The Impact Of Foreign Direct Investments (FDI) In Real Sector Of Nigeria Economy

The Impact Of Foreign Direct Investments (FDI) In Real Sector Of Nigeria Economy

CHAPTER ONE

1.0    INTRODUCTION

1.1     Background of the Study

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:-

1.     To evaluate the factors that stimulates foreign direct investment into Nigeria.

2.     To examine the social cost of foreign direct investment in Nigeria as against the social cost.

3.     To suggest and advice government on the role played in order to attract and regulate the flow of foreign direct investments into Nigeria.

4.     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:

1.     Can foreign direct investment provide the much needed finance and technology to host country?

2.     What are the factors that influence the inflow of foreign direct investment?

3.     How correlated is the quantity of foreign direct investment to its quality in host country?

4.     Does foreign direct investment contribute to the economic growth in Nigeria?

5.     Is there any trade-off between foreign direct investment social cost (return) and its private cost (return)?

6.     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:

1.     Policy Makers: They shall consider this research work to be useful as basis for making economic policies.

2.     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.

3.     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 investments 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.