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Full Project – ASSESSMENT OF FOREIGN DIRECT INVESTMENT ON THE ECONOMIC GROWTH OF NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE SSTUDY

FDI has assumed a prominent place in the strategies for economic growth as it is useful in bridging the technology and resource gap in developing nations and it also stems the tide of debt build up (UNCTAD, 2005). FDI is expected to help a developing nation access pert of the savings of the underdeveloped world, thereby helping to make up for the country’s dearth of savings (Noorzoy, 1979).FDI stimulates growth in developing nations through the transfer of funds, more efficient technology and preferred products for consumption. In other words, FDI helps in filling the gap that exists between the developed and underdeveloped worlds which could be inform of a technological gap, income and consumption gap etc.

FDI can be defined as 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). According to Ayanwale (2007), in corporate governance, ownership of at least 10% of the ordinary shares of voting stock is the criterion for the existence of foreign direct investment relationship. Ownership less than 10% is recorded as portfolio investment.FDI comprises not only of merger and acquisition and new investment, but also of reinvested earnings, loans and similar capital transfer between parent companies and their affiliates. A country can host FDI projects or could be a participant in investment projects in other countries. Thus FDI could be either inward or outward.

The centrality of FDI as a prime mover in the growth process of the Nigerian economy has often been emphasized by the traditional neo-classical theory of the determinants of the growth process. FDI encourages the inflow of technology and skills and fills the gap between domestically available supplies of savings, foreign exchange and government revenue. It also encourages the inflow of technology and skills (Todaro, 1977). In addition, gaps in entrepreneurship, managerial and supervisory personnel, organizational experience and expertise, innovation in products and production techniques are presumed to be partially or wholly filled by foreign investors.

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 low (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.

1.2 STATEMENT OF THE PROBLEM

The available empirical literature on the impact of foreign direct investment (FDI) on growth provides contrasting results not only about the existence of a significant link between foreign direct investment and growth rates of the recipient country, but also about the signs of such relationships. For instance, in Bornschier (1978) and Dutt (1997), growth rates are negatively related to foreign capital stocks but in Dutt, (1996) the same relationship turns out to be positive. Blomstorm (1992) find a significant positive impact of FDI inflows on growth. Hein (1992) find no significant relationship; the coefficient of FDI is significantly positive in Balasubramanyam , (1996) while in other papers such influence is positive or negative according to the level of development of the recipient country (Borensztein, 1998, and De Mello 1999).

The presence of diverging results is due to econometric issues and sampling differences. As far as econometrics is concerned an inadequate treatment of the endogeneity problem characterizes much of the existing empirical literature on international capital flows and growth. To the extent to which factors like the available stock of infrastructures, the market size, and the presence of skilled labour and so on are recognized to be fundamental determinants of foreign capital inflows to developing countries. In addition, recent contributions on the influence of foreign capital on growth is positive when the recipient country has attained a given level of development as measured by capital, income or by available stock of human capital (Borensztein (1998) and Blomstom (1992). The “development threshold hypothesis” is clearly related to the notion of absorption capacity which recipient economies can take advantage of. The potential positive externalities that are associated with the presence of foreign Multinational Corporation (MNCs) can represent “technological enclaves in the host country, characterized by significant productivity and plant size differentials and limited productivity spillovers (De Mello and Luiz 1997 and Brewer (1991).

Other factors that may discriminate between positive and negative experiences of FDI include trade policy regime followed by host countries. The impact of FDI flows is significantly positive in economies which pursue an “Export promotion (EP) strategy and insignificant in countries which are characterized by an Import Substitution (IS) policy (Balasubramanyam, (1996) and Bhagwati (1973). In essence, both differences in development level and trade policy strategy may theoretically help to explain how the influence of foreign direct investment (FDI) on host country may vary.

In Nigeria, the ability to sustain growth and meet its external obligations depends on adequate inflow of foreign investment resources, given low level of per capita real income, high average and marginal consumption propensities, low savings and restricted new productive capital formation. It is discovered that there exists a gap between the domestically available supply of savings, foreign exchange, government revenue and skills, and planned level of these resources necessary to achieve growth targets (Todaro 1977). The contribution of foreign direct investment (FDI) to Nigeria remained doubtful, hence, this study attempts to examine the effect of foreign direct investment on the economic growth of Nigeria from 1970-2010.

1.3 OBJECTIVES OF THE STUDY

The main objective of the study therefore is to examine the relationship between FDI inflows and economic growth in Nigeria and the policy concerns it engenders. The specific objectives are to:

Test if there is any significant relationship between FDI and the economic growth of Nigeria
Examine the impact of FDI inflows on the economic growth of Nigeria.

1.4 RESEARCH QUESTIONS

The research questions the study seeks to find answers to are as follows;

How has foreign direct investment affected the economic growth of Nigeria?
What is the trend of FDI growth in Nigeria?
What is the pattern of foreign direct investment inflow in Nigeria?

1.5 RESEARCH HYPOTHESIS

RESEARCH HYPPOTHESIS I

H˳: There is no significant relationship between foreign direct investment and economic growth (GDP) in Nigeria.

H₁: There is a significant relationship between foreign direct investment and economic growth (GDP) in Nigeria.

RESEARCH HYPOTHESIS II

H˳; FDI has a negative or inverse relationship with the economic growth of Nigeria.

H₁; FDI has a positive or direct relationship with the economic growth of Nigeria.

1.6 JUSTIFICATION FOR THE STUDY

The impact of FDI on economic growth is more contentious in empirical than theoretical studies, hence the need to examine the relationship between FDI and growth in different economic dispensations. There is the further problem of endogeneity, which has not been consciously tackled in previous studies in Nigeria. FDI may have a positive impact on economic growth leading to an enlarged market size, which in turn attracts further FDI. Also, there is an increasing resistance to further liberalization within the economy. This limits the options available to the government to source funds for development purposes and makes the option of seeking FDI much more critical.

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) opines 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.

This study is significant as it examines the relationship between FDI inflows and Nigeria’s economic growth, hence addressing the country’s specific dimension to the FDI growth debate. The study is different from previous studies in scope and in addition, the effect of the major components of FDI on economic growth is examined. The study made conscious effort to address the endogeneity issue, and provide justification for the unrelenting efforts of the government to attract FDI.

1.7 SCOPE OF THE STUDY

The study covers the period of 30years; (1970-2010).

1.8 PLAN OF THE STUDY

The study is divided into 5 sections: Chapter one is the introduction that discusses some facts about FDI in Nigeria. Chapter two reviews the related literature. Chapter three discusses methodology and sources of data. Chapter four presents the results and discussion while Chapter five contains the conclusion and recommendation.

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