IMPACT OF FOREIGN DIRECT INVESTMENT ON EXCHANGE RATE IN NIGERIA

CHAPTER ONE:

INTRODUCTION

1.1       Background to the Study

       Nigeria‘s economic development was anchored basically on agricultural and primary exports before independence.  A purposive effort was made to alter the structure of the economy by increasing investment in other sectors on the attainment of political independence in 1960. Since then and, specifically from the early 1950s, virtually all the productive sectors of the Nigerian economy were dominated by foreign investments and therefore ownership incentive measures were, thus, directly aimed at attracting foreigners, their capital, technology, and skills.  (Garba, 1998:18). Over the last three decades, Foreign Direct Investment(FDI) has emerged as one of the most important sources of globalization and an important catalyst for economic growth, transferring technology and knowledge between participating countries.

      Foreign direct investment is a direct investment into production or business in a country by an individual or company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment also provides opportunities and financial challenges around the world. In addition, gaps in entrepreneurship, managerial and supervisory personnel, organizational experience and expertise, innovation in products and production techniques in third world countries are presumed to be partially or wholly filled by foreign investors.

     The theories related to the types of FDI suggest two types of FDI: horizontal (market-seeking) and vertical. The international market searching for the lowest cost of production is called vertical FDI, which is mainly export-oriented (Shatz and Venables, 2000:222-223). Horizontal

FDI refers to the establishment of homogenous plants in foreign locations as a means of supplying certain goods in a foreign country. This type of FDI replaces exports from the home country to the host country.  

    Nigeria receives the largest amount of Foreign Direct Investment (FDI) in Africa. Foreign Direct Investment inflows have been growing enormously over the course of the last decade: from USD1.14 billion in 2001 and USD2.1 billion in 2004, Nigeria‘s FDI reached USD11 billion in 2009 according to UNCTAD, making the country the nineteenth greatest recipient of FDI in the world.  The country experienced real GDP growth averaging 7.8 percent from 2004 to 2007, and 6.4 percent in 2007. This was higher than those of the low-income sub-Saharan (LI-SSA) countries with median (4.0 percent), the LI median (6.0 percent), and the rate in Indonesia (6.3 percent). Kenya however had a higher rate of 7.0 percent. Prior to 2001 40 percent of GDP came mainly from oil which changed from 2001 to 2006 though in 2003 real growth in other sectors exceeded growth in the oil sector (IMF, 2008). Some notable sectors in this respect include telecommunications, wholesale and retail trade, and agriculture (Economist Intelligent Unit,2008). Agricultures potentials are yet to be fully exploited.

     In the year 2007, Nigeria had an estimated gross domestic product (GDP) of US$166.8 billion according to the official exchange rate and US$292.7 billion according to Purchasing Power Parity (PPP). GDP rose by 6.4 percent in real terms over the previous year.GDP per capita was about US$1,200 using the official exchange rate and US$2,000 using the PPP method. About 60 percent of the population lives on less than US$1 per day. Also during the same period (2007) the GDP was composed of the following sectors: agriculture, 17.6percent; industry, 53.1 percent; and services, 29.3 percent. In 2006 Nigeria received a net inflow of US$5.4 billion of Foreign

Direct Investment (FDI), much of which came from the United States. FDI constituted 74.8 percent of gross fixed capital formation, reflecting low levels of domestic investment. Almost all the FDI is directed toward the energy sector.

   Between 2008 and 2020, Nigeria hopes to attract US$600 billion of FDI to finance its vision. FDI is considered as a strategic instrument for economic growth. Thus, this study assesses the impact of FDI on economic growth in Nigeria within the period 1999-2013.  

1.2       Statement of Problem

     It is widely believed that economic growth depends critically on both domestic and foreign investments (Andenyangtso, 2005: 305-323). Equally, the rate of inflow of foreign investment depends on the rate of economic growth. Osaghale and Amenkhieman (1987: 383-403), Ohiorheman (1993: 1185-1207), Fabayo (2003: 227-252) and Aremu (2005:2079-2085) establish a relationship between investment and growth in Nigeria. However, empirical studies of the impact of FDI on growth are concerned with either the overall effect on growth (or net welfare) or with specific aspects of the FDI impact on employment, technology, trade, entrepreneurship and other areas of the economy, such as, infrastructures, education and health. Thus, the impact of FDI on economic growth remains unclear. It is, therefore, necessary to determine the impact of FDI on the economic growth in Nigeria..

1.3      Research Objectives

   The overall objective of this study is to examine the effect of foreign direct investment on the economy of third world countries economies. Specific objectives of this study are:

i.                    To determine the rate of Foreign Direct Investment  inflows into Nigeria;

ii.                  To determine whether foreign direct investment has impacted positively or negatively on the economy of the Nigeria; and , iii. To examine the relationship between foreign Direct Investment, exports and growth in Nigeria.

1.4      Research Question

        The following questions will be answered in the course of this study:

i. What is the rate of Foreign Direct Investment inflows into Nigeria? ; ii. Does Foreign Direct Investment impact positively or negatively on the economy of

Nigeria? ; and, iii. What are the relationship between Foreign Direct Investment, exports and growth in

Nigeria?  

1.5   Significance of the Study  

    Foreign Direct Investment is an important source of growth for developing countries. Not only can it add to investment resources and capital formation, it can also serve as an engine of technological development with much of the benefits arising from positive spillover effects. Such positive spillovers include transfers of production technology, skills, innovative capacity, and organizational and managerial practices. 

Finding from the study will be of immense benefits in a number of ways and to different groups of persons. 

i.               For policy making, the expected result outcome shall serve as a useful guide for future policies as it relates to stimulating growth within the economy.

ii.             For further studies, it will serve as a reservoir of knowledge for such academic exercises. 

           1.6     Scope of the Study      

   The primary objective of this paper is to find the impact of foreign direct investment on exchange rate 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 1984. The study will basically cover a period of 15years (1999-2013).     This study is limited to the effect of foreign direct investment on third world countries economies with particular emphasis on Nigeria. 

                 1.7   Limitations of study

The study noted the following limitations:

I.               Biasness and sentiments on the side of many publications, writers and respondents was a limitation to the work

II.            Finance: The cost of carrying out in a practical research a city like Lagos due to transportation cost and other logistics is another major constraint to this research

1.8  Organisation of study

This research work has been divided into five chapters. The first chapter is the introduction which discusses the background of the study, statement of the problem, objectives of the study, research questions, significance of the study, and operational definition of terms. Also included in this chapter is the scope of the study and limitations. The second chapter is devoted to literature review and theoretical framework which explicitly expressed the concept as well as the overview of Foreign Direct Investment in Nigeria The third chapter covers research methodology taking cognizance of the of the research design, research population, sample and sampling technique(s), research instrument(s), validity and reliability of instruments, data collection technique and finally the data analysis technique(s) employed in the research. On its part, the fourth chapter discusses analysis, the assessment of data collected research findings. Finally, the fifth chapter contains the summary and conclusion of research work, as well as recommendation

on how problems raised can be tackled .                                                                              

          1.9   Definition of terms Ø Foreign Direct Investment - FDI

   According to FT Lexicon, .a foreign direct investment (FDI) is a controlling ownership in a business enterprise in one country by an entity based in another country.                        Based on this study, Foreign Direct Investment is defined as a company from one country making a physical investment into building a factory in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange. Entities making direct investments typically have a significant degree of influence and control over the company into which the investment is made.

Ø Third world country

    The economically underdeveloped countries of Asia, Africa, Oceania, and Latin America, considered as an entity with common characteristics, such as poverty, high birthrates, and economic dependence on the advanced countries. (Gerard Chaliand, 2010:55)  

   Third World Countries are the technologically less advanced, or developing, nations of Asia,

Africa, and Latin America, generally characterized with poverty, having economies distorted by

their dependence on the export of primary products to the developed countries in return for finished products. Third world nations also tend to have high rates of illiteracy, disease, and population growth and unstable governments

Ø Gross Domestic Product

   Gross domestic product (GDP) is defined by the Organisation for Economic Co-operation and Development (OECD) as "an aggregate measure of production equal to the sum of the gross values added of all resident, institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs).                                               

   Based on this study, Gross Domestic Product is the total market value of all the goods and services produced within the borders of a nation during a specified period. It is the the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

Ø Purchasing Power Parity

   Purchasing power parity (PPP) is a component of some economic theories and is a technique used to determine the relative valueof different currencies.The whole idea  of purchasing power parity is that it allows one to estimate what the exchange ratebetween two currencies would have to be in order for the exchange to be at par with thepurchasing powerof the two countries' currencies.

Ø Economic Growth

   According toStatistics on the Growth of the Global Gross Domestic Product (GDP) from 2003to 2013,IMF, October 2012, Economic growth is the increase in themarket valueof the goods and services produced by aneconomyover time. It is conventionally measured as the percent rate of increase in realgross domestic product,or real GDP. Flowing from the study, Economic growth is primarily the study of how countries can advance their economies.