CHAPTER ONE INTRODUCTION 1.1          BACKGROUND TO 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 capital or 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.

FDI inflows contributed to a strengthening of the balance of payments in several African countries. In 2006, foreign reserves in the region as a whole grew by 30%, and by even more in some major oil-exporting countries such as Nigeria and the Libyan Arab Jamahiriya (World Investment Report, 2007). Indeed, for developing countries taken as a group, net inflows of FDI have increased almost five fold from an average of 0.44% of GNP in the period 1970-74 to 2.18% of GNP in the period 1993-97 (World Bank, 1999). FDI now forms a significant component of domestic investment activity in developing countries accounting for more than 8% of Gross Domestic Investment (GDI) in the mid-1990s up from 2% of GDI in the early 1970s. Finally, FDI is now the pre-eminent source of capital flows into developing countries accounting for about 36% of total capital flows in the mid-1990s up from approximately 18% of flows in the 1970-74 period (World Bank, 1999).

Average annual inflows of Foreign Direct Investment (FDI) into Africa doubled in the 1980s compared with the 1970s. It also increased significantly in the 1990s and in the period 2000–2003. Comparisons with global flows and those of other regions may be more useful, however. In the mid 1970s, Africa’s share of global FDI was about 6%, a level that fell to the current 2–3%. Among developing countries,

Africa’s share of FDI in 1976 was about 28%; it is now less than 9% (United Nations Conference on Trade and Development – UNCTAD, 2005). Also in comparison with all other developing regions, Africa has remained aid dependent, with FDI lagging behind Official Development Assistance (ODA). Between 1970 and 2003, FDI accounted for just one-fifth of all capital flows to Africa. It is well known that FDI is one of the most dynamic international resource flows to developing countries. FDI is particularly important because it is a package of tangible and intangible assets and because firms deploying them are important players in the global economy. There is considerable evidence that FDI can affect growth and development by complementing domestic investment and by facilitating trade and transfer of knowledge and technology. The importance of FDI is envisioned in the New Partnership for Africa’s Development (NEPAD), as it is perceived to be a key resource for the translation of NEPAD’s vision of growth and development into reality. This is because Africa, like many other developing regions of the world, needs a substantial inflow of external resources in order to fill the saving and foreign exchange gaps and leapfrog itself to sustainable growth levels in order to eliminate its current pervasive poverty.

One of the most salient features of today’s globalization drive is conscious encouragement of cross-border investments, especially by trans-national corporations and firms (TNCs). Many countries and continents (especially developing) now see attracting FDI as an important element in their strategy for economic development. This is most probably because FDI is seen as an amalgamation of capital, technology, marketing and management. Sub-Saharan Africa as a region now has to depend very much on FDI for so many reasons, some of which are amplified by (Asiedu, 2001). The preference for FDI stems from its acknowledged advantages (Sjoholm, 1999 and Obwona, 2001, 2004). The effort by several African countries to improve their business climate stems from the desire to attract FDI. 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). Unfortunately, the efforts of most countries in Africa to attract FDI have been futile. This is in spite of the perceived and obvious need for FDI in the continent. The development is disturbing, sending very little hope of economic development and growth for these countries. Further, the pattern of the FDI that does exist is often skewed towards extractive industries, meaning that the differential rate of FDI inflow in to sub-Saharan African countries has been adduced to be due to natural resources, although the size of the local market may also be a consideration (Asiedu, 2002).

Include Source Nigeria is turning out to be one of the most attractive countries in terms of foreign investment inflows. Foreign Direct Investment increased from less than US$ 1billion in 1990 to US$ 1.2billion in 2000, US$1.9 billion in 2004, US$ 2.3billion in 2005 and US$ 4.5 billion in 2006. As percentage of GDP, Foreign Direct Investment has increased substantially in recent years. The same pattern is witnessed in portfolio investment, which grew from  US$0.2 billion in 2003 to US$ 2.9 billion in 2005 and US$ 0.92 billion in 2006. This is attributable to the economic reforms and the resulting of macroeconomic stability, which have instilled great credibility in the Nigerian economy. Home remittances are also becoming an increasingly important catalyst to growth in Nigeria. In 2004, Nigeria received an estimated US$ 2.26 billion in home remittances; this has continued to increase remarkably with a recorded figure of over US$7 billion in 2006. Nigeria’s economy has experienced strong growth in recent years. Real GDP growth averaged 7.8 percent from 2004 to 2007, and growth of 6.4 percent in 2007 exceeded the low-income sub-Saharan (LI-SSA) median (4.0 percent), the LI median (6.0 percent), and the rate in Indonesia (6.3 percent), although it was lower than the rate in Kenya (7.0 percent) (see Figure 1.1). Oil accounts for nearly 40 percent of GDP, but from 2001 to 2006—except in 2003—real growth in other sectors outpaced growth in the oil sector (IMF, 2008). Sectors that have experienced particularly strong growth include telecommunications, which has been liberalized and privatized over the past decade, and wholesale and retail trade. Agriculture has also shown some growth, although it remains far from fulfilling its potential.

Nigeria’s per capita GDP is high relative to GDP in other LI-SSA countries. In purchasing power parity dollars, GDP per capita grew from $1,597.90 in 2003 to $2,034.60 in 2007—an average annual growth rate of 5.6 percent. It is now far higher than the LI-SSA’s median per capita GDP ($1,018.00) and Kenya’s ($1,359.00) but still much lower than Indonesia’s ($3,234.00). In 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. In 2007 the GDP was composed of the following sectors: agriculture, 17.6 percent; 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. Most FDI is directed toward the energy sector. Between 2008 and 2020, Nigeria hopes to attract US$600 billion of FDI to finance its Vision 2020 policy to transform the country’s economy into one of the world’s 20 largest.

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 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.

The centrality of FDI as a prime mover in the growth process of the Nigerian economy has often been emphasized by the traditional neo-classical theory of the determinants of the growth process. 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 (Todaro, 1994). In addition, gaps in entrepreneurship, managerial and supervisory personnel, organizational experience and expertise, innovation in products and production techniques are presumed to be partially or wholly filled by foreign investors.

1.2          STATEMENT OF THE PROBLEM

Despite the plethora of studies on FDI and economic growth in Nigeria, the existing empirical evidence on the causal relationship between Foreign Direct Investment and economic growth and the associated benefits is very inconclusive. In spite of a seemingly positive association between FDI and economic growth, the empirical literature has not reached a consensus on the direction of this impact however suggesting that Foreign Direct Investment can be either beneficial or harmful to economic growth. Moreover, in the framework of the developing countries like ours, little research has yet been done on the topic.

It is widely believed that economic growth depends critically on both domestic and foreign investments (Andenyangtso, 2005). Equally, the rate of inflow of foreign investment depends on the rate of economic growth. Osaghale and Amenkhieman (1987), Ohiorheman (1993), Fabayo (2003) and Aremu (2005) 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          OBJECTIVES OF THE STUDY

The main aim of this study is examine the impact of Foreign Direct Investment on Economic Growth in Nigeria. Specific objectives include:

1. To ascertain the extent at which Foreign Direct Investment inflow influences economic growth in Nigeria.
2. To establish whether there is any kind of relationship between economic growth and Foreign Direct Investments in Nigeria.
3. To find out whether there is a bi-directional relationship between Foreign Direct Investments and economic growth in Nigeria.

1.4          RESEARCH QUESTIONS

1. To what extent does the inflow in Foreign Direct Investment influence economic growth?
2. Is there a long-run causal relationship between Foreign Direct Investment and economic growth?
3. Is there a bi-directional relationship between Foreign Direct Investment and economic growth?

1.5          RESEARCH HYPOTHESES

The following hypotheses are relevant for our study:

Ho1:       Foreign Direct Investment inflow is not a major determinant of economic growth in Nigeria.

Ho2:       There is no long-run causal relationship between FDI and economic growth in Nigeria.

Ho3:       There is no bi-directional relationship between FDI and economic growth in Nigeria.

1.6          SIGNIFICANCE OF THE STUDY

Based on the fact that there are no exhaustive empirical evidence on the causal relationship between Foreign Direct Investment and economic growth in Nigeria, the researcher deemed it necessary to undertake a country specific research study to establish the causal relationship and interaction between Foreign Direct Investment and economic growth.

For Nigeria, this study will add to other studies on the subject matter and also fill any gap that may exist in previous studies which has been undertaken to establish whether Foreign Direct Investment leads to economic growth or vice versa.

The findings of this study when added to the existing body of literature, will be a valuable guide especially policy makers and a good source of reference for future scholarly research. One advantage of academic research is that it investigates matters which practitioners and policy makers find useful but have little time to study. The study is very vital especially to policy makers and development partners because it enables them to initiate, develop and manage long term economic strategies based on empirical evidence.

This study will contribute significantly to knowledge by providing a new study evidence on Foreign Direct Investment and economic growth relationship in Nigeria. Conventional economic theory especially the endogenous growth theory and a number of empirical studies support the notion that there is a causal relationship between Foreign Direct Investments and economic growth and that Foreign Direct Investment inflows enhance growth in host countries.

To the body of academics, this study will serve as a guide for further researches in area of FDI and economic growth which this study did not cover. Because of its presumed benefits to the host country economies, proponents of Foreign Direct Investments such as the World Bank and International Monetary Fund strongly encourage countries to attract more Foreign Direct Investments as a way of stimulating and increasing efficiency of resource allocation.

1.7 SCOPE AND LIMITATIONS OF THE STUDY

The study examined the impact of Foreign Direct Investments on the Nigerian Economic Growth.

The major limitation of this research was fund. A substantial amount was committed to this work in terms of data gathering.

In reviewing of the related literature, the researcher faced some challenges of accessing journals with relevant materials. Some internet sites were secured and could not be accessed, in some cases, subscription were made in order to gain access to needed materials. The researcher also faced a big challenge in acquiring the econometric software that was used for the analysis. The timely aspect of the work was also impeded because it took the researcher a good number of months to learn the software and apply it to the work.

1.8 ORGANIZATION OF THE STUDY

The study is divided into five (5) chapters and organized as follows:

chapter one from the introduction part, this is where the main theme of the research is given. It comprises of the statement of the problem, objectives of the study, research questions, research hypotheses significance of the study, scope and limitation of the study, organization of the study and definition of terms.

Chapter two is the literature review of the impact of Foreign Direct Investment on the Nigerian Economic Growth.

Chapter three from the research methodology which includes research design, method of data collection, data analysis technique, model specification.

Chapter four is the data presentation, analysis of result interpretation of result and discussion of finding. While,

Chapter five includes the summary, conclusion, recommendations and contributions to knowledge.

1.9 DEFINITION OF TERMS

Foreign Direct Investment: FDI is an investment made to acquire a lasting management interest in a business enterprise operating in a country other than that of the investor.

Economic growth: It is the increase in the amount of the goods and services produced by a country over time. It is normally measured as the percent rate of increase in real gross domestic product (GDP).

Gross National Product (GNP): Is the monetary value the total annual flow of goods and services in the economy of a nation. The GNP is normally measured by totalling all personal spending, all government spending, and all investment spending by a nation’s industry both domestically and all over the world.

Gross Domestic Product (GDP): Is the total value of goods and services produced in a country over a period of time. GDP may be calculated in three ways: (1) by adding up the value of all goods and services produced, (2) by adding up the expenditure on goods and services at the time of sale, or (3) by adding up producers’ incomes from the sale of goods or services.

Absorptive capacity: Absorptive capacity is a limit to the rate or quantity of scientific or technological information that a firm can absorb. If such limits exist they provide one explanation for firms to develop internal R&D capacities.

Portfolio investment: The purchase of stocks, bonds, and money market instruments by foreigners for the purpose of realizing a financial return, which does not result in foreign management, ownership, or legal control. e.g. purchase of shares in a foreign company, purchase of bonds issued by a foreign government, acquisition of assets in a foreign country, and purchase of stocks in a foreign company.

Purchasing power parity (PPP): Is a theory of long-term equilibrium exchange rates based on relative price levels of two countries. In other words, PPP is the amount of a certain basket of basic goods which can be bought in the given country with the money it produces.

Capital formation: Capital formation is a statistical concept used in national accounts statistics, econometrics and macroeconomics. It is sometimes also used in corporate business accounts. It is a measure of the net additions to the (physical) capital stock in an accounting period, or, a measure of the amount by which the total physical capital stock increased during an accounting period; though it may occasionally also refer to the total stock of capital formed, or to the growth of this total stock.

Host country: A nation in which representatives or organizations of another state are present because of government invitation and/or international agreement.

Greenfield investment: A Greenfield Investment is the investment in a manufacturing, office, or other physical company-related structure or group of structures in an area where no previous facilities exist.

Mortar and Brick: This refers to a company that possesses a building or store for operations or companies that have a physical presence that is, a physical store and offer face-to-face consumer experiences.

Merger and acquisition: This refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.

New Growth Theory: The endogenous growth theory or the New growth theory holds that policy measures can have an impact on the long-run growth rate of an economy. The new theories argue that, for an economy to innovate and thus grow, some form of imperfect competition must be present. Its main focus is that knowledge drives growth.