THE IMPACT OF FOREIGN DIRECT INVESTMENT ON THE NIGERIAN ECONOMY

ABSTRACT

Most economic rationales for granting special incentives for attracting FDI are based on the belief that FDI bridges the “idea gap” between the rich and the poor nations in addition to the generation of technological transfers and spillovers. Empirical Literature however finds controversial, the effect of FDI on productivity growth. This study is an investigation into the impact of FDI on the Nigerian economy. Using secondary data obtained from CBN Statistical Bulletin and National Bureau of Statistics, Ordinary Least Square regression techniques were employed in the analysis. Major findings show that FDI has a significant positive impact on the Nigerian economy. It is recommended among others that government should enhance its economic climate and increase the incentives to attracting more FDI flows to the economy. It is suggested that further studies should explore the impact of each of the determinants of FDI on the economy.

CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

One of the most salient features of today’s globalization drive is conscious encouragement of cross-border investment, especially by transnational corporations and firms (TNCs). Many countries and continents (especially developing) now see attracting FDI as an important element in their strategy for economic development. This is most probably because FDI is seen as an amalgamation of capital, technology, marketing and management.

Sub-Saharan Africa as a region now has to depend very much on FDI for so  many  reasons,  some  of  which  are  amplified  by  Asiedu  (2001).  The preference for FDI stems from its acknowledged advantages (Sjoholm 1999; Obwona, 2001, 2004). The efforts by several African countries to improve their business climate stem from the desire to attract FDI. In fact, one of the pillars on  which  the  New  Partnership  for  Africa’s  Development  (NEPAD)  was launched was to increase available capital to US$64 billion through a combination of reforms, resource mobilization and condusive environment for FDI (Funke and Nsouli, 2003).

Unfortunately, the efforts of most countries in Africa to attract FDI have been futile. This is in spite of the perceived and obvious need for FDI in the continent. The development is disturbing, sending very little hope of economic development and growth for these countries. Further, the pattern of the FDI that does exist is often skewed towards extractive industries, meaning that the differential rate of FDI in flow into sub-Saharan African countries has been adduced to be due to natural resources, although the size of the local market may also be a consideration (Morriset 2000; Asiedu, 2001).

Nigeria as a country, given her natural resources base and large market size, qualifies to be a major recipient of FDI in Africa and indeed is one of the top three leading African countries that consistently received FDI in the past decade. However, the level of FDI attracted by Nigeria is mediocre (Asiedu,

2003) compared with the resource base and potential need.

Following the collapse of the international market for crude petroleum, Nigeria’s mono-export total foreign exchange earnings declined persistently creating acute shortage in the country’s ability to finance high import bills and servicing of external debt which has been on the increase. Continuation of regime of controls on trade and payment proved counter-productive and made economic environment unsuitable for investment.

In order to deal with the above situation, the federal government introduced several measures in aid of her economic recovery. Paramount on the list of measures is the introduction of Structural Adjustment Programme (SAP) comprising a package of economic policy measures aimed at creating a suitable climate for growth and investment within the economy. The ability of the policy measure in Nigeria’s structural Adjustment Programme (SAP) to stimulate aggregate output in the country depends strictly on the size, composition and quality of foreign direct investment the country can attract in the medium term (Eden, Lekan 1990). Also, among the revamping measures is the use of the monetary policy to attract direct foreign investment. Other policy measures include; the review of the 1970 indigenization policy which restricted foreign investors  venturing  into  some  sectors  of the  economy.  While  some  arrears barred to direct foreign investors have been lifted, others with minority permission have now been liberalized (Ahmed, 1998).

These and other measures have been in force. The question is why “despite the presence of the FDI in the country, their impact on economic and national development is yet to be felt”? Maybe, tracing the history of FDI in Nigeria will help answer the above question, this shall be treated in the next chapter. This  study will therefore  make  its  contributions  by examining  the

contributions of FDI to growth and then determine the contributory variables to

FDI flow in Nigeria.

1.2    STATEMNT OF THE PROBLEM

Nigeria is one of the economies with great demand for goods and services and has attracted some FDI over the years. The government has spent enormous resources meant for other pressing economic needs in attracting foreign direct investment in the country. Large chunk of budget allocations are set aside yearly for embarking on foreign trips in a bid to attract foreign direct investments. The government over the years has introduced different measures to encourage foreign investment. Though there has been an increasing presence of foreign investment in the country, one begins to wonder and worry over the direction and magnitude of the impact of FDIs on the development of Nigeria economy and the question that comes to mind is, do these FDIs actually contribute to economic growth in Nigeria? This informs the approach to this study.

1.3.    OBJECTIVES OF THE STUDY

The following are the objectives of the study:

i)  To examine its impact of FDI on the Nigerian economy.

ii) To prefer solutions and suggestions on how FDI can be managed for better contributions to economic growth and natural advancement.

1.4       RESEARCH QUESTION

The research question for our study shall be:

i)  Is the presence of FDI in Nigeria contributing to economic growth?

1.5      HYPOTHESIS OF THE STUDY

The hypothesis is stated in null approach:

i)  Foreign  Direct  Investment  has  no  significant  impact  on  the  Nigerian economy.

1.6    SCOPE OF THE STUDY

The period of analysis covered 1992-2008. The choice of the period is informed by the development in the Nigerian economy post- SAP. The official change in policy  direction  towards  FDI  was  in  1988  with  the  establishment  of  the Industrial  Development  Coordinating  Committee  (IDCC)  as  a  one  –  step agency  for  facilitating  and  attracting  foreign  investment  flow.  This  was followed in 1995 by the repeal of the Nigerian Enterprises Promotion Decree and its replacement with the Nigerian Investment Promotion Decree 16 of 1995.

Also, the Foreign Exchange (Monitoring and Miscellaneous Provision) Decree

17 of 1995 was promulgated. An export processing zone (EPZ) scheme was also adopted in 1999 to allow interested persons to set up industries and businesses within demarcated zones, particularly with the objective of exporting the goods and services manufactured, or produced within the zone.

1.7    SIGNIFCANCE OF THE STUDY

i)      The study will explore the operations of FDI with a view to ascertaining if their presence is a blessing or a curse.

ii)      The study will ex-ray the origin and development of FDI in Nigerian whilst exploring its various determinants and corresponding impacts on economic growth in Nigeria.

iii)    It will also help proffer suggestions to managing FDI for economic development.

iv)     It will confirm the facts of existing literature and add to the same for future references.

1.8     DEFINITION OF TERMS

FOREIGN DIRECT INVESTMENT: An investment made to acquire a

lasting management interest (normally 10% of voting stock) in a business

enterprise operating in a country other than that of the investor defined according to residency.

GROSS DOMESTIC PRODUCT: Total output of an economy in a given period of time, usually one year.

CAPITAL FLIGHT:     The act of repatriating capital generated within one country say Nigeria, to other countries.

MONO-EXPORT:  This is a situation where one product occupies the export market of a country.

PRIVATIZATION: The decision of the government to relinquish its shareholding in some firms to private individuals. A divesting move by the government to allow private sector participation in business.

COMMERCIALIZATION:  A  situation  whereby  government  allows

some of its firms to play within the dictates of the industry and other market indicators.

ADMINISTRATIVE FRAMEWORK:     The regime of exchange rate and interest rate regulation by the government through the Central Bank of  Nigeria  instead  of  leaving  the  rates  to  the  forces  of  demand  and supply.

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