Commerce Project Topics

Impact of Foreign Direct Investment on the Economic Growth of Nigeria

Impact of Foreign Direct Investment on the Economic Growth of Nigeria

CHAPTER ONE

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.

CHAPTER TWO

2.0     LITERATURE REVIEW

2.1     Introduction

This chapter reviews materials written by scholars that are directly and indirectly related to the problem under study. It reviewed journals, thesis and articles. The reviewed followed the following order; theoretical framework, impact of FDI on Economic Growth in Nigeria, some stylized facts about FDI in Nigeria, sectoral analysis of FDI inflow in Nigeria, graphical analysis of FDI inflow to Nigeria, empirical literature and the summary of the chapter.

2.2 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 a 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 which 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 the 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 engineer 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.

As Biersteker (1978) observes, the best way to assess the role and impact of FDI in developing countries is to study the objectives of foreign investors and host economies for their involvement in FDI. Although FDI has some potential risks, both economic theory and empirical evidence suggest that FDI has likely potential positive impact on developing host countries. The question to be addressed, therefore, should be how developing economies can maximize the benefits of FDI to their advantage. If FDI is to truly be a positive-sum game for both foreign investors and host economies, costs and benefits of FDI should be weighed carefully, particularly by the host countries in search of economic growth.

2.3     THEORETICAL FRAMEWORK

Renewed research interest in FDI stems from the change of perspectives among policy makers from “hostility” to “conscious encouragement”, especially among developing countries. FDI had, until recently, been seen as “parasitic” and retarding the development of domestic industries for export promotion. However, Bende-Nabende and Ford (1998) submits that the wide externalities in respect of the technology transfer, the development of human capital and the opening up of the economy to international forces, among other factors, have served to change the former image. Caves (1996) observe that the rationale for increase efforts to attract more FDI stems from the belief that FDI has several positive effects. Among these are productivity gain, technology transfers, and the introduction of new processes, managerial skills and know-how in the domestic market, employee training, international production networks, and access markets. Carkovic and Levine (2002) notes that the economic rationale for offering special incentives to attract FDI frequently derives from the belief that foreign investment produces externalities in the form of technology transfers and spill-over. According to Althukorala (2003), FDI provides much needed resources to developing countries such as capital, technology, managerial skills, entrepreneurial ability, brand and access to markets which are essential for developing countries to industrialize, develop, create jobs and attack the poverty situation in their countries. Dauda (2007) argues that FDI is generally believed to propel economic growth in developing countries as it makes significant contributions to the host country’s development process especially through easing of the constraints of low levels of domestic savings and investment as well as foreign exchange shortages. He further argues that FDI increases the GDP and generates a stream of real incomes in the host country. The increased productivity benefits local income groups through higher wages and expanded employment, lower product prices paid by consumers, rent to local resource owners, and high tax revenue or royalties to the government.

 

CHAPTER THREE

RESEARCH METHODOLOGY

3.1     Introduction

This chapter describes method and procedure used in conducting this research work. The description of the procedure is done under the following headings: Research design, area of the study, population of the study, sample and sampling procedure, instrumentation, procedure for data analysis.

3.2     Resign Design

A survey study method was be used for this research. This method facilitate the effective gathering of data through sampling of a small size of the population and generalizing the findings on the entire population. This method is considered appropriate for this study because it will help the researcher to discover relative incidence and distribution on the population (Afolabi, 1993)

3.3     Population of and the Study

The population consist of the entire staff of Two multi-national companies in Nigeria(Etisalat and MTN) and the sample size  comprise of Kaduna branch of Etisalat and MTN mobile communication with staff 135,out of which 30 person were drawn using the simply random selection technique in form of Hat drawn. The sample is appropriate in conformity with the view of Ndagi (1996)who opined that at least more than 10% of the population should be adopted as the sample size.

3.4     Source of Data Collection

Questionnaire constitute the sole instrument of primary data collection, while Journals as well as texts and E-books were used to obtain secondary data. The questionnaire was design by the researcher in five liket scale. The questionnaire facilitates easy coverage and in more appropriate in a survey study of this sort.

CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1     Introduction

This chapter contains detailed presentation of results findings and discussion for this study. All the data collected through the questionnaire to provide answers to the research questions.

CHAPTER   FIVE

SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary

The study examine the impact of foreign direct investment on the economic growth in Nigeria. As such the general objective of this is to assess the impact of FDI on the economic growth of Nigeria. Other specific objectives are: To ascertain the impact of FDI on sector of Nigerian economy as well as to determine the impact of FDI on non-oil sector in the economy and to suggest measures for facilitating the steady flow of FDI into the Nigerian economy.

A survey method was used for the study. The population consist of the entire staff of Two multi-national companies in Nigeria(Etisalat and MTN) and the sample size  comprise of Kaduna branch of Etisalat and MTN mobile communication with staff 135,out of which 30 person was drawn using the simply random selection technique in form of Hat drawn.  A questionnaires developed by the researcher based on likert 5-point scale was used for the study. Mean scores and sequences were used to analyzed the data based on the research questions. The analysis indicates the following results: First, FDI into the oil sector contributes positively to economic growth  as well as  enhances revenue generation in Nigeria and facilitate employment generation in Nigeria.secondly, DFI Promote entrepreneurship development in Nigeria as well as Facilitate investment in stock and increase government revenue generation as well as Enhances private sector participation.The analysis also indicates that DFI Facilitate the development of local industry.Finally, The measures that could facilitate the steady flow of FDI into the Nigerian economy is genuine efforts  to engage in joint ventures that are beneficial to the economy as well as the needs to come up with more friendly economic policies and business environment, which will, attract FDI into virtually all the sectors of the economy. The analysis shows that  Nigerian government needs to embark on capital project, which will enhance the infrastructural facilities with which foreign investors can build on.

5.2   Conclusion   

Given the above situation and the fact that Nigeria’s economic recovery efforts and growth requires major private sector investment in modern equipments that can industrialize the agricultural sector and the economy as a whole, then the Nigeria’s foreign investment policy should move towards attracting and encouraging more inflows of foreign capital by moving ahead with economic programmes that includes measures easier set-up and expansion of businesses.

In the years ahead, Nigeria (and many other African and third world countries) in trying to pave way for more foreign direct investment faces greater problems, especially with poor external image problem and particularly the concept of European Economic Unity that includes Eastern Europe. This translate to the fact that investment flows that would ordinarily have come from countries of surplus capital like Western Europe to capital deficient countries like Nigeria would now be going to poor European Economic Communities which includes Eastern Europe. Except African countries are able to adopt new strategies, this development will further compound the crises of under-development confronting countries like Nigeria. A very important challenge of management in the coming years would therefore be the development of indigenous technology and entrepreneurial capabilities as the involvement of multinational companies in our economy may dwindle as a result of new bigger and attractive opportunities that are likely to emerge from Europe.

 

With the up and down movement of foreign direct investment, Nigeria needs to juxtapose foreign investment with domestic investment in order to maintain high levels of income and employment. The problem therefore does not lie so much with the magnitude of investment flows to Nigeria as with the form in which it Is given. We could emphasize that foreign investment cannot contribute much to the economic development of Nigeria if it is directed primarily to capital supply than to investment projects. Foreign investment can be very effective if it is directed at improving and expanding managerial and labour skills. In other words, the task of helping a “poor beggar” can be made less generous and yet more fruitful if it is directed at teaching him a trade rather than giving him food to eat.

The analysis presented in this work does not offer a simple version of multinational corporation investment in Nigeria because the picture in complex. Foreign direct investment can make a valuable contribution to third world countries’ development in general and Nigeria in particular, but not all foreign direct investment doe so. Greater flows of investment fund’s climate in the Nigeria economy are important but a good investment climate is not synonymous with what multinational corporation prizes most.

In conclusion, in order to further improve the climate for foreign investment in Nigeria, the government must appreciate the fact that the basic element in any successful development strategy should be to encourage domestic investors first before going after foreign investors, considering the fact that they constitute the bulk of investment activities in the economy. Thus, the most effective strategy for attracting foreign investment is to make the Nigerian economy very attractive to Nigerian investors first.

5.3    RECOMMENDATIONS

The following policies are hereby recommended to policy makers and government, if it is desired that foreign investment contribute to the growth and development of Nigeria.

  • The Nigerian government should encourage the inflows of foreign direct investment and contact policy institutions that can ensure the transparency of the operations of foreign companies within the economy.
  • In evaluating foreign direct investment, the screening process should be simplified and improved upon. For example, export investment projects that consistently generate positive contribution to national income can be screened separately and swiftly, while projects in import competing industries should be screened separately.
  • Efforts should be made to engage in joint ventures that are beneficial to the economy. Joint ventures provide for a set of complementary or reciprocating matching undertakings, which may include a variety of packages ranging from providing the capital to technical cooperation. The government should intensify the policy to acquire, adopt, generate and use the acquired technology to develop its industrial sectors.
  • Efforts should continue, this time with more vigor at ensuring consistency in policy objectives and instruments through a good implementation strategy as well as good sense of discipline, understanding and cooperation among the policy makers.
  • The Nigerian government needs to come up with more friendly economic policies and business environment, which will, attracts FDI into virtually all the sectors of the economy.
  • The Nigerian government needs to embark on capital project, which will enhance the infrastructural facilities with which foreign investors can build on.
  • The current indigenization policy should be pursued to the letter as a way of preventing absolute foreign ownership in the key sector of the economy.
  • The Nigeria government should also carry out the liberalization of all the sector of the economy so as to attract foreign investors, so that the current efficiency and growth noticed in the telecommunication sector can also be enjoyed there.
  • For Nigeria to generate more foreign direct investments, efforts should be made at solving the problems of government involvement in business; relative closed economy; corruption; weak public institutions; and poor external image. It is therefore advised that the government continues with its privatization programme, external image laundry, seriousness and openness in the fight against corruption, and signing of more trade agreements.

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