Impact of Foreign Direct Investment on Nigeria’s Economy




1.1 Background of the Study

The key component of the movement towards economic globalization or economic integration in the world economy is foreign capital flows, in another word foreign direct investment. The need for foreign capital to complement domestic resources in the economic growth process has been welcomed as a catalyst for development since it is considered as the central element of the process of economic growth. Its origin does not matter. In the face of resource deficiency in financing long-term development, the capital-deficient economies have heavily resorted to foreign capital as the primary means to achieve rapid economic growth.

Promoting and facilitating technology transfer through foreign direct investment (FDI) has assumed a prominent place in the strategies of economic revival and growth being advocated by policy makers at the national, regional and international levels because it is considered to be the key to bridging the technology and resource gap of underdeveloped countries and avoiding further build-up of debt (UNCTAD, 2005).

Unfortunately, the growth experience of Nigeria in the accumulation of foreign direct investment has not been very satisfactory. Hence, they accumulate huge external debt in relation to gross domestic product and face with serious debt servicing problems in terms of foreign exchange flow and also walloping in abject poverty. Conversely, the experience of a small number of fast-growing East-Asian newly industrialized nations has strengthened the belief that foreign capital is the central element of the process of economic development since it could bridge the resource gap of these economies and avoid further build-up of debt while tackling the causes of poverty directly.

Foreign capital flows consist of the movement of financial resources from one country to another. In this context, capital flow is a broad term which includes different kinds of financial transactions such as; lending by governments, and international organizations; bank lending, short and long-term; investment in public or private bonds; investment in equities; and direct investment in productive capacity.

Hence, foreign direct investment (FDI) can, therefore, define as “an increase in the book value of the net worth of investment in one country held by investors of another country where the investments are under the managerial control of the investor” (Graham, 1995).

Todaro and Smith (2003) noted that most FDI is subsidiaries of Multinational Corporations (MNCs) such that the investors are the parent organizations of firms. Thus, foreign direct investment flows represent the expansion of the international activities of Multinational Corporations. Foreign direct investment does not include all investments across the border. There are some features that make foreign direct investment different from other international investments. FDI is the investment made by a company outside its home country.

Since the Asian crisis, the call for an accelerated pace of opening up to FDI has intensified in the belief that this will bring not only more stable capital inflows but also greater technological know-how, higher-paying jobs, entrepreneurial and workplace skills and new export opportunities. Many developing countries and continents see attracting FDI as an important element in their strategy for economic growth and development. This is most probably because FDI is seen as an amalgamation of capital, technology, marketing, and management.

It should be noted that while an enquiry is made about the contribution of FDI inflows to aggregate investment, it should be also noted that augmenting investment is not the only way FDI inflows could contribute to economic growth in developing countries. This contribution could come through at least two other channels. First, FDI inflows are generally associated with transfers of technology and managerial skills, and could generate externalities in the form of positive productivity spillovers to domestic enterprises in recipient developing countries. Secondly, FDI inflows could improve the recipient developing countries’ access to global markets and could thus help promote export orientation, which in turn could lead to an acceleration of economic growth (Obadan, 2004).

The potential advantages of the FDI on the host economy are that it facilitates the use and exploitation of local raw materials, introduction of modern techniques of management and marketing, provision of easy access to new technologies and could be used for financing current account deficits.  Finance flows in form of FDI do not generate repayment of principal and interests (as opposed to external debt) and it increases the stock of human capital.   The rise in the stock of human capital of any nation often leads to increase in the domestic production of goods and services, thereby matching the flow of foreign direct investment. Poor domestic output makes an economy to rely solely on foreign direct investment exposing the economy to the problem of balance of payment deficit (Olokoyo, 2012).

Empirically, there is no establish linkages between Foreign Direct Investment and Export. That is, to determine, whether inflows of Foreign Direct Investment cause export to be greater than what should be expected or whether expanding exports attract increased Foreign Direct Investment.  Multinational Corporations (MNCs) are oligopolistic in nature; hence their investment capital gravitates towards countries and regions with highest financial returns and the greatest perceived safety to avoid the risk of capital loss. Hence, this study sort to seek for the impact of foreign direct investment in Nigeria economy and its capability to correct balance of payment deficit.

1.2 Statement of the Problem

Despite the plethora of incentives to attract foreign direct investment, the performance of foreign investment in terms of quantum is still very unimpressive and indeed disappointing in Nigeria. Most countries all over the world strive to attract foreign direct investment (FDI) because of its acknowledged advantages as a tool for economic development (Egwaikhide, 2012).  Nigeria 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. Foreign Direct Investment (FDI) is assumed to benefit a poor country like Nigeria, not only by supplementary domestic investment but also in terms of employment creation, transfer of technology, increased domestic competition and other positive externalities (Ayanwale, 2007).

However, despite  Nigeria involvement and effort in attracting foreign direct investment, Nigeria is still facing an economic crisis situation featured by inadequate resources for long-term development, high poverty level, low capacity utilization, high level of unemployment, and other Millennium Development Goals (MDGs) increasingly becoming difficult to achieve by 2020 (Dutse, 2008).

In fact, one of the pillars of 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). The UNCTAD World Investment Report 2006 shows that Foreign Direct Investment (FDI) inflow to West Africa is mainly dominated by inflow to Nigeria, who received 70% of the sub-regional total and 11% of Africa’s total. Out of this, Nigeria’s oil sector alone received 90% of the FDI inflow.

However, despite the increase in the inflow of FDI in Nigeria compare to another part of Africa especially West African countries about 60 percent of Nigerian population lives on less than US$1 per day.  Which have prompted so many researchers to doubt the significant impact of FDI on economic growth of Nigeria, thus this research aim to establish if economic growth leads to the rise of foreign direct investment or foreign direct investment is the one leading to economic growth.

1.3. Research Question

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 foreign direct investment impacted on the economic growth of Nigeria?
  2. What is the causal relationship that exists between foreign direct investment and Nigeria economic growth?
  3. Is there any observed long run relationship between economic growth and foreign direct investment in Nigeria?

1.4 Objectives of Study:

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

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

1.5. 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 foreign direct investment on the economic growth of Nigeria.

H0 There exist no causal relationship between foreign direct investment and    economic growth in Nigeria

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

1.6. Significance of the Study

This study aims at investigating the impact of foreign direct investment on Nigeria economic growth 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 student s 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.

1.7    Scope and Limitation of Study

This research will analyse the impact of foreign direct investment on Nigeria economic growth, taking a good analysis on various ways and means put by the government of Nigeria to develop and attract foreign direct investment 1981-2014.

The researcher encountered a number of constraints in the course of this work to include; data sourcing or data inconsistence due to poor nature of information management in Nigeria. Other constraints are; time factor, financial constraints and host of other constraints that prevent the researcher to present a better work than this. However, the researcher made conscious effort to ensure the reliability of the research by employing varying econometric techniques in the estimation procedure.

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