Determinant of Foreign Direct Investment in Nigeria

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

According to Egbo (2012), FDI is an investment made to acquire a lasting management interest in a business enterprise in a given country other than that of the investor defined according to residency. He added that FDI is a combination of merger and acquisition and new investments as well as the reinvested earnings and loans from and similar capital transfers between parent companies and their affiliates.

Foreign Direct Investment (FDI) is the ownership or control of some portion of companies or firms by foreigners in a domestic economy. According to Piana (2005), it consist of acquisition or creation of assets (e.g. firm’s equity, buildings, oil drilling rigs, etc.) and in some cases these companies join together with the government of the domestic economy and termed as joint ventures companies. As obtainable in Nigeria, some factors determine the inflow of capital either in the form of financial resources or real capital for investments. These factors could be economical or political and Nigerian security situation determines largely the aggregate investments in the country.

Since Independence in 1960, FDI has been given prominence in the quest for the growth and sustainable development of Nigeria. According to Udeaja, et al (2008), Nigeria like other developing countries is trapped in low savings-investment cycle is dependent on foreign capital flows to stimulate economic growth and as oil exporting country has attracted more FDI compared to other Sub-Sahara African (SSA) countries.

According to Dinda (2009), Nigeria dominates the recipient of the FDI to African continent which received 70% of the sub-regional total and 11% of Africa’s total and out of this; Nigeria’s oil sector alone received 90% between 1970 and 2006. There have been factors which are seen to drive the growth of FDI in Nigeria which over time have not been performing positively, especially the business environments in the oil-rich region of the Niger Delta and recently the security threats in the northern region of the country coupled with high cost of production brought about by poor electricity supply and poor transport infrastructure. According to Udeaja et al (2008), causes of capital flow to domestic economy include improvement in creditor relations, adoptions of sound fiscal and monetary policies and neighbourhood externalities and the presence of natural resources, etc, that offer a strong locational specific advantage in attracting FDI to a host country.

The Nigerian government has been mobilising foreigners to invest in Nigeria but factors like infrastructures, poor financial system, corruption, security challenges, etc., have continued to hamper the growth of the FDI in this country. On the other hand, Nigeria happens to be an oil dependent country which is largely described as an enclave industry, which needs large quantum of FDI for technology transfer, improvement in productivity, efficiency in resource allocation, etc. With the introduction of Structural Adjustment Programme (SAP) in 1986, Nigeria has continued to embark on liberal, regional, bilateral and multi-lateral trade agreements aimed at achieving more Foreign Direct Investments.

According to Udeaja et al (2008), the SAP programme incorporated trade and exchange rate reforms with monetary and fiscal measures aimed at improving the economy through the discouragement of importation and make export-oriented multinationals gain on their investments.

The performances of the major determinants of FDI in this country have not been impressive over time in terms of infrastructures, business environments, price levels and others. This is contrary to the belief that rational investors will only invest in assets with higher rates of returns and less risk. This is in line with the portfolio allocation theory according to Ferderke (2002) which reasoned that FDI flows just like all other capital flows, are driven principally by rates of return and risk factors with positive correlation with returns and negatively related risks. In addition, the wave of corruption coupled with the challenges of the major determinants of FDI has given impetus to carry out more studies on FDI in Nigeria.

The disappointing economic performance of Nigerian economy coupled with the globalization of activities in the world economy; force her to look outward for development strategies. All was required to enable Nigeria meet the minimum growth rate required to meet the United Nations Millennium development goals. Globalization of developing countries is seen by many as the key economic trend of recent time. In a globalizing world economy, a growing number of countries have received significant capital flows, mainly in the form of foreign direct investment.

A distinctive feature of the world economy in recent times has been the growth of foreign direct investment, or investment by multinational firms in foreign countries in order to control asset and manage production activities in those countries. Nigeria is not an exception. As a result, the cross-border mergers and acquisition, particularly majority-ownership transactions surged worldwide during 1990’s. Thus, mergers and acquisitions through privatization, which increased significantly in Nigeria had helped Nigeria economy to grow tremendously. A recent study by Gastanga, Nugent, and Pashamova (2007) supported the notion that countries with relatively liberalized capital accounts that are open economies attract more foreign direct investment flows from countries that are more closed.

According to Iyela (2009), corruption increases the cost of doing business and as such foreign investors would prefer to invest in countries with lower rates of corruption which is believed to derive maximum profits from their investments. He added that the insecurity which manifest in kidnappings, hostage taking and deaths of innocent souls automatically discourage FDI. In steads firms will prefer countries with peaceful investment environments. It is against this backdrop that this article will x-ray the determinants of FDI in Nigeria and their impacts on the nation’s economy.

1.2 Statement of the Problem

Nigeria’s inability to attract FDI is troubling because it presents a potential solution to the country growth and development challenges.  FDI provides the needed capital for investment, brings with it employment, managerial skills and technology and at the end accelerate growth and development.   The role of FDI is quite critical in Nigeria given the fact that poverty levels are generally high while domestic savings and income remain extremely low as income is mainly channelled to consumption expenditure. These factors coupled with the unpredictability of foreign aid flows, the low share of Africa in world trade and the high volatility of short-term capital flows calls for the need to attract different forms of FDI inflows. Most countries in Africa have undertaken significant steps to attract FDI.

First, countries in Africa have adopted FDI-specific regulatory frameworks to support their investment related objectives. As pointed out by UNCTAD, by 1998 45 out of 53 countries    in   Africa   had   established   FDI – specific regulatory framework. The changes included the setting up of investment promotion agencies and facilities, and the establishment of specialized schemes to attract investment such as export processing zones (EPZs). Second, countries also took steps at the international level through signing of international investment agreements (IIAs) such as bilateral investment treaties (BITs) and double taxation treaties (DTTs).  BITs signed in Africa increased from 41 in 1970 to 772 in 2009.

The performances of the major determinants of FDI in this country have not been impressive over time in terms of infrastructures, business environments, price levels and others. According to Udeaja et al (2008), causes of capital flow to the domestic economy include improvement in creditor relations, adoptions of sound fiscal and monetary policies and neighbourhood externalities and the presence of natural resources, etc, that offer a strong locational specific advantage in attracting FDI to a host country. And Nigeria has all these elements in place except for the fact that the fiscal and monetary policies often lack consistency in its implementation. The question then is why the slow inflow of foreign capital to Nigeria economy.

1.3. Research Questions

In order to address the aforementioned problems as identified in the statement of problem the following researchable questions will guide the researcher:

  1. To what extent has determinants of foreign direct investment impacted on the foreign direct investment in Nigeria?
  2. What is the causal relationship that exists between determinant of foreign direct investment and foreign direct investment in Nigeria?
  3. Is there any observed long run relationship between determinant of foreign direct investment and foreign direct investment in Nigeria?

1.4 Objectives of Study:

The major objective of this study is to investigate the impact of determinant of foreign direct investment on Nigeria FDI at large, while the specific objectives include the followings:

  1. To empirically investigate the extent that determinant of foreign direct investment impacted on the foreign direct investment in Nigeria.
  2. To ascertain the causal relationship that exists between determinant of foreign direct investment and foreign direct investment in Nigeria.
  3. To determine if there is any observed long run relationship between determinant of foreign direct investment and foreign direct investment in Nigeria.

1.5. Significance of the Study

This study aims at investigating on the determinant of foreign direct investment in attracting FDI in Nigeria at large and hence, its impact cannot be over-emphasised. The study will be of great importance to policy makers, government and its agencies, private individuals and firms at large.  The study will be also of great importance to students of economics and other researchers who may have interest in foreign direct investment and its impact on Nigeria economy.Finally, the findings of this study would add to the stock of econometric literature of Nigeria.

1.6. Statement of Research Hypotheses

This provides tentative answers to research questions subject to proof or otherwise by the evidence from the study. Hence the working hypotheses of the study are stated as follows:

H0There is no significant impact of determinants of foreign direct investment on the inflow of FDI in Nigeria.

H0 There exist no significant causal relationship between determinant of foreign direct investment and inflow of FDI in Nigeria

H0 There is no long-run relationship existing between determinant of foreign direct investment (FDI) and inflow of FDI in Nigeria.

1.7    Scope and Limitation of Study

This research will analyze the determinant of foreign direct investment on inflows of FDI in Nigeria, taking a good analysis on various ways and means put by the government of Nigeria to develop and attract foreign direct investment 1981-2012. The work will analyze government efforts towards attracting foreign direct investment and also the significance of FDI to Nigeria economy.

The researcher encountered a number of constraints in the course of this work to include; data sourcing or data inconsistency due to poor nature of information management in Nigeria. Other constraints are; time factor, financial constraints and a host of other constraints that prevent the researcher to present a better work other than this one.

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