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FOREIGN DIRECT INVESTMENT AND ITS IMPACT OF THE
NIGERIA ECONOMY (1980-2005).
ABSTRACT
The
acknowledged benefits of Foreign Direct Investment (FDI) seems to be more than
the demerits, and this seems to explain the current move of developing countries
seeking to attract FDI by removing structural barriers and encouraging foreign
investors. This study examines the impact of FDI on the Nigeria economy,
1980-2005. Data were obtained from the Central Bank of Nigeria (CBN) and the
National Bureau of statistics, (NBS). Hypotheses were formulated to test the
significance of the variables investigated. Data were analyzed using regression
technique to achieve the stated objectives of this study. The study revealed
that there is a positive and significant relationship between FDI and Gross
Domestic Product (GDP). The result of FDI and Balance of Payment (BOP) also
showed a positive and significant relationship. It also revealed that there is
a significant and positive relationship between FDI and unemployment. However,
this is contrary to our expectation, since the positive relationship does not
impact on the Nigeria economy. Essentially, due to the influence of foreign
capital, we concluded that FDI is beneficial to the Nigerian economy.
TABLE OF CONTENTS
Certification i
Dedication ii
Acknowledgment iii
Abstract iv
Table of Contents v
CHAPTER
ONE: INTRODUCTION
1.1 Background
to the study 1
1.2 Statement
of problem 4
1.3 Objective
of the study 5
1.4 Research
question 5
1.5 Research
hypotheses 6
1.6 Method
of study and analysis 7
1.7 Scope
of study 7
1.8 Significance
of the study 7
1.9 Organization
of the study 8
CHAPTER
TWO: LITERATURE REVIEW
2.1 Introduction 9
2.2 Review
of related literature 10
2.3 Overview
of FDI in Nigeria 15
2.4 Rationale
for foreign direct investment 17
2.5 FDI
inflow in Nigeria 21
2.6 Factors
affecting the flow of FDI into the Nigeria economy 22
2.6.1 Market
share 23
2.6.2 Openness of the host country 24
2.6.3 Political risk 24
2.6.4 Labour costs and productivity 25
2.6.5 Infrastructures 25
2.6.6 Privatization 26
2.6.7 Social
factors 27
2.7 Contribution
of FDI to the Nigeria economy 27
2.7.1 Employment 27
2.7.2 Increased revenue 27
2.7.3 Technology of transfer 28
2.7.4 Promotion of export 28
2.7.5 Linkages contribution 29
2.8 Criticism
of FDI 29
2.9 Prospect
for increased inflow of direct foreign investment
into Nigeria 31
CHAPTER
THREE: RESEARCH METHODOLOGY
3.0 Introduction 34
3.1 Source
of data and collection 34
3.2 Data
analysis technique 34
3.3 Model
specification 34
3.4 Theoretical
argument on the relationship between FDI and
GDP, BOP and
unemployment 36
CHAPTER
FOUR: DATA PRESENTATION AND ANALYSIS
4.0 Introduction 38
4.1 Data
presentation 38
4.2 Data
analysis and results interpretation 42
4.3 Hypothesis
one 43
4.4 Hypothesis
two 44
4.5 Hypothesis
three 46
CHAPTER FIVE: DISCUSSION, RECOMMENDATION AND
CONCLUSION
5.0 Introduction 48
5.1 Discussion
of findings 48
5.2 Recommendation 49
5.3 Conclusion 50
References 52
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Foreign
investment appears to be the most crucial component of capital inflow in any
economy. The relative advantage(s) of foreign direct investment as a
productivity enhancing package is now widely acknowledged.
For
a developing country, the inflow of a foreign capital may be significant in not
only raising the productivity of a given amount of labour, but also allowing a
large labour force to be employed (Sjoholm, 1999). According to Taylor and
Sarno (1997), FDI responds to economic fundamentals official policies and
financial market imperfections. Development economists have identified a strong
association between investments and economic growth Barro (1990) and Barro and
Sala-I- Martin (1992) predict that output can only grow through increased
factor accumulation and/or through technical progress. However most growth
models have come to ascribe the rate of growth of an economy as being
determined by the accumulation of physical and human capital, the efficiency of
resource use and the ability to acquire and apply modern technology. Since
investment determines the rate of accumulation of physical capital, it thus
becomes an important factor in the growth of the productive capacity and
contributes to growth of the economy. Hence, increasing foreign private
investment is an important channel for increasing aggregate investment.
FDI
is an integral part of an open and effective international economic system and
a major catalyst to development. Yet, the benefits of FDI do not accrue
automatically and evenly across countries, sectors and local communities.
National policies and the international investment architecture matter for
attracting FDI to a larger number of developing countries and for reaping the
full benefits of FDI for development. The challenges primarily addresses host
countries, which need to establish a transparent, broad and effective enabling
policy environment for investment and to build the human and institutional
capacities to implement them.
From
Nigeria’s early years, foreign direct investment has remained a veritable
source of financing the development of the economy. With the attainment of
independence in 1960, the country was in great need of capital to achieve rapid
economic growth and development. The government realized that the Nigerian
economy at its stage of development will not be able to provide the needed
capital internally, hence the need for foreign investment.
In
an apparent shift of long held stance against FDI, the Nigeria government like
other developing nation introduced the structural adjustment programme (SAP) in
1986. The programme incorporate trade and exchange reform reinforced by
monetary and fiscal measures, which were geared towards diversifying the mono-export
base of the economy by structuring domestic production and encouraging the use
of improved inputs for local production. To reinforced the gains of the
economic policy measures and further encourage foreign participation in the
economy, the Nigeria investment promotion Decree was promulgated in 1995 to
“encourage, promote and co-ordinate foreign investment and enhance capacity
utilization in the production sector of the economy”. To achieve this
objective, the decree established the Nigerian investment promotion commission
(NIPC) in conjunction with the foreign exchange (monitoring and miscellaneous
provision) decree No 17 of 1995 that established the autonomous foreign
exchange market (AFEM).
In
Nigeria, no foreign economic policy has received significant attention from the
late 1990s as debt cancellation and FDI. The united nations conference and on
trade and development UNCTAD (1999:48-49) reported that by 1999 Nigeria has
signed six (6) bilateral investment treaties (BITs) and eleven (11) double
taxation treaties (DTTs) aimed at encouraging the inflow of FDI.
In
effect, the Overseas Development Initiative, ODI (1997) noted that by the end
of the 1990s. Nigeria was the second largest recipient of FDI among low income
countries among which were China, India, Bangladesh, Vietnam and countries of
African region.
Today,
the Nigerian scenarios present a nation with several foreign investments in the
economy. More recently, both federal and state government are going into
partnership with foreign experts and also encouraging indigenous entrepreneurs
to enter into partnership to boost the level of industrialization.
Foreign
investment is a vital tool for industrialization and development. This study is
aimed at creating awareness on the importance or impact of FDI on the Nigerian
economy.
1.2 STATEMENT OF PROBLEM
The
presence of FDI in the country has not created a substantial growth and
development in the Nigeria economy. The government has introduced different
measures, to attract the inflow of FDI, but the effect of these measures has
not had any appreciable impact.
In
consideration of the fact that Nigeria is still grappling with unemployment,
underutilization of resources, lack of major breakthrough in capital
acquisition and also suffering from a continuous balance of payment (BOP)
problem and more painful a hopeless low exchange rate of the naira vis-Ã -vis
other foreign currencies, such as dollars and pound sterling which have
crippled the Nigeria economy. What is the way out of this delirium economic
state? Many analysts and experts like have given thumbs up for foreign Direct
Investment (FDI) as a veritable tool to kick start the Nigerian economy.
It
is against this backdrop that the country has intensified her efforts to
attract new FDI. Also government policies are trying to discourage FDI outflow
via remittance, as this reduces the amount of net flow of FDI available for
re-investment.
There
is need therefore to appraise the nature of FDI net flow into Nigeria and its
effect on economic growth and eventual contribution to national development.
1.3 OBJECTIVES OF THE STUDY
The
objective of this study is to examine the following:
a. To examine
the relationship between FDI and economic growth.
b. To determine
the relative impact of FDI on balance of payment.
c. To
determine the contribution of FDI to unemployment.
d. To determine
the factors affecting the flow of FDI into the Nigeria economy.
e. To
analyze the trend of FDI in Nigeria from 1980-2005.
1.4 RESEARCH QUESTION
The
relevant research questions that relate to the purpose of studying the effect
of FDI on the Nigerian economy are;
a. How has
FDI contributed to the growth of the Nigerian economy?
b. What significant
employment opportunities for labour has FDI generated in the Nigeria economy?
c. How has
FDI worsened or improved the balance of payments
d. What are
the determinants of FDI in the Nigeria economy?
1.5 RESEARCH HYPOTHESES
The
study is guided by the following hypotheses:
H01:
There is no significant relationship between FDI and GDP
H02:
There is a significant relationship between FDI and GDP
H03:
There is no significant relationship between FDI and BOP
H04:
There is a significant relationship between FDI and BOP
H05:
There is no significant relationship between FDI and unemployment
H05:
There is a significant relationship between FDI and unemployment.
1.6 METHOD OF STUDY AND ANALYSIS
The
study is largely empirical data were collected on the hypothesized variables
from 1980-2005. Secondary data were extensively used from the Central Bank of
Nigeria (CBN), journal, textbooks, national Bureau of Statistics (NBS),
articles etc.
Based
on the major objectives to determine the impact of FDI on GDP, BOP and
unemployment, the ordinary least square method of regression analysis is used
as our principal tool of analysis.
1.7 SCOPE OF STUDY
The
study is restricted to the findings on FDI, BOP and unemployment. Data ranging
from 1980-2005 (sample size of 20) is also collected on the hypothesized
variable.
1.8 SIGNIFICANCE OF THE STUDY
The
significance of the study is set against the background of the increasing
relevance of foreign direct investment in Nigeria.
By
examining how direct foreign investment affects the Nigerian economy the study
will inform policy decision and also assist policy makers in their efforts to
formulate policies that could influence or encourage foreign direct investment
in Nigeria for accelerated growth and economic development. It could also serve
as a basis for future studies in the area of foreign investment. The study will
also proffer suggestions to managing FDI for economic development.
1.9 ORGANIZATION OF STUDY
The
study is divided into five chapters.
Chapter
one contains the background to the study statement of problem; objectives of
the study etc.
Chapter
two of this study deals with the theoretical framework and review of relevant
literature on the study.
Chapter
three focuses on the research methodology.
Chapter
four deals with the empirical data analysis as well as testing of hypothesis
and finally the interpretation of results.
Finally,
chapter five takes a look at discussion on findings, summary of findings as
well as policy recommendation.
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