DETERMINANTS OF FOREIGN DIRECT INVESTMENT AND ECONOMIC SITUATIONS IN NIGERIA
ABSTRACT
Generally, policies and strategies of
Nigerian government towards foreign direct investments are shaped by
two principal objectives of desire for economic independence and the
demand for economic development. Multinational corporations are expected
to bring into the country foreign capital in the form of technical
skills, entrepreneurship, and technology and investment fund to boost
economic activities thereby, raising the standard of living in Nigeria.
The main issues in this paper relate to understanding those factors that
determine foreign direct investment in Nigeria as well as our ability
to attract adequate amounts sufficient enough to accelerate the pace of
our economic growth and development. Foreign direct investment (FDI) is
assumed to benefit a developing country like Nigeria, not only by
supplementing domestic investment, but also in terms of employment
creation, transfer of technology, increased domestic competition and
other positive externalities. This work tried to answer the question;
what are the FDI determinants in Nigeria and how do they affect the
Nigerian economy? Secondary data were collected for the period
1999-2013. In order to analyze the data, both econometric and
statistical methods were used. Tables were produced in order to create a
visual impression of the dependence of the Nigerian economy on that of
donor countries such as Western Europe and North America. The economic
regression model of ordinary least square was applied in evaluating the
extent to which foreign direct investment affect major economic
indicators such as gross domestic product, inflation and exchange rate.
The model revealed little impact of foreign direct investment on each of
these variables, foreign direct investment has not contributed much to
the growth and development of Nigeria. This is evident in reality of
enormous repatriation of profits, dividends, contract fees, and interest
payments on foreign loans. The study, thus, suggests that in order to
further improve the economic climate for foreign direct investment in
Nigeria; the government must appreciate the fact that the basic element
in any successful development strategy should be the encouragement of
domestic investors first before going after foreign investors.
CHAPTER ONE
1.0 INTRODUCTION
1.1. Background of the study
Nigeria is a developing country, like
other developing countries, it needs investments from within and outside
to develop. This study focuses on the investment from outside. In other
words, we are looking at those factors that determine the inflow of
Foreign Direct Investment in Nigeria. Foreign direct investment (FDI) as
a major component of international capital flows is an investment made
to acquire lasting interest in enterprises outside the country of the
investor; it has long been a subject of great interest in the field of
international development. The division of the world into emerging and
developing is sometimes predicated upon the availability and/or the
effective utilization of resources. The relative scarcity of resources
has often been identified as a major problem confronting nations and
this call for their judicious use. On the other hand, this argument can
be cast in terms of the overall development of nations
The general rate of development and
growth is thus limited by the shortage of productive factors.
Development economists like Caircross ( 1955, 1962) ,Hicks (1965),
Newlyn (1977) have gone further to single out capital as the critical
missing ingredient in the development of the developing countries,. In
this manner, Caircross (1955) forcefully illustrated this fact when he
observed that the contribution of capital to economic progress embraces
three distinct processes.
- A greater abundance of capital permits the introduction of more roundabout methods of production.
- The accumulation of capital is a normal process or feature of economic expansion however originating.
- Additional capital may be required to allow technical progress to take place.
On the basis of the foregoing, it is
therefore not surprising that countries, especially the developing
countries should strive to acquire capital. Most developing countries of
which
Nigeria is one hardly meet the
requirement of generating internal finance required for mobilization of
an economic surplus derived from a growing surplus above current
consumption.
The genesis of foreign investment in
Nigeria cannot only be attributed to the desire by the country to fill
the resources/savings gap and foreign exchange gap. This is because
foreign investment in the country started with the imposition of British
colonial rule in Nigeria in the
19th century. This category of foreign
investment is referred to as the forced historical perspective. Foreign
trade and investment dates as far back as the Smithian era (1776).
While the Mercantile system propagated
hoarding and a close economy, Adam Smith was a proponent of free trade
and open market system with the “popular invisible hand”.
The neo classicalists equally hold the
view that free trade and investment enhances the accumulation of capital
stock provided that adequate consideration is given to factor prices
and technology. Alternative views have been expressed about the
limitations to financing opportunities especially in the face of capital
rationing and increasing cost of capital (Jerkins and Thomas, 2002)
Since Independence, Nigerian foreign policy has been characterized by a
focus on Africa and by attachment to several fundamental principles,
African unity and independence; and regional economic cooperation and
development. In pursuing the goal of regional economic cooperation
development, Nigeria helped create the Economic Community of West
African States (ECOWAS), which seeks to harmonize trade and investment
practices for its 15 West African member countries and ultimately to
achieve a full customs union. Over the past decade, Nigeria has played a
pivotal role in support of peace in Africa. Nigeria has enjoyed
generally, good relations with her immediate neighbors, she is a member
of the following international organizations; UN, World Trade
Organization (WTO), International Monetary Fund(IMF), World Bank,
Economic Community of West African States (ECOWAS) among others. It was
after independence in 1960 that conscious efforts were made to attract
foreign investors. The earlier legislations were amended and/or new ones
enacted as the case maybe. Foreign investments were substantial and
subsequently received a boost at independence. In 1957, cumulative
foreign investment was under #200million, it grew to #441.8million in
1962. Between 1960 and 1966, private foreign investment accounted for at
least 70 percent of the total industrial investment. Foreign interests
were equally dominant in Banking, Insurance and construction.
Foreign Direct Investment (FDI) as a form
of development finance has been recognized as a preferred option to
market loans. This is because; among other things, Foreign Direct
Investment comes as a package-finance capital, technology and managerial
expertise. As in many developing countries, inflow of FDI into Nigerian
economy dates back to the 19th century. Many foreign investors that
came into the country at that time concentrated their attention towards
export-oriented mineral and agricultural production as well as on public
utilities. At this period, it was customary to see mines and
plantations as enclaves with little overall impact on the growth of
largely subsistent agricultural economy of Nigeria. Foreign investors
were often supported by their home governments to appropriate most of
the economic rents in the country. For instance, the railway line that
was constructed in the south and extended northwards in the country to
Kano by 1914 was mainly financed by pressures on the colonial
administration by the royal Niger company (later known as UAC), a famous
Liverpool merchant (Mr John Holt) and the association of West African
merchants (AWAM); a cartel organization operating as a monophony to buy
Nigerian products under a price understanding arrangement. The British
positively responded by funding the project through both the colonial
loan raised on the London Capital Market and the colonial treasury
loans.
As nationalist movements emerged, these
foreign investors came to be regarded as exploiters. It must be noted
that economic and political opposition to foreign investors is not
limited to the colonial countries alone. There was growing opposition to
their investments from Canada and Australia in the 1920s and 1930s
respectively. The same was true in Europe in the 1950s.
Many of these foreign investors
aggravated the opposition through their insisting that they prefer
absolute control of their subsidiaries in Nigeria. Emerging political
clans started to fear foreign investor’s excessive intrusiveness into
Nigeria as they viewed them as a danger to the newly acquired
independence because they possess some neo-imperialist connotations. Not
minding the ambition of Nigerian leaders to industrialize the economy
as fast as possible, the desires of the foreign investors were mainly
to:
- Safeguard their supplies of raw materials from Nigerian economy through mining operations, agricultural production, as well as light processing activities.
- Maintain or enlarge their market share in the country with a policy of import substitution strategy through manufacturing and processing activities.
- To undertake, where profitable activities that support their home countries firms in developing countries through banking, insurance and other trading and business services. To achieve these (and many more) objectives, foreign investors believe that they need to have firm control of their investments in Nigeria
1.2. Statement of the Problem
FDI is desired by many countries
especially the developing ones. Though desired, their determinants for
countries such as Nigeria are yet to be fully ascertained. Most
literature on foreign direct investment focused mainly on its
applicability, effects and impact on various sectors of the economy,
despite extensive literature on foreign direct investment and its gains,
there were very few studies that investigate the determinants to
foreign direct investments and how they were influenced by the
macroeconomic situations of a particular country. The problem is whether
these determinants are actually affecting the growth of the Nigerian
economy. On one hand, some have argued that these determinants
(INFLATION RATE, EXCHANGE RATE, GROSS DOMESTIC PRODUCT etc) have
positively affected the growth of the economy. On the other hand, some
have argued that they have not positively affected the growth of the
economy. There is therefore need to empirically examine to find out
whether in real sense, the economy is benefiting from this variables
hence these study;
The principal driving force for this work
is on those variables that attract direct investment into Nigeria. It
is thus, of interest to investigate the macroeconomic situations in
Nigeria as it affects FDI over the period under review.
1.3 . Objectives of the study
The main objective of this study is to
evaluate the determinants of Foreign Direct Investment in Nigeria while
specifically; the study sets out to achieve the following objectives
- To Examine the relationship between GDP and FDI in Nigeria
- To Ascertain the relationship between Inflation and FDI in Nigeria
- To Examine the relationship between exchange rates and FDI in Nigeria
1.4 Research Questions
- To what extent does Gross Domestic Product have impact on foreign direct Investment in Nigeria?
- To what extent does inflation have impact on foreign direct Investment in Nigeria?
- To what extent does Exchange rate have impact on foreign direct Investment in Nigeria?
1.5 Hypothesis of the study
To empirically examine the questions raised above, the following are the study’s research hypothesis in the null format
- Gross Domestic Product does not have a positive and significant impact on Foreign Direct Investment in Nigeria.
- Exchange rate does not have a positive and significant impact on Foreign Direct Investment in Nigeria.
- Inflation does not have a positive and significant impact on Foreign Direct Investment in Nigeria.
1.6 Scope of the study
The study covered the period of
1985-2013. Nigeria in the past 15 years had experienced uninterrupted
democracy and it is worthwhile to examine foreign direct Investment and
its determinants under civilian rule as well as the era of military rule
in Nigeria. It utilized annual data on real economic growth using
indicators such as Gross Domestic Product, Exchange rate and Inflation
as reported and published in the Central Bank of Nigeria’s Statistical
Bulletin, World Bank Investment Report and publications from United
Nations Conference on Trade and Development.
1.7 Limitations of the study
This study is limited to the determinants
of foreign investment in Nigeria. Another limitation of this study is
in the use of secondary data, which transfers errors or mistakes in the
reporting of data that would affect the validity of the results A major
constraint was fund. The work was capital intensive and required a lot
of money due to multiple trips made to Central Bank to source for
meaningful materials. Data in FDI inflows as well as that of GDP for the
years under study review were not easy to get due to poor habit of data
presentation in Nigeria. Even though there are write-ups on FDI, the
researcher found it difficult to lay her hands on substantial local
literature on FDI.
1.8 Significance of the study
The following group will benefit immensely from this research work
Reference Point/Academic Purpose
Most of the researches done in this area
have been on FDI’s impact on various sectors on the nation’s economy.
Not much work has been done on its determinants. This research will
serve as a reference point for future researchers especially those
likely to be interested in international trade and finance in general
and inflow of funds (in particular).
Investment decisions
This study will enable investors know
that the most important prerequisite for foreign direct investment to
contribute to economic development is the presence of a well educated
work force Moreover, Nigeria is one the countries in Africa that has
benefited from FDI inflow in recent years, therefore, Investors would
also find this work essentially rewarding, as they would understand the
benefits of foreign direct investment to Nigeria economy.
Government/Policy Makers
Policy makers and practitioners will
benefit from this research work. They make use of academic research
which they find useful but have little time to study. The findings of
this research exercise will benefit government and policy-makers in
formulating policies that will enhance the growth of the economy
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