The Impact Of Foreign Direct Investments (FDI) In Real Sector Of Nigeria Economy
1.0 INTRODUCTION
Foreign direct
investment is viewed as a major stimulus to economic growth in developing
communities, it is quite desirable in any economy, it has played a major role
in the development of the advanced countries and the developing countries too
(like Nigeria) where domestic resources tend to be in short supply. Capital
inflow makes significant contribution to the host countries economic growth and
development through easing of the constraint or the low levels of domestic
savings and investment as well as foreign exchange storage. This is because
inadequate domestic savings, excessive import relates to export as well as high
level of external debts characterizes less developing countries economic growth
and development through increase production activities.
Historically antecedents
indicate that until the first world war, capital to the developing countries came directly mainly from
Great Britain, France, etc to their former
colonies. By 1950 the United States (US), other industrial nations and
multinational agencies started official assistance to less developing countries
(LDC’s) of the various forms of capital flows (official development, export,
credit, international bank loans, Bond issues, Foreign direct investment and portfolio investment). Foreign direct
investment has being viewed as the major
stimulus to economic growth in developing countries like Nigeria. The growth of
private foreign direct investment in the developing world was extremely rapid
during the past decades; it rose from an annual rate of $2.4 billion in 1962 to
$11 billion in 1980 and $35 billion in 1990 before surging to over $185 billion
in 1991. The stock of US foreign direct investment in Nigeria in 2003 was $2.1 billion, up from $1.0
billion in 2002. This shows that over the last
four decades the microeconomic performance of Nigeria cab be described as being checked. The average GDP growth
rate of $3.95% achieved between 1970
and 2008 translates into a low growth rate of 1.49% in per capital income terms. This rate of growth per capital income
is insufficient to reduce in a significant
way, the primary goal of development policy in Nigeria. Ajayi (2006) notes that the savings rate in
Nigeria is lower than that of most other countries
and far lower than the required investment that can induce growth rates that are capable of alienating
poverty.
Recent study has shown
that foreign direct investment is what is needed to bridge that savings
investment gap that existed in Africa in general and Nigeria in particular.
Prior the 1970’s Foreign Direct Investment was not seen as an instrument of
economic development. The perception of FDI as parasitic and retarding the
development of domestic industries for export promotion and engendered
hostility to multi-national companies and their direct investment in many
countries.
However the consensus
now is that FDI is an engine to growth as it provides the much needed capital
for investment, increase competition in the host county’s industries and aids
local fund to become more productive by adopting more efficient technologies or
by investing in human and/or physical capital. Foreign direct investments
contribute to growth in a substantial manner because it is more stable than
other form of capital flows (Ajayi 2006).
In this regard, foreign
direct investment augment domestic savings- investment gap; the ability of
foreign direct investment to fill the gap created by shortages in capital
finance and low technology and skills in most developing countries has being
proven. This has made foreign direct investment a center of attraction for
policy makers in developing countries in order to achieve economic growth and
development. The effort made by less developing countries are geared towards improving
the general investment climate through the adoption and implementation of
foreign investment friendly policies and programmes such as tax incentives,
export promotion and macroeconomic adjustments.
Foreign direct
investment FDI has being acknowledged as a potential source of improving
efficiency of the productive sectors through the competitive stimulation of
economic progress, creation job and fastening growth in the host country.
However in spite of the genuine desire and effort by developing countries to
attract the much needed foreign direct investment, a number of factors rendered
them unattractive. Some of the factors include heavy debt burden which has
eroded confidence in developing countries like Nigeria as well as low credit
worthiness, others are succession and persistent macroeconomic and political
instability which has further worsened the perception of foreign investment.
In Nigeria, the Obasanjo
lead government since the advent of democracy in 1999 to date has told anyone
who cares to listen that for Nigeria economy to get out of wood it needs
foreign direct investments.
Foreign direct
investment in Nigeria over the years has been contracted in the extractive
industry with over 47% (percent) of the total foreign direct investment flowing
to this sector since 1992 (Ana Mavr 1997). But for the new re-engineering and
reforming of the Nigerian economy through privatization, liberalization, and
deregulation, other sectors have received a boast through foreign direct
investment for example, the telecommunication sector which is now the fastest
growing sector achieved 80% (percent) growth (CBN 2005) through the inflow of
foreign direct investment into this sector.
1.2
Statement of the Problem
Recent studies of long
term growth here in incorporated foreign direct investment as a vehicle that
stimulates growth, however findings in most developing countries with low
growth despite the inflow of foreign direct investment has left so much doubt
on the credibility for foreign direct investment in contributing to economic
growth of the host community. The lack of consensus as to whether Foreign
Direct Investment is significantly impactful on the economic growth of the host
3economy is what motivates the researcher to carry out this study. Though it is
widely believed that economic growth depend critically on both domestic and
foreign investments. However, empirical studies of the impact of Foreign Direct
Investment on growth are concerned with either the overall effect on growth or
net welfare or with specific aspects of the Foreign Direct Investment impact on
employment, technology, trade, entrepreneurship and other areas of the economy
such as infrastructures, education and health. Consequently, the impact of
Foreign Direct Investment on economic growth remains imprecise, it is therefore
necessary to determine the Impact of FDI on the economic growth in Nigeria.
1.3 Objective of the Study
The broad objective of
this project is to examine the impact of Foreign Direct Investments (FDI) in
real sector of Nigeria economy.
The others are:-
i.
To evaluate the factors that stimulates foreign direct investment
into Nigeria.
ii.
To examine the social cost of foreign direct investment in Nigeria
as against the social cost.
iii.
To suggest and advice government on the role played in order to
attract and regulate the flow of foreign direct investments into Nigeria.
iv.
To justify the theoretical framework upon which foreign direct investment
should be encouraged to support the theory.
1.4 Research Questions
In order to source for
the relevant data needed for the study, the researcher seeks to find suitable
answers to the following questions:
i. Can foreign direct
investment provide the much needed finance and technology to host country?
ii. What are the factors
that influence the inflow of foreign direct investment?
iii. How correlated is the
quantity of foreign direct investment to its quality in host country?
iv. Does foreign direct
investment contribute to the economic growth in Nigeria?
v. Is there any trade-off
between foreign direct investment social cost (return) and its private cost
(return)?
vi. Does direct investment
encourages or stiffens competition through its agent such as transitional
corporation?
1.5 Hypothesis
The following hypotheses are stated in a null
form.
1. Foreign Direct Investment
has no significant relationship with the economic growth in Nigeria.
2. The quantity of Foreign
Direct Investment has no correlation with the quality in the host country.
3. Foreign Direct
Investment has no effort on the economic growth of a developing country like Nigeria.
1.6 Significance of the
Study
The study is important because the result and findings of the study will
be useful to:
i.
Policy Makers: They shall consider this research work
to be useful as basis for making economic policies.
ii.
Academia: The research work is also significant
for lecturers and students as an addition to existing literary works, thereby
serving as a resource material to all who wish to further the study of the
subject matter.
iii.
Other Researchers: The research work is
significant because other researchers of related subject matter will make use
of it as a resource material.
1.7 Scope of the Study
This project covers
foreign direct investment in the Nigerian economy as a whole and its effect on
economic growth.
The study covers the
period between 2000 and 2014. It also focuses mainly on foreign direct
investment as means of capital inflow into a developing country, Nigeria as a
case study.
1.8 Limitations of the Study
The challenges
encountered by the researcher in the course of the study range from: lack of
finance, time constraint, accessibility to Central Bank of Nigeria (CBN)
statistical bulletin and other network related problems in sourcing for online
data.
1.9 Operational Definition of Terms:
Impact:
the powerful effect that something
has on somebody or something.
Investment:
this is putting one’s monetary
resources into a particular venture with the hope of having a return.
Direct
Investment: this
involves financial assets which had a maturity of more than one year when
issued initially.
Foreign
Direct Investment: A
direct investment into production or business in a country by a company in
another country, either by buying a company in the target country or by
expanding operations of an existing business in that country.
Economic Growth: this refers to the process by which a nation’s wealth increases over
time.
CHAPTER TWO
2.0 LITERATURE
REVIEW
2.1 INTRODUCTION
In recent times the literature on the importance of foreign direct
investment (FDI) is growing therefore, this chapter is aimed at reviewing the
significance of the work contributed by various writers on the project topic. Foreign direct investment (FDI) is
increasing in importance in the world.
They
have always attracted a good deal of attention and give rise to heated controversy; this perhaps is not
astonishing in a world of nationalism.
At the
turn of the present century, private foreign capital mostly flowed in the form
of indirect investment from Europe to the under developed countries in the
1920’s in the form of direct investment went mainly into production for an
export, very little of it went into manufacturing for the home market.
But
since the Second World War, over half of the private investment has being
direct. Direct investment that is direct private investment has being
concentrated mainly in the extractions of raw materials like iron, crude oil,
manganese, bauxite, copper, electric energy etc, only a small percentage has
get manufacturing and distribution. Not until the economy takes off that direct
investment is made in manufacturing that is why direct investment in
manufacturing flows to those countries which are somewhat industrially advanced
and have large domestic market.
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