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THE IMPACT OF
FOREIGN DIRECT INVESTMENT (FDI) ON THE OIL SECTOR IN NIGERIA (1980-2008).
ABSTRACT
The objective
of the research work is to analyze empirically the impact of foreign direct
investment (FDI) on Oil Sector in Nigeria from 1980 to 2008. Secondary data
were collected and hypothesized with variables such as Crude Oil Production
(COP), Foreign Direct Investment (FDI), while Exchange Rate (EXR) is the check
variables. The ordinary least square (OLS) method of multiple regression
analysis was adopted as a measurement technique. The study reveals that foreign
direct Investment is statistically significantly with crude Oil production in
Nigeria within the period of study. It also shows that foreign economy through
contributes positively to other sector of the economy through technology and
capital inflows, as well as the creation of employment. Therefore, foreign
direct investment is inevitable and necessity for growth and development of the
Nigeria economy. Hence the work recommends the creation of a conductive
environment that will attract more foreign direct investment (FDI).
TABLE OF CONTENTS
PAGES
Title Page i
Declaration ii
Dedication iii
Acknowledgment iv
Abstract v
Table of Contents vi
List of Tables vii
CHAPTER
ONE: INTRODUCTION
1.1 Background
of the study 1
1.2 Statement
of the problem 4
1.3 Objectives
of the study 6
1.4 Hypothesis
of the study 7
1.5 Significant
of the study 7
1.6 Scope
and limitations 8
1.7 Definition
of terms 10
1.8 Organization
of the study 12
CHAPTER TWO: LITERATURE REVIEW AND THEORETICAL
FRAMEWORK
2.1 Literature 17
2.1.1 Understanding foreign direct
investment (FDI) 22
2.1.2 Overview of foreign direct
investment (FDI) in Nigeria 27
2.1.3 Characteristics of foreign
direct investment 32
2.1.4 Trends in foreign direct
investment (FDI) 34
2.1.5 Argument for and against foreign
direct investment (FDI) 39
2.1.6 Risk taking of foreign direct
investment (FDI) 41
2.2 Theoretical
framework 42
CHAPTER
THREE: METHOD OF STUDY
3.1 Data
collection 47
3.2 Model
specification 48
3.2.1 Variables in the model 48
3.3 Analytical
framework 51
CHAPTER
FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Data
presentation 54
4.2 Empirical
result and discussion of findings 56
CHAPTER FIVE: SUMMARY, RECOMMENDATIONS AND
CONCLUSION
5.1 Summary 60
5.1.1 Summary
of major findings 60
5.2 Recommendations 61
5.2.1 Policy
recommendation 61
5.2.2 Suggestion
for further studies 64
5.3 Conclusion 65
References
Appendix
LIST OF TABLES
Table 4.1: Comprehensive data for the variables in the
model 54
Table 4.2 Short run regression for COP at log 56
Table 4.3: Short-run regression for COP at level 57
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The policy thrust of any government is to provide
her citizens with an improved standard of living build and sustain a
self-reliant economy. To this level we claim that economy development is a
necessary condition and the improvement in the quality of life.
Decades of bad government with corruption and
misappropriation of funds including mounting arrears on its external debt with
parish club creditors have almost crippled the nation’s economy.
Service activities have been generally stagnant;
all other sectors are emerging from near total collapse. Oil services have been
dominated by inefficient a public enterprise, which over the years has seriously
handicapped other sectors that use their services as input.
In addition, the value of the Naira depreciated
against the Dollar, this virtually wipe out any economic direct investment
(FDI) into Nigeria shows an uneven path or distribution. In other words, there
is a concentration of foreign direct investment in some sectors compared to
others. Why the uneven distribution? Why investor’s preference of a particular
sector and what is the impact on the Nigeria economy?
It is common knowledge that the ability of
developing country like Nigeria to sustain economic growth and development as
well as meet up with external obligations depend to a large extent on the
inflow of foreign direct investment resources. This is as a result of the fact
that little of noting is available at the current low level of foreign exchange
earnings and high external debt services obligations. Therefore, to improve the
situations, foreign investment should be seen as a complement to our local
opinion that “Foreign Direct Investment fills the gap between domestically
available capital/technology and the gain, considering the highly import
dependent native of the Nigeria economy.
Moreso, the economy is highly vulnerable to
fluctuation in the oil price and the dynamic oil sector contrast sharply with
sluggish growth in the rest of the economy. In other words, the nation’s
economy was at a cross-road. This ugly scenario gave rise to the question, what
is the way out of this delirium economic condition? Many analysts and experts
alike have given a thumb up for foreign direct investment as a veritable
booster to kick-start the Nigeria economy.
With the enthronement of democratic government in
1999, the administration embarked on a number of steps to attract foreign
investors into Nigeria. For instance, Former President Olusegun Obasanjo in a
bid to achieve this objective and improve the economic environment embarked on
a global trotting mission that saw him interacted with fellow Presidents and
business community of different countries in the time. However, a cursory look
at the distribution of Foreign required amount of their inputs necessary to
achieve development”.
The role of oil sector in transforming both the
social and economic framework of Nigeria economy cannot be over-emphasized. It
is against this background that this study examined the degree of foreign
direct investment policy framework to ensure conducive foreign investment
atmosphere. In other words, we assessed the level of distribution of foreign
direct investment flow in the oil sector, its performance and influence on the
economy.
1.2 STATEMENT OF THE PROBLEM
Every country in the world is involved in the race
for growth and development. The motivating factor is the desire to attain a
sustainable human development and this result from inventions and technology.
Due to the level of economic backwardness in
developing countries like Nigeria, foreign direct investment (FDI) has become a
vital tool for industrialization and development. Its importance represents one
of the defining features of globalization and reshaping of the international
business environment.
There are other sources of capital grants which
act as supplements to foreign direct investment (FDI) and external borrowing
which are unattractive due to the debut obligation and vulnerability of the
borrowing country. Aware of the importance of investment in and economy,
successive Nigeria governments have introduced a number of incentives in the
form of tariff, concessions, tax incentives to create a conducive atmosphere
for investment and to encourage both local and foreign investors to invest in
the economy. In one of his speeches, President Babangida (former) reiterated
the need for pro-investment policy for a more stable and enabling
macro-economic environment for foreign investors. Recently, President Goodluck
Jonathan had interaction with Chinese government on how to improve on our power
supply and other teething technological problems in Nigeria.
Earlier research works have been done on the
impact of foreign direct investment on specific sectors of the economy. This is
necessary variables generalization of the economy wide sectorial variables
could conceal the implementations of foreign direct investment (FDI) on the
targeted engine of growth of developing an economy like Nigeria, hence the need
of this study, Ogba A.A (1993).
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to examine the
impact of foreign direct investment (FDI) on the oil sector in Nigeria.
1. Analyze the relationship between foreign
direct investment (FDI) and the output of the oil sector in Nigeria.
2. Evaluate the problem of foreign direct
investment (FDI) in Nigeria.
1.4 HYPOTHESIS OF THE STUDY
The hypothesis for
this study is stated here in the null form as:
H01: There
is no significance relationship between foreign direct investment (FDI) and oil
sector.
1.5 SIGNIFICANCE OF THE STUDY
Foreign direct investment (FDI) is aimed to
promote economic development of the host country. The foreign investors at the
same time expect to have a good return from their investment. The host country
therefore, should be accommodating so as the gain a position of attracting
these investors.
Empirical, theoretical and analytical tools are
used in this study to investigate and explain the impact of foreign direct
investment (FDI) on oil sector in Nigeria. Secondary data would be collected on
the an econometric technique (multiple regression) would be used as the major
measurement tools in the testing, estimation and empirical stage for the research
work. This multiple regression analysis will help to understand some other
factors away from foreign direct investment (FDI).
The Nigeria economy is characterized by low
investment; low savings, low income and large amount of resources in the land
especially crude oil, raw materials, labour etc remain underutilized. These
make the economy suffers from low output, high unemployment rate and poverty.
According to Overseas Development Institute
(2002), Foreign Direct Investment (FDI) is viewed as a major stimulus to
economic growth in developing countries. Its ability to deal with two major
obstacles namely; shortage of financial resources, technology and skills made
it the centre of attraction for policy makers in low-income countries in
particular by providing firms in relatively backward countries with greater
access to finance a wide range of intermediate product.
On the other side of the spectrum, the radical
school of thought holds the view that foreign direct investment (FDI) in the
developing countries confers little of no benefits to the host country. It reinforces
the centre periphery relations which are created between the metropolitan
countries at the time of colonization.
According to Seitz (1990.6) “the radical school of
thought sees the multinational companies (MNCs) as one of the elements foreign
direct investment in developing countries and as the present vehicles of
economic domination by the west on the south”.
This research will enable any reader to understand
the consequences that may arise from avoiding foreign investors on oil sector
in Nigeria. It will also contribute a lot in the development progress and
enrichment of the literature on the subject. It will also contribute a lot in
the development progress and enrichment of the literature on the subject. It
will point out the importance of oil sector in Nigeria economic development.
It is equally expected that the findings and
recommendation would go a long way in providing organizations, both private and
public sectors with measures on how best to engage foreign investors carefully,
to avoid the loop-holes that are pointed out in this study.
1.6 SCOPE AND LIMITATIONS OF STUDY
The focus on the study is on the impact of foreign
direct investment (FDI) on oil sector in Nigeria and it covers the period from
1980 to 2008. This era will cover the policy reform programme in Nigeria. The
period under review enable the researchers have a broad look into the study.
The statistics (T-Test), adjusted R square (R2)
and Durbin-Watson test (DW’ test) of the parameter estimates should be computed
to find out if the estimates are noted or largely not in the multiple
regression pattern.
Crude oil as it is sometimes called is the most
important of all the mineral resources found in Nigeria. Apart from the
provision of internal energy requirements, it provides foreign exchange for the
country through its sales in the world oil market. In fact more than three
quarters of the foreign exchange earning of the country come from crude oil,
Venon, (1996).
The research was carried out in an uncertain
environment which made it impossible to fully achieve or realized the desired
aim. Such impediments include; lack of adequate fund, non-challant attitude of
some factors in releasing the needed data, information etc. notwithstanding all
these obstacles, efforts were made to limit the adverse effects of these
restrictions.
It is hoped that in spite of these problems, the
result of this study will be relevant and serve the intended purpose.
1.7 DEFINITION OF TERMS
1. Foreign
Direct Investment (FDI): according to
the World Bank (1996), foreign direct investment is conceptualized as
investment that is made to acquire a lasting management interest in an
enterprise operating in a country other than that of the investors, the investors’
purpose being an effective voice in the management of the enterprise.
2. Growth:
This occurs whenever there is a quantitative increase in country’s input and
output over a period of time without qualitative occurrence.
3. Development:
It can be defined as when there are qualitative and quantitative improvements
in all or almost all the sectors of an economy which can be sustainable.
4. Product:
It is the transformation of raw materials into finished goods and the
distribution and provision of goods and services in order to satisfy human
wants.
5. Regression:
it is the process of going back to an earlier or less advanced form or state.
6. Capital:
it may be defined as wealth reserved or set aside for the production of future
wealth.
7. Oil:
it can be defined as a thick liquid that is found in a rock underground.
8. Gross
Domestic Product (GDP): it is defined as the total monetary value of goods
and services produced in a country at a particular period of time.
9. Employment:
it can be defined as a situation whereby the potentiality of a worker is fully
utilized.
10. Gross
National Product (GNP): it can be defined as the total monetary value of
goods and services.
11. Employment:
it can be defined as a situation whereby the potentiality of a worker is fully
utilized.
12. Gross
National Product (GNP): it can be defined as the total monetary value of
goods and services produced in a country including the net income realized from
the country’s investments abroad.
13. Hypothesis:
It can be defined as an idea or explanation of something that is based on a few
known facts but that has not yet proved to be true or correct.
14. Empirical:
it can be defined as an explanation that is based on experiments or experience
rather ideas or theoretical.
15. Data:
it is facts or information especially when examined and used to find things or
to make decisions.
16. Estimation:
a judgments or opinion about the value or quality of something.
17. Analytical:
it is a process of using a logical method of thinking about something in order
to understand it especially by looking at all the parts separately.
18. Macro-Economic:
it can be defined as the study of large economic system.
19. ORGANIZATION
OF THE STUDY
This research is
structured into five chapter and they are as follows:
Chapter one introduces the general concepts of
investment in all sector. It also specifies the scope limitation, hypothesis,
organization, significance and definition of terms in the study.
In chapter two, there was a critical review of
available literature and theoretical framework. Moreso, in chapter three, it
looks at the method of study, data collection, model variables and analytical
framework.
Furthermore, chapter four deals with the
presentation and analysis of result. Furthermore, chapter four deals with the
presentation and analysis of result. Here data presentation and empirical
result and discussion were made.
Finally, in chapter five, the study handles the
summary, conclusions, recommendations and suggestions for further study.
References and appendix were made at the end of
the chapters.
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