Impact of Foreign Direct Investment on Nigerian Economic Growth (1980 – 2012)

CHAPTER ONE

INTRODUCTION

  • Background to the Stud

The most strategic factor influencing economic growth in any country is investment and it is characterized as the key to increased level of productivity. The traditional model of economic growth assumes labour to be in unlimited supply and the only constraint to output growth is capital accumulation (Adofu, 2010). Consequently the most strategic factor affecting investment is capital accumulation, which is made possible majority through savings, since economic agents borrow the accumulated savings for investment purpose. In countries where there exists poor savings habit, what is evident is that realized savings fall short of desired investment and hence there will be disequilibrium in the economy which in turn slows down the rate of economic growth. This is a clear case for most developing countries, Nigeria inclusive, where deficiency in capital accumulation is attributed to low level of savings caused by factors such as high level of entrepreneurial spirit among local entrepreneurs among others.

Foreign direct Investment (FDI) has been recognized globally as very viable development paths especially for developing economy since the end of World War II (Loyerant, 2003). The contributions of foreign investment to Japan after World War II and in South Korean after the Korean War are eloquent testimonies. The emerging economic “Tigers” of Asia namely: thail and, Singapore, Yainan, Malaysia, Hongkong and Indonesia owe their successes to heavy in-flow of FDI over the years (Onu, 2012). The economic growth of these countries has been enhanced by providing   the local economy with a source of foreign development through international training and collaboration.

According to Thingan (1998), quoted in Egbo (2011), foreign direct investment (FDI) is any investment that is made to acquire lasting management interest (Usually 10 percent of voting stock) in an enterprise operating in a country other than that of the investor. Such investment may take the form of either “Green field” investment or merger and acquisitions (M&As) which entails the acquisition of existing invest rather than new investment.

Many countries and continents (especially developing countries like Nigeria) now see attracting FDI as an important element in their strategy for economic development Nigeria as a country, given her natural resources base and large market size qualifies to be a major recipient of FDI in Africa and is indeed one of the top three leading Africa countries that consistently received FID in the past decade (Egbo, 2011). Consequently, FDI has been given prominence by past and present administrations since they see FDI as an antidote for slow rate of economic growth which has been experienced in the country. Since 1986, the federal government of Nigeria has embarked on sustained effort to encourage FDI. The most significant of the policy measures according to Adofu (2010) was the introduction of the Structural Adjustment Programme (SAP) which provided the basis for deregulation of the economy. The country has therefore witnessed an increased level of FDI has a result of investment in the Global system of mobile (GSM) telecommunication. The oil sector of the economy has also witnessed an increased level of FDI as evidenced by the increasing numbers and operations of oil multinational corporations in the country. Similarity, since the enthronement of democracy in 1999 the government of Nigeria has taken a number of measures necessary to woo foreign investors to Nigeria. These measures include the repeal of laws that were inimical to foreign investment growth, promulgation of investment laws, various over sea’s trip for image laundry by the presidents among others (Onu, 2011).

According to Folorunso (2009), the amount of FDI inglow into Nigeria reached US $ 2.33 billion in 2003, rose to US$ 5.31 billion in 2004, again to US $ 9.44 billion in 2005 and however declined to US $ 9.44 billion in 2006. The portfolio investment also followed the same direction, growing from US $ 0.2 billion in 2003 to US $ 2.9 billion in 2005 and US $ 0.92billion in 2006, (Egbo et al, 2011). Equally, between 2008 and 2020, Nigeria hopes to attract US $ 600 billion of FDI to finance its vision 2020 policy to transform the country’s economy into one of the world’s 20 largest economy (Egbo, et al 2011). The country experienced GDP growth averaging 7.8 percent from 2004 to 2007 and has maintained an average growth rate of about of percent up to this present moment (Egbo al, 2011).

However, there have been a lot of controversies in the country over the effectiveness of foreign direct investment in stimulating the rate of economic growth. It is this controversy that this study intends to settle.

  • Statement Of The Problem

Nigeria’s economic development was anchored basically on agricultural and primary exports before independence. But a purposeful effort was made to after the structure of the economy by increasing investment in 1960. Incentive measures were thus directly aimed at attracting foreigners, their capital, technology and skills.

The centrality of FDI as a prime mover in the growth process of the Nigeria economy has often been emphasized by the traditional neo-classical theory of the determinants of the growth process. Hence, foreign direct investment encourages the inflow of technology and skills and fills the gap between domestically available supplies of savings, foreign exchange and government revenue.

Asiedu (2003), cited in Egbo (2011) asserted that foreign direct investment in Nigeria is mediocre compared with the resource base and potential need of the country. In addition to this assertion, the empirical link 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. However, the extent to which FDI contributes to growth depends on the economic and social conditions or in short the quality of the environment of the recipient country (Akinlo, 2004). The quality of environment relates to the safe of savings in the country, the degree of openness and the level of technological development.

Nigerian is one of the economies with great demand for goods and services and has attracted some FDI over the years, but the most pertinent question that usually comes to mind is whether FDI actually contributes to economic growth in Nigeria. Equally, there has been a good number of studies on FDI and economic growth in Nigeria but the existing empirical evidence on their long-run relationship has been inconclusive in relation to the periods under review the motivation for this work therefore arose from the fact that for Nigeria in particular, the   issue of economic growth is a very important one.

Therefore, the extent to which economic growth has been achieved in Nigeria as a result of various policy measures put in place by successive administrations to attract foreign direct investment is an economic issue that requires investment. Hence, the main thrust of this study shall be to evaluate the impact of foreign direct investment in Nigeria economic growth

  • Research Questions

The study was guided by the following research questions:

  1. To what extent does foreign direct investment impact on economic growth in Nigeria?
  2. Is there the existence of a long run relationship between economic growth and foreign direct investment in Nigeria?
    • Objective of the Study

The main objective of the study is to assess the overall impact of FDI on Nigerian economy. However, the following specific objectives would also be achieved:

  1. To ascertain the extent at which foreign direct investment inflow influences economic growth in Nigeria.
  2. To establish whether is a long run relationship between economic growth and FDI in Nigeria.

1.5 Research Hypotheses

The following null hypotheses were tested in the course of the research work:

H01: Foreign direct investment inflow does not have a significant impact on the economic growth of Nigeria

H02: There is no long run relationship between FDI and economic growth in Nigeria

1.6 Significance of the Study

Findings of the study will make meaningful contribution to the general knowledge and understanding of the nature of FDI and its impact on Nigeria economy. It could help economists, leaders and other members of the government to understand the importance or other wise of FDI which in turn would help in policy formulation.

Lastly, it could stimulate further research in the area of FDI and would provide policy recommendations to policy makers on ways to attract more FDI.

1.7 Scope of the Study

The study aims to address the issue on the impact of foreign direct investment on the Nigerian economy. The areas to be covered include the concept of foreign direct investment; its impact and determinants with special regard to the Nigerian economy. The empirical investigation shall be restricted to the period between 1980 and 2012.

Secondary data was used for the study and the data was sourced from library, internet, published articles on books and journals and from central Bank” statistical reports for the years under review.

1.8 Limitations of the Study

The success of this research work was hindered by several factors but the most important of these factors is data accessibility. Access to secondary data posed a lot of hindrance to the work since it was common to observe in consistent data of the same economic variable for the same period. Equally, office keepers were often un-corporative in making available records and information.

Another factor which equally reduced the quality of the work is time constraint since the researcher had to make decision on how best to allocate her limited time among numerous engagements seeking her attention. In spite of these problems and limitation, a lot of efforts were put in place to enhance the quality of the study.

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