THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH AND DEVELOPMENT (1990-2016)

ABSTRACT

The study examined the impact of foreign direct investment on economic growth and development, using the time frame 1990 and 2016 (32 years). It was established in the study that before the introduction of appropriate  foreign investment,  all sector funds were grossly mismanaged, contracts were awarded based on ‘connection’ rather than on merit and high occurrence of corruption in all sectors in Nigerian. Since foreign investment has been seen as an important instrument tool to be used by the government to improve the economy, the appropriate growth from oil sector, power sector etc have strengthened all sectors in Nigeria economy and minimize the incidence. The study showed that Foreign direct investment has significant impact on the economic growth of Nigeria between 1990 and 2016 (32 years). The study concluded that foreign direct investment has significant impact on the economic growth of Nigeria between 1990 and 2016 (32 years). The study suggested that; The government should improve the state of infrastructures in the country. This will encourage meaningful investments in the economy; The Central Bank of Nigeria should come-up with policies that will help to stabilize the Naira exchange rate vis-à-vis the major currencies of the world, like the United States Dollar; There is need to have a stable political and economic environment and improve on the critical infrastructure, level of security at all levels in the country; Systems of governance should be based on accountability, transparency, effective and efficient resource; Government needs to liberalize the foreign sector in Nigeria so that all barriers to trade such as arbitrary tariffs; import and export duties and other levies should be reduced so as to encourage investors.

 

CHAPTER ONE

INTRODUCTION

This part of the research study deals with the introduction of of the study. Information on the background of foreign direct investment (FDI) in as well as its problems will be discussed. The research’s objectives, hypothesis, scope and limitations would be stated.

1.1 BACKGROUND OF STUDY.

Nigeria as a country given her magnanimous natural resource base and large market size qualifies to be one of the major recipients of FDI in Africa. Although, its one of the top three leading African countries that consistently received FDI in the past decade. Foreign direct investment from developing countries has increased tremendously over the past two decades. However, the level of FDI attracted by Nigeria is mediocre compared with the resource base and potential need (Asiedu, 2003). This has been noted by several authors since the early ’80’s; for instance, Lall 1983,; Kumar 1995; Page 1988, e.t.c. Foreign  direct investment is an investment made by an individual or a company (an investor) in a country which is not the country of origin of the investor, in the form of establishing business or acqurirng assets in the country.

It is an unalienable fact that FDI plays a vital role in any economy regardless of its level of development. Foreign direct investment can be seen as the basis upon which the general advancement of a nation is based on. There have been many controversies regarding the effect of foreign direct investment on the growth of the host country’s economy. While some researchers suggest a positive effect, others found a negative effect. Many policy makers and academics argue that foreign direct investment can have robust effect on the hosts economic development. For instance, the major component that drives economic integration is foreign investment. It is usually considered the central element for the process of growth and development. Most economic rationale for franting special incentives for attracting foreign direct investment is based on the belief that foreign direct investment bridges the gap between the rich and poor nations in addition to the generation of technological transfers. The major component that drives economic integration is foreign investment. It is usually considered the central element for the process of growth and development. According to UNCTAD 2005, promoting and facilitating technological transfer through foreign investment has assumed prominent place in the strategies of economic revival and growth being advocated by policy makers at the national, regional and the 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.

Oseghale and Amonkhienan (1987) found that foreign direct investment is positively associated with GDP, concluding that greater inflow of FDI will spell a better economic performance for the country. In addition to the direct capital financing it supplies, foreign direct investment can be a source of valuable technology and know-how while fostering the linkages with local firms which can help jumpstart an economy (Melnyk, Kubatko and Pysarenko, 2014). Most foreign direct investments have been by Asian frims establishing footholds in other Asian countries but there have also been investments in developed countries such as the EU. However, the special merits of the foreign direct investment are being questioned particularly the kinds of incentives offered to foreign firms in practice. Although some FDI promotion efforts are probably motivated by temporary macroeconomic problems such as low growth rates and rising unemployment, there are also more fundamental explanations for the increasing emphasis on investment promotion in years. In particular, it appears that the globalization and regionalization of international economy have made FDI incentives more interesting and important for national governments.

Neo-classical researchers regard foreign direct investment and international capital flows as closing the savings gap in developing countries (e.g Chenery and Bruno, 1962). We would expect capital to flow from capital rich to capital poor countries as suggested in the Heckscher-Ohlin apprroach to trade by Mundell (1957), because capital is scarce in developing countries and should lead to profitable investment opportunities for capital in developing countries. For a developing country like Nigeria, foreign direct investment is considered a way of transferring technology and capital from other developed and even developing countries to the domestic economy. According to Yu, Ning, Tu, Younghong and Tan (2011) FDI is considered to be one of the major channels of technological transfer. Romer (1993) argues that idea gaps exists between the rich and the poor countries and foreign investment can ease the transfer of technology and business understanding of the poorer countries. Based on this view, FDI has a spillover on all firms thereby boosting the productivity of the entire economy. Boyd and Smith (1992) however argued to the contrary. According to them, FDI can affect resource allocation and growth negatively where there is price distortion, financial, trade and other forms of distortion existing prior to FDI injections. Wheeler and Mody (1992) also supports the view of Boyd and Smith (1992).

1.2 STATEMENT OF PROBLEM.

The theory of big push simply states that the stagnant and undeveloped economies need huge and sudden injection of large capital form foreign direct investment. The role of capital in economic growth is still regarded as very crucial as both the theory of big push and the concept of vicious cycle attest to the crucial role of capital in the growth process. One of the major economic problem in less developed countries is low capital formulation to finance the necessary investment for growth. Ayanwale and Bamire (2001) assess the influence of FDI on firm’s level of productivity in Nigeria and report a positive spillover of foreign firms on domestic firms productivity.

Nigeria is one of the economies with great demand for goods and services and has attracted some FDI over the years. The amount of FDI inflow into Nigeria has reached US$2.23 billion in 2003 and it rose to US$5.31 billion in 2004 (a 138% increase) this figure rose again to US$9.92 billion (an 87% increase) in 2005. The figure however declined slightly to US$9.44 billion in 2006 (LOCOmonitor.com). The question that comes to mind is, do these FDIs actually contribute to economic growth in Nigeria? If FDI actually contributes to growth, then the sustainability of FDI is a worthwile activity and a way of achieving its sustainability is by identifying the factors contributing to its growth with a view to ensuring its enhancement.

Earlier studies (for instance, Otepola, 2002; Oyejide, 2005; Akinho, 2004) examines only the importance of FDI on growth and the channels through which it may be benefiting the economy. Overall, empirical evidence in the last few decades indicates that FDI flows have been growing at a pace far exceeding the volume of international trade. Between 1975 and 1995, the aggregate stock of FDI rose from 4.5% to 9.7% of world GDP, with sales of foreign affiliates of multinational enterprises substantially exceeding the value of world exports (Barrell and Pain, 1997). The United Nations Conference on Trade and Development, UNCTAD (2007) reports that FDI flow to Africa has increased from $9.68 billion in 2000 to $1.3 trillion in 2006. The UNCTAD World Investment Report 2006 shows that 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.

1.3 RESEARCH QUESTIONS.

1.) What impact does foreign direct investment have on the Nigerian economy?

2.) What is the casual relationship that exists between the foreign direct investment and the Nigerian economic  growth?

3.) Is there any observed long run relationship between the economic growth and foreign direct investment in Nigeria?

1.4 OBJECTIVES OF THE STUDY.

The major objective of this study is to investigate the impact of foreign direct investment on Nigeria economic growth at large. The objective can futher be classified as:

1.) To empirically investigate the impact of foreign direct investment on the economic growth of Nigeria.

2.) To ascertain the casual relationship that exists between foreign direct 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 HYPOTHESIS.

This provides tentative answers to research questions subject to proof or otherwise by the evidence from the study. Hence the working hypothesis of the study is stated below:

HYPOTHESIS:

H0 : There is no significant impact of foreign direct investment on the economic growth of Nigeria.

H1 : There is a significant impact of foreign direct investment on the economic growth of Nigeria.

1.6 SIGNIFICANCE OF THE RESEARCH PROBLEM.

This study aims to explain the importance of this research paper in the economy. It’ll try to establish the trends of inflow of investment into the country. This study which is an assessment of the impact of foreign direct investment on economic growth will be important to policy makers, investors, researchers, firms, governments and it’s agencies, students to formulate new policies, modify existing ones and to help attract foreign investors. Since it’s obvious that one of the fundamental keys to economic growth and development is foreign investment, this study further explains how foreign investment affects economic stability. Would it have a positive or negative effect both in the long-run and short-run?

1.7 SCOPE OF STUDY.

The scope of this study is limited to the data obtained from World bank indicator, Central bank of Nigeria (CBN) Annual statistics bulletin and the National Bureau of statistics on foreign direct investment sector between 1990 and 2016.

1.8 ORGANIZATION OF THE STUDY.

This study will consist of various chapters. The first chapter will discuss the introduction to this study , including the background of study, research questions, objectives of study and the significance of the study. Chapter two consists the review of literature and will include the conceptual review, theoretical framework and the review of empirical literature. Chapter three will consist of the methodology and data. Chapter four will consist of results and discussion. Finally, chapter five will consist of conclusion and recommendation.

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