Abstract
Foreign Direct Investmemt has been widely described as an indispensible
vihicle of economic growth, Variuos reseachers have tried to advocate foreign
direct investment as a tool for employment generation, transfer of technological
skills, manpower development and increased foreign dexchange earnings.
This study was carried out to determine the impact of FDI on economic
growth in Nigeria. The study made use of the ordinary least square (OLS) method
of estimation in determinig the impact of FDI amid other variables on economic
growth from the period of 1980 – 2010. This study further reveals that inflation
rate have a negative influence on economic growth. Recommandation based on
the findings made are geared towards a restructuring and redirecting of foreign
direct investment if successfully put in place would yeild great benefits to
economic growth in Nigeria.
1.1Background of the study
Over the years countries of the world have mutually helped each other in
growing and developing. This has been made possible through the instrument
of international trade. This trade is necessitated by the fact that no country is an
island therefore is naturally endowed with all her needed resources.
In line with this trade between the advanced countries and the developing
countries is necessary so that the advanced countries with their technical
knowledge can transform the raw materials of the developing nations into
finished goods.
The advantage of foreign capital investment especially foreign direct
investment cannot be over emphasised, some of which include the acquisition
of relevant and required technology, employment, inflow of foreign direct
investment, manpower and human capital development, increased foreign
exchange to the host countries and international accreditation and relevance.
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In Nigeria context successive government supported by the strong
industrial and academic forces have identified this machinery of international
trade as an important tool for growth and development. Using some e measures
like giving credit consideration provision, basic infrastructure and right
environment for production and investment, quality tax concession and
favourable lending rates.
A compares of the results between the impact of FDI on economic
growth and domestic investment has been made between the East and West
African countries. The overall results indicate that FDI promotes economic
growth that higher foreign direct investment promotes economic growth rate.
Foreign direct investment is also found to crowd in domestic investments likely
attributed to technology transfer and related spill overs effects comprising East
and West African countries. It is found that the positive effect of FDI on growth
is driven by West African countries while the negative effect of FDI on
domestic investment is led by East African countries.
Over the last decades, the macro-economic performance of Nigeria can
be described as being chequered. The average GDP growth rate of 3.95%
achieved between 1970 – 2008 translates into a low growth rate of 1.49% in per
capita income terms. This rate of growth in per capita terms is insufficient to
reduce in a significant ay the level of poverty which remains the primary goal
of developing policies in Nigeria. Ajayi (2006) notes that the savings rate of
Nigeria is lower than that of most countries and far lower than the required
investment that can induce growth rates that are capable of alleviating poverty.
Recent studies however show that Foreign Direct Investment is what is
needed to bridge the gap of savings and investment that exists in African and
in nigeria particularly. Prior to the 1970?s FDI was not seen as an instrument of
economic development the perception of FDI as parasitic and retarding the
development of domestic industies for export promotion had engendered
hospitality to multi –national companies and their direct investments in many
countries.
However, the consensus now is that FDI is an engine of growth as it
provides the much needed capital for investment, increased competition in the
host countries industries and aids local firms to become more productive by
adopting more efficient technologies or by investing in human and or physical
capital. Foreign Direct investment contributes to growth in a substantial manner
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because it is more stable than other forms of capital (Ajayi ,2006). While the
FDI growth link is still ambiguous most macroeconomics studies nevertheless
support the notion of a positive role of FDI within particular economic
conditions. There are three main channels through which FDI can bring about
economic growth. The first is through the release it affords from the binding
constraints of domestic savings. In this case, foreign direct investment
contributes to savings in the process of capital accumulation. Second FDI is the
main source through which technology spillovers lead to an increase in factor
productivity and efficiency in the utilization of resources which leads to growth
. third FDI leads to export as a result of increased capacity and competitiveness
in domestic production. This linkage is often said to depend on another factor
called „?Absorptive Capacity?? which include the level of human capital
development, type of trade regimes and degree of openness (Ajayi 2006;
Borenztein et al 1998).
The proposition made in this paper is that FDI facilitates economic growth on
one hand and on the other hand economic growth attracts FDI into Nigeria. In
other words FDI and economic growth are endogeneousely determined in
Nigeria.
Consequently the objective of this study is to analyse the edogeneouse nature of
the effect of FDI on economic growth in Nigeria using data between 1980-
2010. The aim is to find out if there is a directional relationship between
economic growth and FDI?s inflows into Nigeria.
This study justified particularly for the following reasons: the study recognizes
the growing evidence from cross countries studies that the relationship between
FDI and economic growth is endogenous. That is FDI engenders growth and
growth attracts FDI. The study does not simply assume endogenity but actively
tests for endogenity of FDI and economic growth in Nigeria, using appropriate
econometric methodologies. The study is also significant because it differs from
other studies in the scope. This gives the study an edge because it examines the
FDI growth relation in the near contemporary context, checking account of past
trends and recent developments in the global financial market for capital flows.
Finally the study adds to the literature by specifically examine the
interaction between FDI and human capital and infrastructure with the view for
examining whether FDI affects growth by itself or through an indirect
interaction term.
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1.2STATEMENT OF THE PROBLEM
Interestingly there are some arguments about whether FDI is really
beneficial and how significant this benefit is to economic growth some critical
proponents have said that in the cost of benefit analysis context, the less accuring
to the host countries as a result of FDI outweighs the guaranteed benefit.
Typically, multinational corporations in developed countries have actually become
a threat to host countries as they are now subversive and exploitative.
Also, multinational corporations are in reality the representation of the
global corporation around countries as they see the state as the only unit of analysis
in international relation. These arguments above and indeed many more have
necessitated a critical look and finding out of whether the often acclaimed benefits
of FDI are significant or not.
Dependency theorist has also focused on how FDI of Multinational
Corporation distorts developing nation economies. In the view of these scholars,
distortion includes the crowding out of national firms rising unemployment related
to the use of capital intensive technology and a marked loss of political
sovereignty. Developing nations generally depend on the foreign investors for the
finance capital that they need. Multinational corporations carryout much of this
foreign investment and many developing countries also borrow money from
international financial markets by selling bonds, but they usually must pay higher
interest rate (the cost of borrowing). Foreign investors may refuse to buy bonds if
they fear that a government may not be able to repay its loans.
However the basis of this study is the general notion that FDI investment
generates considerable benefits to the host country by helping to accelerate her
development efforts
1.3 OBJECTIVE OF THE STUDY
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The general and foremost objective of this study is to examine and
determine the impact of Foreign Direct Investment on the Nigerian economic
development specifically. Other aims of this research work includes;
1. Determine whether foreign direct investment has actually been contributing
significantly to economic growth in Nigeria.
2. To ascertain the magnitude of the impact of FDI on economic growth in
Nigeria.
1.4 RESEARCH HYPOTHENSIS
1. Ho – There is no significant relationship between Foreign Direct
Investment and Economic Growth.
2. Ho -Foreign Direct investment and Economic growth are not
endogenously determined in Nigeria.
1.5 SCOPE OF THE STUDY.
This research work focuses on FDI and the economic growth in
Nigeria and covers a period of time between 1980-2010. This period
was chosen to sufficiently determine the long –run impact of FDI on
economic growth.
1.6 SIGNIFICANCE OF THE STUDY
This research will help policy makers? access or find out the extent
to which FDI has gone in influencing economic growth in Nigeria. It also
serves as an eye opener for the Nigerian government in the area of FDI
and also a reference material to researchers.