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IMPACT OF FOREIGN DIRECT INVESTMENT
ON THE ECONOMIC GROWTH IN NIGERIA (1986-2010)
CHAPTER
ONE
INTRODUCTION
1.1 Background of the Study
Various
classifications have been made on Foreign Direct Investment (FDI). For
instance, FDI has been described as investment made so as to acquire a lasting
management interest (for example, 10 percent of voting stock) and at least 10
percent of equity shares in an enterprise operating in another country other
than that of the investor’s country (Mwillima, 2003). Policy makers believe
that FDI produces positive effects on host economies. Some of these benefits
are in the form of externalities and the adoption of foreign technology (Alfaro
et. al, 2006). According Alfaro et. al, 2006, multinational enterprises (MNEs)
diffuse technology and management know-how to domestic firms. When FDI is
undertaken in high risk areas or new industries, economic rents are created
accruing to old technologies and additional management styles. It has been
theorized by development economists that the integration of developing
countries with the global economy increased sharply in the 1990s with changes
in their economic policies and lowering of barriers to trade and investment.
Most countries strive to attract foreign direct investment (FDI) because of its
acknowledged advantages as a tool of economic development. Africa and Nigeria
in particular joined the rest of the world in seeking FDI as evidenced by the
formation of the New Partnership for Africa’s Development (NEPAD), which ahs
the attraction of foreign investment to Africa as a major component. FDI 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).
Nigeria
is one of the economies with great demand for goods and services and has attracted
some FDI over the years. The amount of FDI inflow into Nigeria was estimated at
US$2.23 billion in 2003 and the rose to US$5.31 billion in 2004 representing an
increase of 138 percent. The figure rose again to US$9.92 billion or 87 percent
increase in 2005. The figure, however, slightly declined to US$9.44 billion in
2010/11. The question that comes to mind is, does FDI actually contribute to
economic growth in Nigeria? If FDI actually contributes to growth, then the
sustainability of FDI is a worthwhile activity, and a way of achieving its
sustainability is by identifying the factors contributing to its growth with a
view to ensuring its enhancement.
This
is even more so as Africa and indeed Nigeria is undoubtedly facing an economic
crisis situation featured by inadequate resources for long-term development,
low capacity utilization, high level of unemployment, high poverty rate, high
state of insecurity and Millennium Development Goals (MDGs) increasingly
becoming difficult to achieve by 2020.
In
fact, one of the pillars on which the New Partnership for Africa’s Development
(NEPAD) was launched was to increase available capital to US$64 billion through
a combination of reforms, resource mobilization and a conducive environment for
FDI (Funke and Nsouli, 2003). Nigeria as a country, given her natural resource
base and large market size, qualifies to be a major recipient of FDI in Africa
and indeed is one of the top three leading African countries that consistently
received FDI in the past decade. Despite in the enormous amount of literature
in this field of study, the empirical linkage between FDI and economic growth
in Nigeria is yet unclear (Akinlo, 2004). The results of studies carried out on
the linkage between FDI and economic growth in Nigeria are not unanimous in
their submissions. A closer examination of these previous studies revealed that
conscious effort was not made to take care of the fact that more than 60
percent of the FDI inflows into Nigeria is made into the extractive industry
(oil). Hence this study actually modeled the influence of natural resources on
Nigeria’s economic growth. There is also the problem of endogeneity, which has
not been consciously tackled in previous studies in Nigeria. Again, most of the
studies on FDI and growth are cross-country studies, however; FDI and growth
debates are country specific. Earlier studies, for example, Otepola (2002),
Oyejide (2005) etc, examine the impacts
of FDI on growth and the channels through which it may be benefiting the
economy. The concerned of this study, therefore, is to examine the long run
impact of FDI on Nigeria’s economic growth, hence addressing the country’s
specific dimension to the FDI growth debate. The study is different from
previous studies, even as the effect of the major components of FDI on economic
growth will be examined thereby offering the opportunity to assess the
differential impact of oil FDI and non-oil FDI on Nigeria’s economic growth.
1.2 Statement of the Problem
In
view of our weak economy structure, unemployment, budget deficit, weak
currency, high taste for foreign goods and consistence unfavorable balance of
trade, foreign direct investment, thus, became imperative for Nigeria to
sustain her economy and remain relevant in the committee of nations.
Unlike
Ghana, South Africa, Benin Republic and some other African countries that enjoy
and felt the impact of foreign direct investment steady, Nigeria is not, due to
her socio-political challenges which in-turns affected her economic policies.
Hence the need for this study is to ascertain the impact of FDI in the Nigerian
economy and its obstacles.
1.3 Objectives of the Study
The
general objective of this is to assess the impact of FDI on the economic growth
of Nigeria. Other specific objectives are:
1. To
ascertain the impact of FDI on sector of Nigerian economy.
2. To
determine the impact of FDI on non-oil sector in the economy.
3. To
suggest measures for facilitating the steady flow of FDI into the Nigerian
economy.
1.4 Research Questions
The research
intends to ask the following questions:
1.
What is the impact of FDI on oil sector in the economy?
2.
What is the influence of FDI on non-oil
sector in the economy?
3.
What are the measures that could
facilitate the steady flow of FDI into the Nigerian economy?
1.5 Statement of Hypothesis
Hypothesis
is a tentative statement put forward to test the validity of a given
phenomenon, (Osuala 2007). Thus,
our hypotheses for this study are:
HO1: FDI does not have impact on Nigerian economy
sector
H11 : FDI has an
impact on the nigerian economy sector
HO2 : FDI does not have any
significant impact on non-oil sector
H12: FDI has a significant impact on non oil sector
1.6 Significance of the Study
The
study will broaden the knowledge of the researcher as well contribute to the
existing literature on the subject matter by providing an expository analysis
of the pattern of FDI in the Nigerian economy. This would enhance policy
formulation in the economic policy and as well address our economic challenges
in general.
It
would also be an invaluable tool for students, academic, institutions and
individuals that want to know more about the link between FDI and economic
growth.
1.7 Scope of the
study
The scope of the study is to
assess the impact of FDI in the economic growth of Nigeria (1986-2010). Thus,
the research is limited to the above stated title alone.
The study will review useful literature
and theoretical framework that are directly and indirectly related to the
subject matter.
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