ABSTRACT
Many developing countries are competing to attract foreign direct investment with a belief that it can be a tool for poverty reduction because it serves as supplements to domestic savings and it is often accompanied with technology and managerial skills which are indispensable in economic development. Foreign direct investment can contribute in significant ways to breaking of growth – poverty vicious circle and there lies Nigerian hope.
In this study, the relationship between foreign direct investment and economic growth in Nigeria is analyzed empirically. It is based on secondary data which was collected from the central Bank of Nigeria and the World Bank’s world development indicators. The period covered in the study is 1980-2013. The model was estimated using the Ordinary Least Square Estimation Approach. The results show that foreign direct investment responds positively to real GDP and real per capita GDP both in the long run and short run but with no effect. The insignificant impact on the Nigerian economy may be due to the under development of human capital, repatriation of profit, crowding out of domestic investment or other reasons which require further investigation. It is recommended that; Government should enact favourable fiscal and monetary policies that will encourage foreign investors that want to invest in the economy hence bring about increase in economic growth.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The importance of foreign capital, most especially FDI, to developing countries cannot be over emphasized. It serves as a supplement to their domestically mobilized savings and it is often accompanied with technology and managerial skills which set the pace for economic development. Foreign direct investment (FDI) can contribute in various ways to economic development in developing nations, most importantly breaking the vicious circle of poverty. The trends of the flows of Foreign Direct Investment (FDI) globally and the distribution of its attendant effect across the regions of the world have been a subject of empirical decisions over the past decades (Akinmulegun, 2012). Several studies have provided evidence of upsurge and increasing degree of the international capital mobility among the developed and developing economies of the world.
Despite how desirable is the inflow of FDI to developing nations; many critics of this capital inflow also allege that multinational companies tend to locate production in countries or region with low wages, low taxes and weak environmental and social standards. They argue that FDI thus contributes to a ‘‘race to the bottom’’, where countries are forced to lower their standards so as not to lose investments and jobs. It is certainly true that these features of the business environment play a significant role in the decisions of multinationals. However, these items are all first part of the cost side of a business. In the end it is not cost that matter, but profit (Klein et al, 2001). Foreign investors balance cost considerations with others that determine the productivity of operations in a particular country. Overall, FDI flows to places where costs are lowest. This is reflected in the basic fact that about three-quarters of FDI flows to developed countries and not to low cost developing nations. It is the priority of investors to locate business where productivity is high, thus FDI will only flow into countries with low productivity when wages and other costs are low enough to offset the productivity disadvantage.
In actualizing the Millennium Declaration, which gave birth to the Millellium Development Goals [MDGs], which is essentially the top priority of the world leaders. The MDGs is made up of eight objectives to be reached by the end of 2015. The achievement of these Goals will contribute to improved human development and notable poverty reduction. Unfortunately, at present, most African countries are off–track on meeting these Goals and require significant levels of capital investment to help them to get back on track. In Nigeria for instance, it is discovered that there exist a wide gap between the domestically available supply of savings, investment, foreign exchange, government revenue, skills and the planned level of the resources necessary to achieve these development targets that will lead to poverty alleviation in the country. Thus, this gap necessitates the need for external resources to augment the domestic resources in the country; and a major source of this external resource is Foreign Direct Investment (FDI).
1.2 STATEMENT OF RESEARCH PROBLEM
Africa and Nigeria in particular, has witnessed monumental increase in the level of poverty. Available records from the Federal Office of Statistics (1996) show that about 71percent of Nigerian households are considered poor. However, the poverty level increased to 74.2 percent in the year 2000. The high level of poverty has a lot of destabilizing effects on the citizens as well as the country. Poverty has the tendency to exacerbate crime, prostitution and high level of HIV/AIDS, loss of confidence in the economy and increase in the level of frustration. Evbromeran (1997) observed that poverty can cause fear, depression, despondency and suicide as well as revolution, envy, bitterness, selfdepreciation of ego etc. The effects of poverty can therefore be said to be multi dimensional in nature.
In order to reduce the level of poverty, the Nigerian government introduced lot of incentives such as fiscal, financial and non-financial. In 1997 budget governments showed its intention to enter into investment production agreements (i.e Bilateral, Regional and multilateral treaties) with foreign governments or private organisations wishing to invest in Nigeria as well as discuss additional incentives with them, (Aremu 1997: 2).The inflow of foreign resources such as
foreign private investment has the tendency of stimulating employment, income, consumption and economic growth, hence the possibility of reducing poverty. Borenstein and Lee (1998) have shown that foreign private investment has significant effect on the host country e.g. a one percent point rise in the ratio of foreign direct investment and gross domestic product increase the rate of per capita income growth of the Less Develop Countries (LDCs) by 0.3 percent to 0.8 percent, which will tend to trickle down to the populace and hence bring about decrease in the level of poverty.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is empirically examine the impact of Foreign Direct Investment on economic growth in Nigeria economy. The specific objectives of the study are stated below:
(i) To examine the extent at which foreign direct investment can impact on the economy.
(ii) To evaluate policies that can hinder or foster foreign direct investment.
(iii) Proffering appropriate recommendations based on the conclusions made.
1.4 RESEARCH QUESTIONS
The research questions, which would guide this study are as follows:
- Has FDI impacted on economic growth in Nigeria?
- Is there any significant relationship between FDI and economic growth in Nigeria?
1.5 RESEARCH HYPOTHESIS
The hypothesis to be tested hence will include the following:
H0: Foreign direct investment has no significant impact on economic growth in Nigeria
H1: Foreign direct investment has significant impact on economic growth in Nigeria
1.6 SIGNIFICANCE OF THE STUDY
This study is significant for two reasons; to the Nigerian government and the general public. In the first place it is significant because it is timely. This is because the period of study coincides with the period (1997-2013) which the United
Nations has declared as the decade of eradication of poverty in the world most especially in the third world countries. Secondly, it is significant because it would expose and proffer
recommendations to the Nigerian government about its policies on foreign direct investment and how it can be fully encouraged to bring about increased economic growth.
1.7 RESEARCH METHODOLOGY
The analysis that will be made in this study shall be based on time series data. The data for this study would be obtained mainly from secondary sources; particularly from Central Bank of Nigeria (CBN) publications such as the CBN Statistical Bulletin, CBN Annual Reports and Statements of Accounts, CBN Economic and Financial Review Bullion and National Bureau of Statistics publications.
Due to the linearity nature of the model formulation, Ordinary Least Square (OLS) estimation method would be employed in obtaining the numerical estimates of the coefficients in the model using Eviews. Real gross domestic product and per capita real gross domestic product will be used to capture poverty in this study.
Two multiple regression models shall be used in the estimation. The model shall seek to investigate the effect of Foreign Direct Investment, Degree of Trade Openness and Exchange rate on Gross domestic product while model two would investigate the effect of Foreign Direct Investment, Degree of Trade Openness and Interest rate on Per capita income in Nigeria economy. This is a follow up on the objectives of the study stated earlier.
1.8 SCOPE OF THE STUDY
The economy is a large component with lot of diverse and sometimes complex parts; this research work will only look at a particular part of the economy (Foreign direct investment). The empirical analysis and estimation will cover the period between 1980 and 2013.
1.8 LIMITATION OF THE STUDY
Finance is one of the elements that assist a good research. Financial constraint created difficulties in the process of this research work, however, it did not hinder the research.
The main limitation of this study is time constraint. The time allotted for the completion of this research is not adequate based on recent and contemporary happening with respect to the impact of foreign direct investment on economic growth in Nigeria.
1.9 ORGANIZATION OF THE STUDY
This study shall be divided into five chapters. The first chapter provides the background of the subject matter justifying the need for the study. Chapter two presents related literature concerning foreign direct investment and poverty alleviation. Theoretical framework and research methodology, which includes the theoretical framework, sources of data, model formulation, estimation techniques etc are stated in chapter three while data presentation, analysis and interpretation of regression result were made in chapter four. Concluding comments in chapter five reflects on the summary, conclusion, recommendations and suggestion for further studies based on the findings of the study.
1.10 DEFINITION OF TERMS
Foreign Direct Investment: An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation’s stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made.
Economic Growth: This refers to the increased over time of an economy’s capacity to produce those goods and services needed to improve the well-being of the citizens in increasing number and diversity. It is the study of the process by which productive capacity of the economy is increased over time to bring about rising level in national income.
Economic Development: Economic development ideally refers to the sustained, concerted actions of communities and policymakers that improve the standard of living and economic health of a specific locality. The definition of economic development given by Professor Michael Todaro is an increase in living conditions, improvement of the citizens self-esteem needs and free and a just society.
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