ABSTRACT
This study investigated the impact
of Foreign Direct Investment (FDI) on the Growth of the Nigerian Economy, and
also examined the contributions of Domestic Investment to the growth of
Nigeria’s economy. Secondary data were sourced from the Central Bank of Nigeria
and National bureau of Statistics. The period covered by this analysis was
1981-2009. A growth model estimated via the Ordinary Least Square method was
used to ascertain the relationship between FDI, Gross Fixed Capital Formation
(GFCF), and economic growth in Nigeria. Gross Fixed Capital Formation was used
as a proxy for domestic investment. The study also added Interest Rate and
Exchange Rate in the model as control variables. The Granger Causality test was
also employed to determine the direction of causality between FDI and economic
growth in Nigeria. Employing the OLS technique, our result showed that FDI has
positive impact on economic growth in Nigeria during the period under study.
Although the relationship between FDI and economic growth was found to be
statistically insignificant, there still exist positive relationships among
them. The result also showed a positive and significant relationship between
economic growth and domestic investment measured by GFCF in Nigeria. The
findings of the study also revealed that interest rate positively but
insignificantly affect the growth of the Nigerian economy. Exchange rate was found
to have positive and significant impact on the growth of the Nigerian economy.
The result of the granger causality test showed that it is GDP that granger
causes FDI and not the other way round as against the findings of many writers.
Based on these findings, it is recommended that the government and the monetary
authorities should formulate policies and programmes aimed at attracting
world-class transnational corporations (TNCs), design and implement a strategy
to attract non-oil FDI, improving the regulatory framework, increase investment
in physical and human capital; foster linkages and local industries capacity,
strengthening institutions dealing with investment and related issues, increase
in image laundry of the country to increase investors’ confidence etc. This
work has provided practical evidence to the roll of FDI in the growth of the
Nigerian economy.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY.
The underdeveloped nature of the
Nigerian economy that essentially hindered the pace of her economic development
has necessitated the demand for Foreign Direct Investment into the country.
Nigeria as one of the developing countries of the world, has adopted a number
of measures aimed at accelerating growth and development in the domestic
economy, one of which is to attract foreign direct investment (FDI). According
to World Bank (1996), FDI is an investment made to acquire a lasting management
interest (normally 10% of voting stock) in a firm or an enterprise operating in
a country other than that of the investor defined according to residency.
However, Foreign Direct Investment (FDI) is often seen as an important catalyst
for economic growth in the developing countries because it affects the economic
growth by stimulating domestic investment, increase in capital formation and by
facilitating the technology transfer in the host countries. (Falki 2009).
Khan (2007) asserts that Foreign
Direct Investment (FDI) has emerged as the most important source of external
resource flows to developing countries over the years and has become a
significant part of capital formation in these countries, though their share in
the global distribution of FDI continued to remain small or even declining. The
role of Foreign Direct Investment (FDI) has been widely recognized as a
growth-enhancing factor in the developing countries. Falki (2009), speaking on
the effects and advantages of FDI to the host economy, noted that the effects of
FDI on the host economy are normally believed to be: increase in employment,
augmenting the productivity, boost in exports and amplified pace of transfer of
technology. The potential advantages of the FDI to the host economy are: it
facilitates the utilization and exploitation of local raw materials, introduces
modern techniques of management and marketing, eases the access to new
technologies, foreign inflows can be used for financing current account
deficits, finance inflows form FDI do not generate repayment of principal or
interests (as opposed to external debt) and increases the stock of human
capital via on-the-job training. The realization of the importance of FDI had
informed the radical and pragmatic economic reforms introduced since the
mid-1980s by the Nigerian government. The reforms were designed
to increase the attractiveness of Nigeria’s investment opportunities and foster
the growing confidence in the economy so as to encourage foreign investors to
invest in the economy.(Ojo:1998).
According to Umah (2007), the
reforms resulted in the adoption of liberal and market-oriented economic
policies, the stimulation of increased private sector participation and
elimination of bureaucratic obstacles which hinders private sector investments
and long-term profitable business operations in Nigeria. This, for instance, is
to encourage the existence of foreign Multinational and other private investors
in some strategic sectors of the Nigeria economy like the oil industry, banking
industry, communication industry, and others. Reacting to this, Shiro (2009)
noted that since the enthronement of democracy in 1999, the government of
Nigeria has taken a number of measures necessary to woo foreign investors into
Nigeria. These measures, he noted, include the repeal of laws that are inimical
to foreign investment growth, promulgation of investment laws, various over sea
trips for image laundry by the President among others.
Continuing on this, Uma (2007)
asserts that the Nigerian government has instituted various institutions,
policies and laws aimed at encouraging foreign direct investment. For instance,
in 1995, the Nigeria Investment Promotion Commission (NIPC) was established
through Decree No 16 of 1995. The Law provides for a foreign investor to set up
a business with 100% ownership which must be registered with the Corporate
Affairs Commission (CAC) in accordance with the provisions of the Companies and
Allied Matters Decree of 1990. The registration is finalized with the NIPC. To
ensure adequate protection, the NIPC Decree guarantees foreign investments
against Nationalization and expropriation by the government. The NIPC Decree
repealed the Industrial Development Coordination Committee (IDCC) Decree No 36
of 1988 and the Nigeria Enterprise Promotion Decree (NEPD) of 1972 as amended
in 1977 and 1989 which, hitherto, reserved for Nigerians the ownership of
certain business. The operation of the Autonomous Foreign Exchange Market
(AFEM) as provided for in the decree liberalized the FEM operation. The Decree
replaced the Exchange control Act No 16 of 1962 in its entirety.
Dunning
(1994), however, noted that FDI is attracted to serve as a means of augmenting
Nigeria’s domestic resources in order to effectively carryout her development
programmes and raise the standard of living of her people.
According to Bello (2003),
privatization was also adopted, among other measures, to encourage foreign
investments in Nigeria. This involved transfer of state-owned enterprise
(manufacturing, agricultural production, public utility services such as
telecommunication, transportation, electricity and water supply) companies that
are completely or partly owned by or managed by private individuals or
companies. Qualified foreign firms were given open arms to take over most of
these establishments to enhance efficiency. This is because such foreign firms
are reported to possess the managerial acumen and technical prowess needed to
resuscitate and sustain the weak industries in Nigeria (Umah:2007).
1.2 STATEMENT OF PROBLEM
Over the years, there has been a
considerable increase in the volume of FDI inflow into the Nigerian economy,
yet the economy is still battling with a high level of unemployment, inadequate
infrastructural development and increase in poverty rate. This situation has
resulted to the question as to how FDI has contributed to the growth of the
Nigerian economy. Meanwhile, the relationship between FDI and economic growth
is a subject that has received great attention in the development economics
literature, both theoretically and empirically (Barro: 1991).
However despite the considerable
volume of research on the subject, there is conflicting evidence in the
literature regarding the question of how FDI relates to economic growth. In
particular, a two-way interaction has been discoursed in the literature of FDI
and economic growth relationship. On one hand, FDI is seen by many (Blomstrom,
1986; Kokko, 1994; Blomstrom and Sjoholm,1999) as an important element in the
solution to the problem of scarce local capital and overall low productivity in
many developing countries. Hence the flow of foreign direct capital is seen to
be a potential growth-enhancing player in the receiving country (mello, 1999;
Eller et al 2005).
This
view has been challenged by those who argued that FDIs create income
inequalities, discourage self reliance, and repatriate capital from the economy
to the home country thereby denying developing economies of the opportunity to
grow (Hien, 1992, Agosin and Mayer, 2000; Mencinger, 2003). They also argued
that FDIs do prevent the cultural patterns, subvert the political process,
establish and maintain ownership, consumption and income patterns which
generate social tension and political instability, and adversely affect
national sovereignty and self dependency (Carkovic and Levine: 2002). However,
considering the wide range of conflicting empirical studies on how FDIs in
developing countries affect the rate of aggregate growth, distribution of
income, employment and some non-economic indicators like culture and political
structures, one cannot draw conclusion from them with minimal acceptable level
of confidence (Shiro:2009).
Looking at the Nigerian
experience, a large number of applied papers have looked at the FDI-GDP growth
nexus, but their results have also been far from conclusive. Notwithstanding
this absence of any robust conclusions, Nigeria, like most developing countries
has continued to vigorously pursue policies aimed at encouraging more FDI
inflows. And so, one wonders the extent FDI has contributed to aggregate output
in the Nigerian economy to warrant this attention given to it. To this end,
there is need to investigate whether the inflow of FDI into Nigeria is
significant enough to lead to an increase or decrease in economic growth......
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