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CHAPTER
ONE |
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1.0 BACKGROUND OF STUDY 1.1
INTRODUCTION Growth in neoclassical theory is
brought about by increase in the quantity of factors of production in the
efficiency of their allocation. In a simple world of two variables, labour
and capital, it is often presumed that low income countries have abundant labour
but lees capital. This situation of domestic savings in these countries
places constraints on capital formation and hence growth. Even where domestic
input in addition to labour are readily available and no problem of input
supply, increased production may be influenced by scarcity of imported inputs
upon which the production processes in low income countries are based. International capital flows (ICF)
readily becomes an important source or means of enhancing developing
countries to overcome their capital flow in foreign private investment (FPI)
other components are: a.
Official flows from bilateral sources (e.g. developed and OPEC countries) and
multilateral sources such as the World Bank and its two affiliates: The International
Development Assistance (IDA) and the International Finance Corporation (IFC)
on concessional and non-concessional terms. b.
Commercial loans including exports credit: Economic theory suggests that
capital will move from countries where it is abundant to countries where it
is scares. This pattern of movement will be informed by the returns of new
investment opportunities which are considered higher in cases where capital
is limited. The result capital
relocation will boost investment in the recipient countries and bring about
enormous social benefits. With the advent of the third millennium era,
globalization has continued to accelerate. In the areas of international
trade and finance, many factors including accelerated privatization and
economic liberalizations have also pushed globalization in almost every
nation in the world. One important economic consequence of globalization for
developing countries has been massive and unprecedented inflows of foreign
capital during the final decade of the 20th century. However, Private Capital Inflows (PCI)
wrested primacy place from public flows, seizing the pre-eminent finance for
developing countries. According to Weitz and Lijane (1998), while official
flows totaled $56billion in 1990, compared to $44billion in private flow by
1996, public flows had declined to $41billion and private flows grew to
244billion. UNCTAD figures show that in 1997, FDI
inflow amounted to US $400billion and in 1998 rose to an unprecedented level
of US $440billion (Mallampally and Sauvant, 1999). Although GDP have become
widely dispersed among recipient countries in recent years, the distribution
is still skewed with Asia receiving the lion’s share of FDI flows going to
developing countries and Africa receiving little. According to Mallam Pally and Sauvant,
among developing countries the distribution of the World FDI inflows is
uneven. In 1997 for example developing Asia received 22%, Latin America and
Caribbean 14% and Africa 1%. Another perspective on the skewness of
distribution is obtained when it is realized that in 1995, 81% of global FDI
flows to developing countries went to 12 countries while 89% of all portfolio
flows to almost the same dozen countries (Weizt and Lijane, 1998). Therefore,
the challenge to attract more inflows of foreign investment in developing
countries particularly those Sub-Saharan Africa has increased in recent years
due to the accelerating process of globalization. According to Weitz and Lijane (1998).
Opening of a country requires investment for connecting the necessary
infrastructure such as roads, telecommunication, power plants and financial
system. Given the low income and low savings in many African countries, the
investment- savings gap has widened and little hope of closing without the
active involvement of private sector, both domestic and foreign. 1.2 STATEMENT
OF PROBLEM Nigeria is believed to be a high risk
market for investment because of
factors such as bad governance, unstable macroeconomic policies among others.
Since the enthronement of democracy in 1999, the government of Nigeria has
taken a number of measures necessary to woo foreign investors into the
country. These measures include the repeal of laws that are inimical to
foreign investment growth, promulgation of investment laws, oversea trips of
image laundry such as “re-branding” campaign, among others. Despite the plethora of incentives,
the performance of foreign investment in terms of quantum is still very
unimpressive and indeed disappointing in Nigeria. Therefore the questions
raised are: i.
What are the major determinants of foreign investment inflow? ii.
What is the likely impact of foreign direct investment on economic
development in Nigeria? iii.
What is the policy framework of attracting foreign investment by the
government? 1.3
OBJECTIVE OF THE STUDY The study
specifically seeks: 1.
To evaluate the determinants of foreign investment in Nigeria. 2.
To trace the impact of foreign investment in Nigeria. 3.
To review the trend of foreign investment inflows in the country overtime. 4.
To examine the issue of foreign investment volatility. 1.4
HYPOTHESIS OF THE STUDY The following hypotheses have been
formulated and shall be tested for conclusive result on the determinants of
foreign direct investment (FDI). The hypothesis of this study holds that: 1.
H0 (Null Hypothesis):
That Nigeria’s foreign investment has no significant impact on the
development of the Nigeria economy. 2.
H1 (Alternative hypothesis): That foreign investment inflow has a
significant impact on the development of the Nigerian economy. 1.5
SIGNIFICANCE OF THE STUDY Given
the unprepossessing growth rate of the Nigeria economy especially as she is
interested in becoming one of the 20th largest economies in the
world by the year 2020, the study will focus on discovering the factors that
will extend and enlarge the frontiers investment flows in the economy. This research will serve as a good
guide for monetary authorities and authorized players in the external sector
as it will portray at a glance the state of foreign investment in Nigeria.
There is no doubt that academics will also find it useful for further
research 1.6
SCOPE OF THE STUDY The primary objective of this paper is to find the
main determinants of foreign investment 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 it is not possible to include all. |
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