THE DETERMINANT OF FOREIGN DIRECT INVESTMENT ON GROWTH OF THE NIGERIAN ECONOMY

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THE DETERMINANT OF FOREIGN DIRECT INVESTMENT ON GROWTH OF THE NIGERIAN ECONOMY

ABSTRACT

The research investigates the determinants of foreign direct investment (FDI) in Nigeria over the period for 1980-2007. Cochrane Ocutt method of regression was utilized in the study. The findings indicate that exchange rate (economic factor) and political instability are the crucial determinants of FDI in Nigeria. Domestic market size (represented by GDP), openness to trade and inflation are insignificant determinants of FDI. The regression model however, showed a significant fit with f-value of 36. 521 and adjusted R2 of 0.93 at 0.05 confidence level. It was also observed in the result that the behaviour of GDP and inflation to FDI is contrary to theoretical and empirical expectation of positive and negative relationship respectively. The findings suggest that policy measures, primarily directed at efficient exchange rate management and minimal political risk, would promote FDI flow in the country.

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CHAPTER ONE

1.0 BACKGROUND OF STUDY

1.1 INTRODUCTION

Growth in neoclassical theory is brought about by increase in the quantity of factors of production in the efficiency of their allocation. In a simple world of two variables, labour and capital, it is often presumed that low income countries have abundant labour but lees capital. This situation of domestic savings in these countries places constraints on capital formation and hence growth. Even where domestic input in addition to labour are readily available and no problem of input supply, increased production may be influenced by scarcity of imported inputs upon which the production processes in low income countries are based.

International capital flows (ICF) readily becomes an important source or means of enhancing developing countries to overcome their capital flow in foreign private investment (FPI) other components are:

a. Official flows from bilateral sources (e.g. developed and OPEC countries) and multilateral sources such as the World Bank and its two affiliates: The International Development Assistance (IDA) and the International Finance Corporation (IFC) on concessional and non-concessional terms.

b. Commercial loans including exports credit: Economic theory suggests that capital will move from countries where it is abundant to countries where it is scares. This pattern of movement will be informed by the returns of new investment opportunities which are considered higher in cases where capital is limited.

The result capital relocation will boost investment in the recipient countries and bring about enormous social benefits. With the advent of the third millennium era, globalization has continued to accelerate. In the areas of international trade and finance, many factors including accelerated privatization and economic liberalizations have also pushed globalization in almost every nation in the world. One important economic consequence of globalization for developing countries has been massive and unprecedented inflows of foreign capital during the final decade of the 20th century.

However, Private Capital Inflows (PCI) wrested primacy place from public flows, seizing the pre-eminent finance for developing countries. According to Weitz and Lijane (1998), while official flows totaled $56billion in 1990, compared to $44billion in private flow by 1996, public flows had declined to $41billion and private flows grew to 244billion.

UNCTAD figures show that in 1997, FDI inflow amounted to US $400billion and in 1998 rose to an unprecedented level of US $440billion (Mallampally and Sauvant, 1999). Although GDP have become widely dispersed among recipient countries in recent years, the distribution is still skewed with Asia receiving the lion’s share of FDI flows going to developing countries and Africa receiving little.

According to Mallam Pally and Sauvant, among developing countries the distribution of the World FDI inflows is uneven. In 1997 for example developing Asia received 22%, Latin America and Caribbean 14% and Africa 1%. Another perspective on the skewness of distribution is obtained when it is realized that in 1995, 81% of global FDI flows to developing countries went to 12 countries while 89% of all portfolio flows to almost the same dozen countries (Weizt and Lijane, 1998). Therefore, the challenge to attract more inflows of foreign investment in developing countries particularly those Sub-Saharan Africa has increased in recent years due to the accelerating process of globalization.

According to Weitz and Lijane (1998). Opening of a country requires investment for connecting the necessary infrastructure such as roads, telecommunication, power plants and financial system. Given the low income and low savings in many African countries, the investment- savings gap has widened and little hope of closing without the active involvement of private sector, both domestic and foreign.

1.2 STATEMENT OF PROBLEM

Nigeria is believed to be a high risk market for investment because of factors such as bad governance, unstable macroeconomic policies among others. Since the enthronement of democracy in 1999, the government of Nigeria has taken a number of measures necessary to woo foreign investors into the country. These measures include the repeal of laws that are inimical to foreign investment growth, promulgation of investment laws, oversea trips of image laundry such as “re-branding” campaign, among others.

Despite the plethora of incentives, the performance of foreign investment in terms of quantum is still very unimpressive and indeed disappointing in Nigeria. Therefore the questions raised are:

i. What are the major determinants of foreign investment inflow?

ii. What is the likely impact of foreign direct investment on economic development in Nigeria?

iii. What is the policy framework of attracting foreign investment by the government?

1.3 OBJECTIVE OF THE STUDY

The study specifically seeks:

1. To evaluate the determinants of foreign investment in Nigeria.

2. To trace the impact of foreign investment in Nigeria.

3. To review the trend of foreign investment inflows in the country overtime.

4. To examine the issue of foreign investment volatility.

1.4 HYPOTHESIS OF THE STUDY

The following hypotheses have been formulated and shall be tested for conclusive result on the determinants of foreign direct investment (FDI). The hypothesis of this study holds that:

1. H0 (Null Hypothesis): That Nigeria’s foreign investment has no significant impact on the development of the Nigeria economy.

2. H1 (Alternative hypothesis): That foreign investment inflow has a significant impact on the development of the Nigerian economy.

1.5 SIGNIFICANCE OF THE STUDY

Given the unprepossessing growth rate of the Nigeria economy especially as she is interested in becoming one of the 20th largest economies in the world by the year 2020, the study will focus on discovering the factors that will extend and enlarge the frontiers investment flows in the economy.

This research will serve as a good guide for monetary authorities and authorized players in the external sector as it will portray at a glance the state of foreign investment in Nigeria. There is no doubt that academics will also find it useful for further research

1.6 SCOPE OF THE STUDY

The primary objective of this paper is to find the main determinants of foreign investment in Nigeria. In the process, a special effort is made to analyze the nexus between policy environment and foreign investment inflow in Nigeria, and explain the pattern of foreign investment flows since it is not possible to include all.

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