THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH AND DEVELOPMENT

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THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH AND DEVELOPMENT

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Various classifications have been made on Foreign Direct Investment (FDI). For instance, FDI has been described as investment made so as to acquire a lasting management interest (for example, 10 percent of voting stock) and at least 10 percent of equity shares in an enterprise operating in another country other than that of the investor’s country (Mwillima, 2003). Policy makers believe that FDI produces positive effects on host economies. Some of these benefits are in the form of externalities and the adoption of foreign technology (Alfaro et. al, 2006). According Alfaro et. al, 2006, multinational enterprises (MNEs) diffuse technology and management know-how to domestic firms. When FDI is undertaken in high risk areas or new industries, economic rents are created accruing to old technologies and additional management styles. It has been theorized by development economists that the integration of developing countries with the global economy increased sharply in the 1990s with changes in their economic policies and lowering of barriers to trade and investment. Most countries strive to attract foreign direct investment (FDI) because of its acknowledged advantages as a tool of economic development. Africa and Nigeria in particular joined the rest of the world in seeking FDI as evidenced by the formation of the New Partnership for Africa’s Development (NEPAD), which ahs the attraction of foreign investment to Africa as a major component. FDI is assumed to benefit a poor country like Nigeria, not only by supplementary domestic investment, but also in terms of employment creation, transfer of technology, increased domestic competition and other positive externalities (Ayanwale, 2007).

Nigeria is one of the economies with great demand for goods and services and has attracted some FDI over the years. The amount of FDI inflow into Nigeria was estimated at US$2.23 billion in 2003 and the rose to US$5.31 billion in 2004 representing an increase of 138 percent. The figure rose again to US$9.92 billion or 87 percent increase in 2005. The figure, however, slightly declined to US$9.44 billion in 2010/11. The question that comes to mind is, does FDI actually contribute to economic growth in Nigeria? If FDI actually contributes to growth, then the sustainability of FDI is a worthwhile activity, and a way of achieving its sustainability is by identifying the factors contributing to its growth with a view to ensuring its enhancement.

This is even more so as Africa and indeed Nigeria is undoubtedly facing an economic crisis situation featured by inadequate resources for long-term development, low capacity utilization, high level of unemployment, high poverty rate, high state of insecurity and Millennium Development Goals (MDGs) increasingly becoming difficult to achieve by 2020.

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 a conducive environment for FDI (Funke and Nsouli, 2003). Nigeria as a country, given her natural resource 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. Despite in the enormous amount of literature in this field of study, the empirical linkage between FDI and economic growth in Nigeria is yet unclear (Akinlo, 2004). The results of studies carried out on the linkage between FDI and economic growth in Nigeria are not unanimous in their submissions. A closer examination of these previous studies revealed that conscious effort was not made to take care of the fact that more than 60 percent of the FDI inflows into Nigeria is made into the extractive industry (oil). Hence this study actually modeled the influence of natural resources on Nigeria’s economic growth. There is also the problem of endogeneity, which has not been consciously tackled in previous studies in Nigeria. Again, most of the studies on FDI and growth are cross-country studies, however; FDI and growth debates are country specific. Earlier studies, for example, Otepola (2002), Oyejide (2005) etc, examine the impacts of FDI on growth and the channels through which it may be benefiting the economy. The concerned of this study, therefore, is to examine the long run impact of FDI on Nigeria’s economic growth, hence addressing the country’s specific dimension to the FDI growth debate. The study is different from previous studies, even as the effect of the major components of FDI on economic growth will be examined thereby offering the opportunity to assess the differential impact of oil FDI and non-oil FDI on Nigeria’s economic growth.

1.2 Statement of the Problem

In view of our weak economy structure, unemployment, budget deficit, weak currency, high taste for foreign goods and consistence unfavorable balance of trade, foreign direct investment, thus, became imperative for Nigeria to sustain her economy and remain relevant in the committee of nations.

Unlike Ghana, South Africa, Benin Republic and some other African countries that enjoy and felt the impact of foreign direct investment steady, Nigeria is not, due to her socio-political challenges which in-turns affected her economic policies. Hence the need for this study is to ascertain the impact of FDI in the Nigerian economy and its obstacles.

1.3 Objectives of the Study

The general objective of this is to assess the impact of FDI on the economic growth of Nigeria. Other specific objectives are:

1. To ascertain the impact of FDI on sector of Nigerian economy.

2. To determine the impact of FDI on non-oil sector in the economy.

3. To suggest measures for facilitating the steady flow of FDI into the Nigerian economy.

1.4 Research Questions

The research intends to ask the following questions:

1. What is the impact of FDI on oil sector in the economy?

2. What is the influence of FDI on non-oil sector in the economy?

3. What are the measures that could facilitate the steady flow of FDI into the Nigerian economy?

1.5 Statement of Hypothesis

Hypothesis is a tentative statement put forward to test the validity of a given phenomenon, (Osuala 2007). Thus, our hypotheses for this study are:

HO1: FDI does not have impact on Nigerian economy sector

H11 : FDI has an impact on the nigerian economy sector

HO2 : FDI does not have any significant impact on non-oil sector

H12: FDI has a significant impact on non oil sector

1.6 Significance of the Study

The study will broaden the knowledge of the researcher as well contribute to the existing literature on the subject matter by providing an expository analysis of the pattern of FDI in the Nigerian economy. This would enhance policy formulation in the economic policy and as well address our economic challenges in general.

It would also be an invaluable tool for students, academic, institutions and individuals that want to know more about the link between FDI and economic growth.

1.7 Scope of the study

The scope of the study is to assess the impact of FDI in the economic growth of Nigeria (1986-2010). Thus, the research is limited to the above stated title alone.

The study will review useful literature and theoretical framework that are directly and indirectly related to the subject matter.

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