to any sector of the economy, not necessary construction sector, can lead to more activities in the construction sector. This is because, directly or indirectly, these sectors would need construction facilities such as buildings and access roads to commence full activity.
The study further established that there is significant effect of FDI on the construction sector. That is why there is need to encourage the inflow of FDI into the economy in order to boost the construction sector, knowing full well that this sector is a potent motivator of other sectors. It also reveals a highly positive correlation of 94.7% between FDI and construction sector. This finding agrees with the cointegration model (Granger Test) that indicated a significant relationship of FDI and construction sector at 5%.
A regression model was developed to establish the relationship. The model is:
Construction inflow = α0 + α1 FDI + e1
Construction inflow = -726.998 + 0.0311638FDI.
The interpretation of the above model is that a unit change in the FDI inflow into the construction sector will result to 3.1% increase in the construction sector. This result actually indicated a poor flow of FDI into the construction sector, hence it suggest that any unit increase in FDI inflow may result to subsequent increase in construction sector. This model agrees with the cointegration model (Granger Test) that indicated a significant relationship of FDI and construction sector at 5%. The cointegration regression trend analysis model (Granger Test) is:
Construction inflow = α0 + α1 FDI + e1
Construction inflow = -254.524 + 0.04012FDI.
This is a little deviation from regression model, showing 4.0% increase in the construction sector from the FDI inflow with a unit change from FDI inflow. This is less than 5%, indicating a valid model.
Conclusions, Implications and Recommendations
Conclusions and Implications of the Study
With the high positive correlation of the regression model developed to establish the relationship between FDI and construction sector, it is believed that this model will significantly act as indicator to monitor whether there is increase or decrease from FDI inflow to construction sector. Also, even though FDI impacted significantly on construction sector as shown according to Granger Causality Test, it also shown that construction sector can Granger-Cause FDI. It is therefore hoped that the result of this research will provide early warning signs to policy makers of the economy to either enhance their strategy or change it entirely if there was no improvement or positive increase within a span of two to three years. This study will also assist the construction industry, by urging policy makers to appreciate that this sector is the prime and potent motivator of the national economy.
Moreover, the study has revealed that the extent of financing required to bridge the country’s infrastructure deficit surpasses the supply of capital available from government. Therefore, there is urgent need for increased private and public sector participation alongside the foreign investors in arresting the nation’s infrastructural decay. Finally, the study will enhance the competitiveness and survival of Nigerian construction industry in the global market and ultimately improve the contribution of the construction sector to the national economy with the enhancement of flow of foreign direct investment to the construction sector in Nigeria.
Recommendations
Based on the findings of the study, the following policy recommendations are proposed:
The Nigerian Government should build a strong institutional framework, mainly in areas of investor protection and investment facilitation. Investors should be convinced of the efforts being made regarding tackling political, security risks and the environment of uncertainty.
Policy makers should put all machinery in place to encourage FDI inflow in the Nigerian construction sector. They should examine the existing laws, remove bottlenecks and devise ways of increasing foreign investment flow in construction investment. This could be achieved in the form of public private partnership to encourage investors to build infrastructure such as roads, dams, airports and seaports to operate for defined period. All these builds investor confidence needed to tap the global pool of capital.
The interest of major partners in the development of the economy should be recognized and protected. Support institutions should also be provided, as well as a dynamic domestic entrepreneurial class as a key success factor for attracting foreign direct investment. For instance, the Government should encourage and empower the relevant investment and monitoring institutions or agencies like the Nigerian Investment Promotion Council (NIPC), to evolve strategies aimed at assessing progress, and adopting measures to create an investor-friendly environment. Proper funding of these agencies is also necessary.
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