RELATIONSHIP BETWEEN FOREIGN DIRECT INVESTMENTS AND ECONOMIC GROWTH OF NIGERIA FOR THE PERIOD BETWEEN 1981 AND 2014

CHAPTER ONE

INTRODUCTION

1.1              Background Of The Study

Foreign Direct Investment (FDI) is   perceived as one of the most important strategies for the promotion of economic growth and development in developing countries such as Nigeria. this is because FDI can serve as catalyst for growth by increasing  the opportunity for  developing the countries integration into global financial and capital flows, expand development and export base, generate  technological capability  building and efficiency spillovers to local firms as well as establish investments arrangements that increases the potential for host countries for economic growth (Olyiwuola and Okodun 2007) .

            The perception of FDI role in retarding the development of domestic countries/industries for export promotions had engendered hostility to multi-natural companies and their direct investment in many countries. But this view started  diminishing when it was obvious that savings rate in such developing countries is lower than the required investments  that can induce higher growth rates in the economy .

            Foreign Direct Investment is considered as the central element of the process of economic growth. In the face of resources deficiency in financing long term development. The capital deficiency economies have heavily resoled to foreign capital as the primary means to achieve rapid economic growth, Promoting and facilitating technology transfers through foreign direct Investment (FDI) has assumed a prominent place in the strategies  of economic revival and growth being advocated by policy makers at the  national, regional and international levels because it is considered to be the key to bridging  the  technology and resources gap of underdeveloped countries such as Nigeria and avoiding further build- up of debt .

            The Nigeria government  in its efforts to attract the inflow of Foreign Direct Investment made several policies, for instance in 1995, the laws deemed to be hostile to Foreign investment  growth such as Nigeria enterprises promotions Act which hitherto regulated  the exert and limits of foreign participations in diverse sectors of the economy were replaced in 1995 . The Federal government of Nigeria and the monetary authority have also adopted  science policies, strategies and innovations to open up the economy , improve infrastructural  facilities , provide tax inducement like tax holiday for infant industries, reduction in import tariff etc, to improve the inflow of Foreign Direct Investment  into the Nigeria economy.

           Finance flows in form of Foreign Direct Investment do not generate repayment of principal and interest (as opposed to external debt) and it increases the stock of human capital. The rise in the stock of   human capital of any nation often leads to increases in the domestic production of goods and services. There by matching the flow of Foreign Direct Investment. Poor domestic output makes an economy to rely solely of Foreign Direct Investment exposing the economy to the problems of balance of payment deficit. But the pertinent question here is whether these measures have improved the Foreign Direct Investment’s impact positively on Nigeria economy. Foreign Direct Investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. World bank (1996) conceptualized foreign direct investment a investment that is made to acquire a lasting management interest (usually 10%0 of voting stock) in an enterprises and operating in a country other than that of the investors international journal of Academic Research in Business and Social Sciences.

            The Federal Government  of Nigeria have recognized the importance of Foreign Direct Investment in enhancing economic growth and development and to this effect, various strategies involving incentives policies and regulatory measures  have been put in place to promote the inflow of Foreign Direct Investment to the country.;

1.2              Statement of the Problem      

 Despite the plethora of incentives to attract Foreign Direct Investment, the performance of foreign investment in terms of quantum is still very unimpressive and indeed disappointing in Nigeria. Most countries all over the world strive to attract Foreign Direct Investment (FDI) because of it’s acknowledge advantages as a tool of economic development (Egwaikode 2012). Nigeria joined the rest of the world in seeking Foreign Direct Investment as evidenced by the formation of the New partnership for Africa’s Development (NEPAD), which has the attraction of foreign investment to Africa. As a major components. Foreign Direct Investment 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).

            However, despite Nigeria involvement and effort in attracting Foreign Direct Investment, Nigeria is s till facing an economic crisis situation featured by inadequate resources for  long-term development, high poverty level, low capacity utilization, high level of unemployment and other millennium Development Goals (MDGs) increasingly becoming difficult to achieve  by 2020 (Dutse, 2008) .

             In fact, one of the pillars on which the New partnership for Africa’s Development (NEPAP) was launched was to  increases available capital to 64 (sixty four billion dollars) through  a combination of reforms, resources mobilization and a conducive environment for FDI (Funke and Nsouli, 2003) the UNCTAD world investment Report 2006 shows that Foreign Direct Investment inflow to west Africa is mainly  dominated  by to Nigeria , who received 70% of the sub- regional total and 11% of Africa’s total . Out of this, Nigeria’ oil sector alone received 90% of the Foreign Direct Investment inflow. The library of Congress-Federal Research Division Report (2008) show that in 2006, Nigeria received a net inflow of five Billion four hundred dollars (5.4$) of Foreign Direct Investment much of which came from the United States. Foreign Direct Investment consisted 74.8 percent of Gross fixed capital formation, reflecting low level of domestic investment. Most Foreign Direct Investment is directed towards the energy sector. As at august 2007, World Bank assistance to Nigeria involved 23 active projects with a total commitment value of about $2.67 Billion. Since Nigeria joined the World Bank in 1961 the World Bank has assisted it on one hundred and twenty three (123) projects.

             In 2007, Nigeria had an estimated Gross Domestic product (GDP) of $166.8 billion according to the official exchange rate and $292.7 billion according to purchasing power parity (PPP). GDP rise by 6.4% in real terms over the previous year. GDP per capital was about $ 1,200 using the official’s exchange rate and $ 2,000 using the PPP method. However  despite the increases in the inflow of Foreign Direct Investment in Nigeria compared to other part of Africa especially West African countries about 60 percent of Nigerian population  lives on less than $1 per day,  which of leads so many researchers to doubt the significant impact of Foreign Direct Investment to economic growth of Nigeria thus this research aim to establish if economic growth leads to rise of Foreign Direct Investment or foreign direct investment is the one leading to economic growth .

1.3              Research Questions

          In order to address the aforementioned problems as identified in the statement of problem the following researchable questions will guide the researcher;

1.      To what extent has Foreign Direct Investment impacted on the economic growth of Nigeria?

2.       What is the causal relationships that exist between Foreign Direct Investment and Nigeria economic growth.

3.       Is there any observed long run relationship between economic growth and Foreign Direct Investment in Nigeria?

1.4              Objectives of the Study

 The major objective of this study is to investigate the impact of Foreign Direct Investment on Nigeria economic growth at large, while the specific objectives include the followings;

1.      To empirically investigate the extent at which Foreign Direct Investment has impacted on the economic growth of Nigeria.

2.       To ascertain the causal relationship that exist between Foreign Direct Investment and Nigeria economic growth.

3.       To determine if there is any observed long run relationship between economic growth and Foreign Direct Investment in Nigeria.

1.5              Research Hypotheses

           This provides tentative answers to research question subject to proof or otherwise by the evidence from the study. Hence the working hypothesis of this study are stated as follows:

Ho: There is no significant impact of Foreign Direct Investment on the economic growth of Nigeria.

Ho:  There exist no causal relationship between Foreign Direct Investment and economic growth in Nigeria.

 Ho: There is no long-run relationship existing between Foreign Direct Investment (FDI) and economic growth in Nigeria.

1.6       Significance of the Study

            This study aims at investigating the impact of Foreign Direct Investment on Nigeria economic growth at large and hence, its impact cannot be over-emphasized. The study will be of great importance to policy makers, government and its agencies, private individuals and firms at large. The study will be also of great important to students of economics and other researchers who may have interest in Foreign Direct Investment and its impact on Nigeria economy.

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

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

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

1.7              Scope and Limitations of the Study

            The  focus of the study is to verify if there has been any contribution made towards the economic growth and development of the Nigeria economics via Gross Domestic product (GDP)  through Foreign Direct Investment  for the period (1985- 2014). The study will however be limited to investigate the impact of Foreign Direct Investment on the growth of the Nigeria economy.

             This research will analyze the impact of foreign direct investment on Nigeria economic growth, taking a good analysis on various ways and means put  by the government of Nigeria to develop and attract Foreign Direct Investment (1981- 2012) .

             The researcher encountered a number of constraints in the course of this work to include; data sourcing or data inconsistency due to poor nature of information management in Nigeria. Other constraints are;

i.                    Time factor

ii.                   Financial constraints and host of other constraints that prevent the researchers to present a better work than this.