DETERMINANTS OF FOREIGN DIRECT INVESTMENT AND ECONOMIC SITUATIONS IN NIGERIA

ABSTRACT

Generally, policies and strategies of Nigerian government towards foreign direct investments are shaped by two principal objectives of desire for economic independence and the demand for economic development. Multinational corporations are expected to bring into the country foreign  capital  in  the  form  of  technical  skills,   entrepreneurship,   and  technology  and investment  fund  to  boost  economic  activities  thereby,  raising  the  standard  of  living  in Nigeria. The main issues in this paper relate to understanding those factors that determine foreign  direct  investment  in Nigeria  as  well as our  ability to  attract  adequate   amounts sufficient enough to accelerate the pace of our economic growth and development. Foreign direct investment (FDI) is assumed to benefit a developing country like Nigeria, not only by supplementing domestic investment, but also in terms of employment creation, transfer of technology, increased domestic competition and other positive externalities. This work tried to answer the question; what are the FDI determinants in Nigeria and how do they affect the Nigerian economy?  Secondary data were collected  for the period 1999-2013.  In order  to analyze the data, both econometric and statistical methods were used. Tables were produced in order to create a visual impression of the dependence of the Nigerian economy on that of donor countries such as Western Europe and North America. The economic regression model of  ordinary  least  square  was  applied  in  evaluating  the  extent  to  which  foreign  direct investment affect major economic indicators such as gross domestic product, inflation and exchange rate. The model revealed little impact of foreign direct investment on each of these variables, foreign direct investment has not contributed much to the growth and development of Nigeria. This is evident in reality of enormous repatriation of profits, dividends, contract fees, and interest payments on foreign loans. The study, thus, suggests that in order to further improve the economic climate for foreign direct investment in Nigeria; the government must appreciate the fact that the basic element in any successful development strategy should be the encouragement of domestic investors first before going after foreign investors.

CHAPTER ONE

INTRODUCTION

1.1.  Background of the study

Nigeria is a developing country, like other developing countries, it needs investments from within and outside to develop. This study focuses on the investment from outside. In other words, we are looking at those factors that determine the inflow of Foreign Direct Investment in Nigeria. Foreign direct investment  (FDI) as a major component  of  international  capital flows is an investment made to acquire lasting interest in enterprises outside the country of the  investor;  it  has  long  been  a  subject  of  great  interest  in  the  field  of  international development.  The  division  of  the  world  into   emerging  and  developing  is  sometimes predicated  upon the availability and/or the  effective  utilization  of resources.  The relative scarcity of resources has often been identified as a major problem confronting nations and this call for their judicious use. On the other hand, this argument can be cast in terms of the overall development of nations

The general rate of development and growth is thus limited by the shortage of productive factors. Development economists like Caircross ( 1955, 1962) ,Hicks (1965), Newlyn (1977) have gone further to single out capital as the critical missing ingredient in the development of the developing countries,.  In this manner,  Caircross (1955)  forcefully illustrated  this fact when  he  observed  that  the  contribution  of capital  to  economic  progress  embraces  three distinct processes.

1)  A greater abundance of capital permits the introduction of more roundabout methods of production.

2)  The accumulation of capital is a normal process or feature of economic  expansion however originating.

3)  Additional capital may be required to allow technical progress to take place.

On the basis of the foregoing,  it is therefore  not surprising that countries,  especially  the developing countries should strive to acquire capital. Most developing countries of  which Nigeria  is  one  hardly  meet  the  requirement  of  generating  internal  finance  required  for mobilization  of  an  economic  surplus  derived  from  a  growing  surplus   above  current consumption.

The genesis of foreign investment in Nigeria cannot only be attributed to the desire by the country to fill the resources/savings  gap and foreign exchange gap. This is because foreign investment in the country started with the imposition of British colonial rule in Nigeria in the

19th   century.  This  category of  foreign  investment  is  referred  to  as  the  forced  historical

perspective.   Foreign trade and investment  dates as far back as the Smithian era  {1776}. While the Mercantile system propagated hoarding and a close economy, Adam Smith was a proponent of free trade and open market system with the “popular invisible hand”.

The  neo  classicalists  equally  hold  the  view  that  free trade  and  investment  enhances  the accumulation of capital stock provided that adequate consideration is given to factor prices and technology.  Alternative  views have been expressed  about the limitations to  financing opportunities especially in the face of capital rationing and increasing cost of capital {Jerkins and Thomas, 2002}

Since Independence, Nigerian foreign policy has been characterized by a focus on Africa and by  attachment  to  several  fundamental  principles,  African  unity  and  independence;  and regional economic cooperation and development. In pursuing the goal of regional economic cooperation development, Nigeria helped create the Economic Community of West African States [ECOWAS}, which seeks to harmonize trade and investment practices for its 15 West African   member countries and ultimately to achieve a full customs union. Over the past decade, Nigeria has played a pivotal role in support of peace in Africa.

Nigeria has enjoyed generally, good relations with her immediate neighbors, she is a member of  the  following  international  organizations;   UN,  World  Trade   Organization  [WTO}, International Monetary Fund{IMF}, World Bank,   Economic   Community of West African States{ECOWAS}  among others. It was after  independence  in 1960 that conscious efforts were made to attract foreign investors.  The  earlier legislations were amended  and/or new ones enacted  as the  case maybe.  Foreign  investments  were substantial  and  subsequently received  a  boost  at  independence.  In  1957,  cumulative  foreign  investment  was  under

#200million,  it grew  to #441.8million  in 1962.  Between  1960  and 1966, private  foreign investment  accounted  for  at  least  70  percent  of  the  total  industrial  investment.  Foreign interests were equally dominant in Banking, Insurance and construction.

Foreign Direct Investment (FDI) as a form of development finance has been recognized as a preferred  option  to  market  loans.  This  is  because;  among  other  things,  Foreign  Direct Investment comes as a package-finance capital, technology and managerial expertise.

As in many developing countries, inflow of FDI into Nigerian economy dates back to the

19th century. Many foreign investors that came into the country at that time concentrated their attention towards export-oriented  mineral and agricultural production as well as  on  public utilities. At this period, it was customary to see mines and plantations as enclaves with little overall impact on the growth of largely subsistent agricultural economy of Nigeria. Foreign investors  were  often  supported  by their  home  governments  to  appropriate  most  of  the economic rents in the country. For instance, the railway line that was constructed in the south and extended northwards in the country to Kano by 1914 was mainly financed by pressures on the colonial administration by the royal Niger company (later known as UAC), a famous Liverpool merchant (Mr John Holt) and the association of West African merchants (AWAM); a cartel  organization  operating  as a monopsony  to buy Nigerian  products  under  a price understanding arrangement. The British positively responded by funding the project through both the colonial loan raised on the London Capital Market and the colonial treasury loans.

As  nationalist  movements  emerged,  these  foreign  investors  came  to  be  regarded   as exploiters. It must be noted that economic and political opposition to foreign investors is not limited to the colonial countries alone. There was growing opposition to their  investments from Canada and Australia in the 1920s and 1930s respectively. The same was true in Europe in the 1950s.

Many of these foreign investors aggravated the opposition through their insisting that they prefer absolute control of their subsidiaries in Nigeria. Emerging political clans started to fear foreign investor’s excessive intrusiveness into Nigeria as they viewed them as a danger to the newly acquired independence because they possess some neo-imperialist connotations.     Not minding the ambition of Nigerian leaders to industrialize the economy as fast as possible, the desires of the foreign investors were mainly to:

a)     Safeguard  their supplies  of raw materials  from Nigerian  economy through  mining operations, agricultural production, as well as light processing activities.

b)     Maintain  or  enlarge  their  market  share  in  the  country  with  a  policy  of  import substitution strategy through manufacturing and processing activities.

c)     To undertake, where profitable activities that support their home countries firms  in developing  countries  through  banking,  insurance  and  other  trading  and  business services. To achieve these (and many more) objectives, foreign investors believe that they need to have firm control of their investments in Nigeria

1.2.   Statement of the Problem

FDI  is desired  by many countries  especially  the developing  ones.  Though  desired,  their determinants for countries such as Nigeria are yet to be fully ascertained.  Most literature on foreign direct investment focused mainly on its applicability, effects and impact on various sectors of the economy, despite extensive literature on foreign direct investment and its gains, there were very few studies that investigate the determinants  to foreign direct investments and  how  they were influenced  by the macroeconomic  situations  of a particular  country. The problem is whether these determinants are actually affecting the growth of the Nigerian economy.  On one hand, some have  argued that these determinants  {INFLATION  RATE, EXCHANGE  RATE,  GROSS  DOMESTIC  PRODUCT  etc}  have positively  affected  the growth of the economy. On the other hand, some have argued that they have not positively affected the growth of the economy. There is therefore need to empirically examine to find out whether in real sense, the economy is benefiting from this variables hence these study; The principal driving force for this work is on those variables that attract direct investment into Nigeria. It is thus, of interest to investigate the macroeconomic situations in Nigeria as it affects FDI over the period under review.

1.3.   Objectives of the study

The main objective of this study is to evaluate the determinants of Foreign Direct Investment in Nigeria while specifically; the study sets out to achieve the following objectives

1.   To Examine the relationship between GDP and  FDI in Nigeria

2.   To Ascertain  the relationship between Inflation and FDI in Nigeria

3.   To  Examine the relationship between exchange rates and FDI in Nigeria

1.4      Research Questions

1.   To  what  extent  does    Gross  Domestic  Product  have  impact  on    Foreign  direct

Investment  in Nigeria

2.   To what extent does  inflation have impact on  Foreign direct Investment in Nigeria

3.   To what extent does   Exchange rate have impact on  Foreign direct Investment   in

Nigeria

1.5      Hypothesis of the study

To empirically examine the questions raised above, the following are the study’s research hypothesis in the null format

1. Gross Domestic Product does not have a positive and significant impact on Foreign

Direct Investment in Nigeria.

2. Exchange  rate does not have a positive  and significant  impact  on Foreign  Direct

Investment in Nigeria.

3. Inflation does not have a positive and significant impact on Foreign Direct Investment in Nigeria.

1.6      Scope of the study

The study covered the period of 1985-2013. Nigeria in the past 15 years had  experienced uninterrupted democracy and it is worthwhile to examine foreign direct  Investment and its determinants under civilian rule as well as the era of military rule  in Nigeria.. It utilized annual data on real   economic  growth using indicators such as  Gross Domestic  Product, Exchange  rate and Inflation as reported  and published  in   the Central Bank of Nigeria’s Statistical Bulletin, World Bank Investment  Report and  publications  from United  Nations Conference on Trade and Development.

1.7      Limitations of the study

This study is limited to the determinants of foreign investment in Nigeria. Another limitation of this  study is  in the use  of secondary  data,  which  transfers  errors  or  mistakes  in the reporting of data that would affect the validity of the results A major constraint was fund. The work was capital intensive and required a lot of money due to multiple trips made to Central Bank to source for meaningful materials. Data in FDI inflows as well as that of GDP for the years under study review  were not easy to get  due to poor habit of data presentation  in Nigeria.    Even though there are write-ups on FDI, the researcher found it difficult to lay her hands on substantial local literature on FDI.

1.8      Significance of the study

The following group will benefit immensely from this research work

1. Reference Point/Academic Purpose

Most of the researches done in this area have been on FDI’s impact on various sectors on the nation’s economy.  Not much work has been done on its determinants.  This  research will serve as a reference point for future researchers  especially those likely to  be interested  in international trade and finance in general and inflow of funds [in particular}

2. Investment decisions

This study will enable investors know that the most important prerequisite for foreign direct investment to contribute to economic development is the presence of a well educated work force Moreover, Nigeria is one the countries in Africa that has benefited from FDI inflow in recent years, therefore, Investors would also find this work  essentially rewarding,  as they would understand the benefits of foreign direct investment to Nigeria economy.

3. Government/Policy Makers Policy makers and practitioners  will benefit  from this research work. They make use  of academic research which they find useful but have little time to study. The findings of this research exercise will benefit government and policy-makers in formulating policies that will enhance the growth of the economy

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