THE EFFECT OF FOREIGN DIRECT INVESTMENT ON THE NIGERIAN ECONOMY 2005-2015

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of 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 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 (FDI) as investment that is made to acquire a lasting management interest (usually 10% of voting stock) in an enterprise and operating in a country other than that of the investors (define according to residency) the investors purpose being an effective voice in the management of earning either long term capitalor short term capital as shown in the nations balance of payments account statement (Macaulay, 2012). Broadly, foreign direct investment includes mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans. In a narrow sense, foreign direct investment refers just to building new facilities. Todaro, (1977) believed that FDI encourages the inflow of technology and skills and fills the gap between domestically available supplies of savings, foreign exchange and government revenue. It also encourages the inflow of technology and skills.  Onu, (2012) asserted that the contributions of foreign investment to Japan after the World War II and in South Korea after the Korean War has tremendously assisted the economic growth of these countries by providing the local economy with a source of foreign skill, technology, management expertise and human resource development through international training and collaboration.

Macaulay, (2012) asserted that Nigeria’s foreign investment can be traced back to the colonial era, when the colonial masters had the intention of exploiting our resources for the development of their economy. There was little investment by these colonial masters. With the research and discovery of oil foreign investment in Nigeria, but since then, Nigeria’s foreign investment has not been stable. The Nigerian governments have recognized the importance of FDI in enhancing economic growth and development and various strategies involving incentive policies and regulatory measure have been put in place to promote the inflow of FDI to the country. According to Lall, (2002), privatization was also adopted, among other measures, to encourage foreign investments in Nigeria. This involved transfer of state-owned enterprises (manufacturing, agricultural production, public utility services such as telecommunication, transportation, electricity and water supply), companies that are completely or partly owned by or managed by private individuals or companies. Shiro (2009) noted that since the enthronement of democracy in 1999, the government of Nigeria has taken a number of measures necessary to woo foreign investors into Nigeria. These measures, he noted, include the repeal of laws that are inimical to foreign investment growth, promulgation of investment laws, various oversea trips for image laundry by the President among others.  Thus, this study assesses the impact of FDI on economic growth in Nigeria within the period 2005-2015.

1.2 STATEMENT OF PROBLEMS

One of the major economic problem in less developed countries (LCD) is low capital formation to finance the necessary investment for economic growth.

Capital was one regarded by most economists as the principal obstacle to economic development and this is lot attentions were paid to capital formation. The role of capital in economic growth is still regarded as very crucial both the theory of ‘big push’ and the concept of ‘vicious cycle’ all a test to the crucial role of capital in the growth process. The theory of ‘big push’ simply state that the stagnant and undeveloped economies need huge and sudden injection of large capital from foreign direct investment.

However in the literature FDI is found to be related to export growth while human capacity building is found to be related to FDI floe.

Most studies on FDI and growth are cross country studies. However FDI and growth debates are country specific. Among Nigeria studies like those by otepola(2002) oyeyide(2005), Akinlo(2004) examined the importance of FDI on growth for several period and the channel through which it may be benefiting the economy.

In the literature there exist a direct positive link between export growth and the growth of an economy. This growth in export can further be traced down to the level of investment which in most cases can be domestic or foreign investment.

This is so given that foreign capital remains the sure best option of filling the saving investment gap where it exists. Given this fact assessment will be based on the existing link among investment, export, exchange rate and economic growth.

1.3 OBJECTIVE OF THE STUDY

The main objective of the study is to examine the effect of foreign direct investment on the Nigerian economy.

The specific objectives are as follows:

1. To examine the relationship between foreign direct investment and Nigeria economic growth.
2. To determine the extent to which foreign direct investment has improved the GDP of Nigeria.
3. To fine out the significance of foreign direct investment on the Nigerian economic growth.

1.4 RESEARCH QUESTION

Base on the objective of the study, the following research question are raised.

1. What is the  impact  of  foreign  direct  investment  to  the  growth  of Nigeria economy?
2. To to what extent is the relationship between foreign direct investment and Nigeria economic growth?
3. What is the extent to which foreign direct investment has improved the GDP of Nigeria?
4. What is the significance of foreign direct investment on the Nigerian economic growth?

1.5 STATEMENT HYPOTHESES

Ho: There is no significant relationship between FDI, Exchange Rate and economic growth in Nigeria.

Hi: There is significant relationship between FDI, Exchange Rate and economic growth in Nigeria.

1.6 SIGNIFICANCE OF STUDY

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 outcome shall serve as a riseful 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 exercises.

1.7 SCOPE OF THE STUDY

The focus of the study is to verify if there has been any contribution made toward the economic growth and development of the Nigeria economics via gross domestic product (GDP) through foreign direct investment for the period. (2005-2015).

1.8 LIMITATION OF THE STUDY

This study will however be limited to investigate the impact of foreign direct investment on the growth of the Nigeria economy.

1.9 DEFINITION OF TERMS

Foreign Direct Investment: Foreign direct investment (FDI) is an investment in a business by an investor from another country for which the foreign investor has control over the company purchased. The Organization of Economic Cooperation and Development (OECD) defines control as owning 10% or more of the business.

Economy: The wealth and resources of a country or region, especially in terms of the production and consumption of goods and services.

GDP: It is the broadest quantitative measure of a nation’s total economic activity. More specifically, GDP represents the monetary value of all goods and services produced within a nation’s geographic borders over a specified period of time.