Impact of foreign direct investment on Nigeria economic growth



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 other word foreign direct investment. The need for foreign capital to complement domestic resources in the economic growth process has been welcomed as a catalyst of 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 many of the economies 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 flows 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.

Over the past two decades, many countries around the world have experienced substantial growth in their economies, with even faster growth in international transactions, especially in the form of foreign direct investment (FDI). The share of net FDI in world GDP has grown five-fold through the eighties and the nineties, making the causes and consequences of FDI and economic growth a subject of ever-growing interest

The importance of FDI is envisioned in the New Partnership for Africa’s Development (NEPAD), as it is perceived to be a key resource for the translation of NEPAD’s vision of growth and development into reality. This is because Africa, like many other developing regions of the world needs a substantial inflow of external resources in order to fill the saving and foreign exchange gaps and leapfrog itself to sustainable growth levels in order to eliminate its current pervasive poverty (Ajayi, 1999).

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.

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 of 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 on 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. The Library of Congress- Federal Research Division report (2008) shows that in 2006 Nigeria received a net inflow of US$5.4 billion of Foreign Direct Investment (FDI), much of which came from the United States. FDI constituted 74.8 percent of gross fixed capital formation, reflecting low levels of domestic investment. Most FDI is directed toward the energy sector. As at August 2007, World Bank assistance to Nigeria involved 23 active projects with a total commitment value of about US$2.67 billion. Since Nigeria joined the World Bank in 1961, the World Bank has assisted it on 123 projects.

Also, in 2007 Nigeria had an estimated Gross Domestic Product (GDP) of US$166.8 billion according to the official exchange rate and US$292.7 billion according to purchasing power parity (PPP). GDP rose by 6.4 percent in real terms over the previous year. GDP per capita was about US$1,200 using the official exchange rate and US$2,000 using the PPP method. However, despite the increase in the inflow of FDI in Nigeria compare to other part of Africa especially West African countries about 60 percent of Nigerian population lives on less than US$1 per day. Which of leads so many researchers to doubt the significant impart of FDI to economic growth of Nigeria, thus this research aim to establish if economic growth leads to 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:

H0 There 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 1981-2012.

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.

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