CHAPTER ONE
INTRUDUCTION
1.1 Background to the Study
Foreign direct investment is one of the most dynamic international resource flows to developing countries. It is important because it is a package of tangible and intangible assets, and firms deploying them are being regarded as very important players in the global economy. Foreign direct investment serves as an engine for economic growth most especially to developing countries like Nigeria. Holger and Greenaway, (2004) noted that these is a considerable evidence that Foreign direct investment can effect growth and development by complementing domestic investment and by facilitating trade and transfer of knowledge and technology. Foreign direct investment is attached with great importance especially in the growth of an economy. And because of this,
Nigeria tries to attract greater volume of this important potential resource. Ajayi, (2000) notes that Africa, like many other developing regions of the world, needs a substantial inflows of external resources in order to fill the savings and foreign exchange gaps and leaping itself to sustainable growth levels in order to eliminates its pervasive poverty. And because of this, developing countries regard foreign direct investment as an engine of economic growth as it provides much needed capital for investment, increases competition in the host country industries, and aids local firms to become more productive by adopting more efficient technology or by investing in human and /or physical capital. Foreign direct investment inflows into developing countries have grown rapidly over the years, and this is because the developing countries see foreign direct investment as an important element in their strategy for economic development.
Ayanwale, (2007) FDI is not only important for developing countries, it is equally important for developed countries and because of its great importance in an economy, countries comes up with some promotional measures like mergers and acquisitions through privatisation to lure FDI into their economy. Kyaw, (2003) submits that mergers and acquisitions including private-to-private transactions as well as acquisitions through privatisation which increased significantly in developing countries because an increasingly important vehicle for FDI. UNCTAD (2008) reported that the increase in FDI inflows largely reflected relatively high economic growth and strong corporate performance in many parts of the world. Promoting and attracting FDI has therefore become a major component of development strategies for developing countries. In the case of Nigeria, the role of FDI as a source of capital has become increasingly important not only because of the belief that it can help to bridge the savings- investment gap but also because it can assist in the attainment of millennium Development goal targets. FDI contributes to growth in substantially manner because it is more stable than other forms of capital flow. Other benefits of FDI in an economy include, employment, facilitating access to foreign market and – generating both technological and efficiency spill over to local firms. Abimbola, (2010) points out that the benefits of FDI vary with respect to the level of openness and quality of human capital in developing countries. The economy of Nigeria is a middle income, mixed economy marked with well-developed financial, legal, communications, transport and entertainment sectors. It is ranked 31st in the world in terms of GDP (PPP) as of 2009 Wikipedia, (2011). From 2003 to 2007, Nigeria attempted to implement an economic reforms program called the National Economic Empowerment Developing Strategy (NEEDS). The purpose of the NEEDS was to raise the country’s standard of living through a variety of reforms, including macroeconomic stability, deregulation, liberation, privatisation, transparency and accountability. Oil continues to dominate the public finance and foreign exchange resources in Nigeria.
Amadi (2002) opined that with oil as the main sources of foreign exchange, a one –product monoculture economy must be continuously deficient in investment capital. FDI also compete with domestic firms. Markusen and Venables(1999), in their analysis of the effect of foreign firms on the developing of domestic firms in the industrial sector, discovered that foreign companies compete with domestic producers while creating additional demand for domestically produced intermediate goods through linkages with local suppliers. Nigeria is endowed with reach natural resources. According to Asiedu (2003), the level of FDI attracted by Nigeria is mediocre compared with the resource base and potential need. The aim of this paper is to examine the impact of Foreign Direct Investment on Nigeria’s economic growth.
1.2 Statement of Problem
Nigeria’s economic development was anchored basically on agricultural and primary exports before independence. But a purposeful effort was made to alter the structure of the economy by increasing investment in 1960. Incentive measures were thus directly aimed at attracting foreigners, their capital, technology and skills
The centrality of FDI as the prime mover in the growth process of the Nigeria economy has often been emphasized by the traditional Neo-classical theory of the determinants of the growth process. Hence, foreign direct investment encourages the flow of technology and skills and fills the gap between domestically available supplies of savings, foreign exchange and government revenue. Asiedu (2003), cited in Egbo (2011) asserted that foreign direct investment in Nigeria is mediocre compared with the resource base and potential need of the country. In addition to this assertion, the empirical link between FDI and Nigeria’s economic growth is yet unclear despite numerous studies that have examined the influence of FDI on Nigeria’s economic growth. However the extent to which FDI contributes to growth depends on the economic and social conditions or in short the quality of the environment of the recipient country (Akinlo, 2004). The quality of environment relates to the safe of savings in the country, the degree of openness and the level of technological development.
Nigeria is one of the countries with great demand for goods and services and has attracted some FDI over the years, but the most pertinent question that usually comes to mind is whether FDI actually contributes to economic growth in Nigeria. Equally, there have been a good number of studies on FDI and Economic growth in Nigeria but the existing empirical evidence on their long-run relationship has been inconclusive in relation to the periods under review, the motivation for this work therefore arose from the fact that for Nigeria in particular, the issue of economic growth is a very important one.
Therefore, the extent to which economic growth has been achieved in Nigeria as a result of various policy measures put in place by successive administrations to attract foreign direct investment is an economic issue that requires investment. Hence, the main thrust of this study shall be to evaluate the impact of foreign direct investment on Nigeria economic growth.
1.3 Research Questions
The study was guided by the following research questions:
1. To what extent does foreign direct investment contribution to Nigeria’s economic growth?
2. Is there any significant longrun relationship between foreign direct investment and Nigeria’s economic growth?
3. Is there any significant causal relationship between foreign direct investment and economic growth.
1.4 Objectives of the Study
The main objective of the study is to ascertain the extent at which foreign direct investment inflow influences Nigeria’s economic growth. However, the following specific objectives would also be achieved to;
1. empirically investigate the contributions of foreign direct investment on Nigeria’s economic growth.
2. establish whether there is a significant longrun relationship between foreign direct investment and Nigeria’s economic growth.
3. determine the natureof causal relationship between foreign direct investment and economic growth.
1.5 Research Hypotheses
The following null hypotheses were tested in the course of the research work:
1. H0: Foreign Direct Investment does not have a significant impact on Nigeria’s economic growth.
2. H0: There is no longrun relationship between Foreign Direct Investment and Nigeria’s economic growth.
3. H0:There is no significant causal relationship between foreign direct investment and economic growth in Nigeria.
1.6 Significance of the Study
Findings of the study will make meaningful contribution to the general knowledge and understanding of the nature of FDI and its impact on Nigeria’s economy. It would help economists, leaders and other members of the government to understand the importance or otherwise of foreign direct investment which in turn would help in policy formulation.
Lastly, it would stimulate further research in the area of foreign direct investment and would provide policy recommendations to policy makers on ways to attract more foreign direct investment into the country.
1.7 Scope and Limitations of the Study
The study aims to address the issue on the impact of foreign direct investment on the Nigeria economy. The areas to be covered include the concept of foreign direct investment; its impact and determinants with special regards to the Nigeria economy. The empirical investigation shall be restricted to the period 1981 to 2014.
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