ABSTRACT
This study investigated the impact of Foreign Direct Investment (FDI) on the Growth of the
Nigerian Economy, and also examined the contributions of Domestic Investment to the growth of Nigeria’s economy. Secondary data were sourced from the Central Bank of Nigeria and National bureau of Statistics. The period covered by this analysis was 1981-
2009. A growth model estimated via the Ordinary Least Square method was used to
ascertain the relationship between FDI, Gross Fixed Capital Formation (GFCF), and economic growth in Nigeria. Gross Fixed Capital Formation was used as a proxy for domestic investment. The study also added Interest Rate and Exchange Rate in the model as control variables. The  Granger Causality test  was also  employed to  determine the direction of causality between FDI and economic growth in Nigeria. Employing the OLS technique, our result showed that FDI has positive impact on economic growth in Nigeria during the  period under study.  Although the  relationship  between FDI  and  economic growth was found to be statistically insignificant, there still exist positive relationships among them. The result also showed a positive and significant relationship between economic growth and domestic investment measured by GFCF in Nigeria. The findings of the study also revealed that interest rate positively but insignificantly affect the growth of the Nigerian economy. Exchange rate was found to have positive and significant impact on the growth of the Nigerian economy. The result of the granger causality test showed that it is GDP that granger causes FDI and not the other way round as against the findings of many writers. Based on these findings, it is recommended that the government and the monetary authorities should formulate policies and programmes aimed at attracting world- class transnational corporations (TNCs), design and implement a strategy to attract non-oil FDI, improving the regulatory framework, increase investment in physical and human capital; foster linkages and local industries capacity, strengthening institutions dealing with investment  and  related  issues,  increase  in  image  laundry  of  the  country to  increase investors’ confidence etc. This work has provided practical evidence to the roll of FDI in the growth of the Nigerian economy.
CHAPTER ONE INTRODUCTION
1.1 BACKGROUND TO THE STUDY.
The underdeveloped nature of the Nigerian economy that essentially hindered the pace of her economic development has necessitated the demand for Foreign Direct Investment into the country. Nigeria as one of the developing countries of the world, has adopted a number of measures aimed at accelerating growth and development in the domestic economy, one of which is to attract foreign direct investment (FDI). According to World Bank (1996), FDI is an investment made to acquire a lasting management interest (normally 10% of voting stock) in a firm or an enterprise operating in a country other than that of the investor defined according to residency. However, Foreign Direct Investment (FDI) is often seen as an important catalyst for economic growth in the developing countries because it affects the economic growth by stimulating domestic investment, increase in capital formation and by facilitating the technology transfer in the host countries. (Falki 2009).
Khan (2007) asserts that Foreign Direct Investment (FDI) has emerged as the most important source of external resource flows to developing countries over the years and has become a significant part of capital formation in these countries, though their share in the global distribution of FDI continued to remain small or even declining. The role of Foreign Direct Investment (FDI) has been widely recognized as a growth-enhancing factor in the developing countries. Falki (2009), speaking on the effects and advantages of FDI to the host economy, noted that the effects of FDI on the host economy are normally believed to be: increase in employment, augmenting the productivity, boost in exports and amplified pace of transfer of technology. The potential advantages of the FDI to the host economy are: it facilitates the utilization and exploitation of local raw materials, introduces modern techniques of management and marketing, eases the access to new technologies, foreign inflows can be used for financing current account deficits, finance inflows form FDI do not generate repayment of principal or interests (as opposed to external debt) and increases the stock of human capital via on-the-job training. The realization of the importance of FDI had informed the radical and pragmatic economic reforms introduced since the mid-1980s by the Nigerian government. The reforms were
designed to increase the attractiveness of Nigeria’s investment opportunities and foster the growing confidence in the economy so as to encourage foreign investors to invest in the economy.(Ojo:1998).
According to Umah (2007), the reforms resulted in the adoption of liberal and market- oriented economic policies, the stimulation of increased private sector participation and elimination of bureaucratic obstacles which hinders private sector investments and long- term profitable business operations in Nigeria. This, for instance, is to encourage the existence of foreign Multinational and other private investors in some strategic sectors of the Nigeria economy like the oil industry, banking industry, communication industry, and others. Reacting to this, Shiro (2009) noted that since the enthronement of democracy in
1999, the government of Nigeria has taken a number of measures necessary to woo foreign investors into Nigeria. These measures, he noted, include the repeal of laws that are inimical to foreign investment growth, promulgation of investment laws, various over sea trips for image laundry by the President among others.
Continuing on this, Uma (2007) asserts that the Nigerian government has instituted various institutions, policies and laws aimed at encouraging foreign direct investment. For instance, in 1995, the Nigeria Investment Promotion Commission (NIPC) was established through Decree No 16 of 1995. The Law provides for a foreign investor to set up a business with 100% ownership which must be registered with the Corporate Affairs Commission (CAC) in accordance with the provisions of the Companies and Allied Matters Decree of 1990. The registration is finalized with the NIPC. To ensure adequate protection, the NIPC Decree guarantees foreign investments against Nationalization and expropriation by the government. The NIPC Decree repealed the Industrial Development Coordination Committee (IDCC) Decree No 36 of 1988 and the Nigeria Enterprise Promotion Decree (NEPD) of 1972 as amended in 1977 and 1989 which, hitherto, reserved for Nigerians the ownership of certain business. The operation of the Autonomous Foreign Exchange Market (AFEM) as provided for in the decree liberalized the FEM operation. The Decree replaced the Exchange control Act No 16 of 1962 in its entirety.
Dunning (1994), however, noted that FDI is attracted to serve as a means of augmenting Nigeria’s domestic resources in order to effectively carryout her development programmes and raise the standard of living of her people.
According to Bello (2003), privatization was also adopted, among other measures, to encourage foreign investments in Nigeria. This involved transfer of state-owned enterprise (manufacturing, agricultural production, public utility services such as telecommunication, transportation, electricity and water supply) companies that are completely or partly owned by or managed by private individuals or companies. Qualified foreign firms were given open arms to take over most of these establishments to enhance efficiency. This is because such foreign firms are reported to possess the managerial acumen and technical prowess needed to resuscitate and sustain the weak industries in Nigeria (Umah:2007).
1.2 STATEMENT OF PROBLEM
Over the years, there has been a considerable increase in the volume of FDI inflow into the Nigerian economy, yet the economy is still battling with a high level of unemployment, inadequate infrastructural development and increase in poverty rate. This situation has resulted to the question as to how FDI has contributed to the growth of the Nigerian economy. Meanwhile, the relationship between FDI and economic growth is a subject that has received great attention in the development economics literature, both theoretically and empirically (Barro: 1991).
However despite the considerable volume of research on the subject, there is conflicting evidence in the literature regarding the question of how FDI relates to economic growth. In particular, a two-way interaction has been discoursed in the literature of FDI and economic growth relationship. On one hand, FDI is seen by many (Blomstrom, 1986; Kokko, 1994; Blomstrom and Sjoholm,1999) as an important element in the solution to the problem of scarce local capital and overall low productivity in many developing countries. Hence the flow of foreign direct capital is seen to be a potential growth- enhancing player in the receiving country (mello, 1999; Eller et al 2005).
This view has been challenged by those who argued that FDIs create income inequalities, discourage self reliance, and repatriate capital from the economy to the home country thereby denying developing economies of the opportunity to grow (Hien, 1992, Agosin and Mayer, 2000; Mencinger, 2003). They also argued that FDIs do prevent the cultural patterns, subvert the political process, establish and maintain ownership, consumption and income patterns which generate social tension and political instability, and adversely affect national sovereignty and self dependency (Carkovic and Levine: 2002). However, considering the wide range of conflicting empirical studies on how FDIs in developing countries affect the rate of aggregate growth, distribution of income, employment and some non-economic indicators like culture and political structures, one cannot draw conclusion from them with minimal acceptable level of confidence (Shiro:2009).
Looking at the Nigerian experience, a large number of applied papers have looked at the FDI-GDP growth nexus, but their results have also been far from conclusive. Notwithstanding this absence of any robust conclusions, Nigeria, like most developing countries has continued to vigorously pursue policies aimed at encouraging more FDI inflows. And so, one wonders the extent FDI has contributed to aggregate output in the Nigerian economy to warrant this attention given to it. To this end, there is need to investigate whether the inflow of FDI into Nigeria is significant enough to lead to an increase or decrease in economic growth.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to examine the impact of foreign direct investment on the growth of the Nigerian Economy. Based on this, the following specific objectives have been identified:
1. To determine the impact of FDI on Gross Domestic Product (GDP) in Nigeria.
2. To ascertain the impact of domestic investment in the growth of the Nigerian economy
3. To determine whether there is a unidirectional relationship between FDI and economic growth in Nigeria.
1.4 RESEARCH QUESTIONS
The following questions will be addressed in the course of this work.
1. To what extent, has FDI contributed to economic growth in Nigeria?
2. How has domestic investment contributed to economic growth in Nigeria?
3. Is there a unidirectional relationship between FDI and economic growth in
Nigeria?
1.5 RESEARCH HYPOTHESES
The following hypotheses are formulated for this work:
1 HO1: FDI does not significantly and positively impact on Gross Domestic Product
(GDP) in Nigeria.
2 HO2: Domestic investment does not positively and significantly impact on the growth of the Nigerian economy
3 HO3: There is no unidirectional relationship between FDI and Gross Domestic
Product
1.6 SCOPE OF THE STUDY
This study is designed to cover the period of 29years (1981-2009). The period is considered long enough for a considerable change in policies, reforms and programmes relating to FDI and Domestic investment to have taken place. For instance, in 1995, the Nigeria Investment Promotion Commission (NIPC) was established through Decree No
16 of 1995. The Law provides for a foreign investor to set up a business with 100% ownership which must be registered with the Corporate Affairs Commission (CAC) in accordance with the provisions of the Companies and Allied Matters Decree of 1990. The registration is finalized with the NIPC. To ensure adequate protection, the NIPC Decree guarantees foreign investments against Nationalization and expropriation by the government.
The NIPC Decree repealed the Industrial Development Coordination Committee (IDCC) Decree No 36 of 1988 and the Nigeria Enterprise Promotion Decree (NEPD) of 1972 as amended in 1977 and 1989 which, hitherto, reserved for Nigerians the ownership of certain business. The operation of the Autonomous Foreign Exchange Market (AFEM) as
provided for in the decree liberalized the FEM operation. The Decree replaced the
Exchange control Act No 16 of 1962 in its entirety.
This period was also chosen because of the availability of data relating to FDI, Domestic Investment and other economic variables that will be considered. This work also takes into consideration all the FDI that flowed into Nigeria irrespective of their country of origin.
1.7 SIGNIFICANCE OF THE STUDY
The significance of this work will be grouped into two: significance to policy makers and academic significance.
TO POLICY MAKERS,
This study will enable the government have more focus on the areas to intensify its reforms activities as it relates to attracting FDI for economic growth.
The study will also be a stepping stone for redirection of strategies, programs and policies that will enhance given attention to rural areas for even development.
The finding will enable the government know the need to encourage domestic investment as well as FDI
TO RESEARCHERS
The work will contribute to the existing body of knowledge on this subject area.
The result of the study will form part of the needed information by other scholars working on FDI.
1.8 LIMITATIONS TO THE STUDY
In the course of this work the following limitations were encountered.
The increasing cost of carrying on a research work in a developing country like
Nigeria imposed a great limitation to this work.
The incorrect nature of secondary data also imposed a limitation to the finding of this work.
1.9 DEFINITION OF TERMS
DEVELOPING COUNTRY:- A country that is beginning to industrialize, but is still too poor to do so without foreign aid.
FOREIGN DIRECT INVESTMENT (FDI):- the purchase of a controlling share in an existing company in a foreign country or the setting up of new business venture in a foreign country.
FOREIGN PORTFOLIO INVESTMENT:- the purchase of shares in an existing company in a foreign country, but without gaining control over its management.
FOREIGN PRIVATE INVESTMENT:- it represents all partial and full investments made by foreigners in any country. It comprises of foreign direct and portfolio investment in a country. MULTINATIONAL CORPORATION:- this is a corporation that has investments and offices in more than one country.
This material content is developed to serve as a GUIDE for students to conduct academic research
THE IMPACT OF FOREIGN DIRECT INVESTMENTS ON THE GROWTH OF THE NIGERIAN ECONOMY (1981-2009).
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