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FOREIGN DIRECT INVESTMENT AND ITS IMPACT OF THE NIGERIA ECONOMY (1980-2005).





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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-à-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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