DETERMINANTS OF FOREIGN DIRECT INVESTMENT AND ECONOMIC SITUATIONS IN NIGERIA

DETERMINANTS OF FOREIGN DIRECT INVESTMENT AND ECONOMIC SITUATIONS IN NIGERIA

ABSTRACT

Generally, policies and strategies of Nigerian government towards foreign direct investments are shaped by two principal objectives of desire for economic independence and the demand for economic development. Multinational corporations are expected to bring into the country foreign capital in the form of technical skills, entrepreneurship, and technology and investment fund to boost economic activities thereby, raising the standard of living in Nigeria. The main issues in this paper relate to understanding those factors that determine foreign direct investment in Nigeria as well as our ability to attract adequate amounts sufficient enough to accelerate the pace of our economic growth and development. Foreign direct investment (FDI) is assumed to benefit a developing country like Nigeria, not only by supplementing domestic investment, but also in terms of employment creation, transfer of technology, increased domestic competition and other positive externalities. This work tried to answer the question; what are the FDI determinants in Nigeria and how do they affect the Nigerian economy? Secondary data were collected for the period 1999-2013. In order to analyze the data, both econometric and statistical methods were used. Tables were produced in order to create a visual impression of the dependence of the Nigerian economy on that of donor countries such as Western Europe and North America. The economic regression model of ordinary least square was applied in evaluating the extent to which foreign direct investment affect major economic indicators such as gross domestic product, inflation and exchange rate. The model revealed little impact of foreign direct investment on each of these variables, foreign direct investment has not contributed much to the growth and development of Nigeria. This is evident in reality of enormous repatriation of profits, dividends, contract fees, and interest payments on foreign loans. The study, thus, suggests that in order to further improve the economic climate for foreign direct investment in Nigeria; the government must appreciate the fact that the basic element in any successful development strategy should be the encouragement of domestic investors first before going after foreign investors.

CHAPTER ONE

1.0       INTRODUCTION

1.1.      Background of the study

Nigeria is a developing country, like other developing countries, it needs investments from within and outside to develop. This study focuses on the investment from outside. In other words, we are looking at those factors that determine the inflow of Foreign Direct Investment in Nigeria. Foreign direct investment (FDI) as a major component of international capital flows is an investment made to acquire lasting interest in enterprises outside the country of the investor; it has long been a subject of great interest in the field of international development. The division of the world into emerging and developing is sometimes predicated upon the availability and/or the effective utilization of resources. The relative scarcity of resources has often been identified as a major problem confronting nations and this call for their judicious use. On the other hand, this argument can be cast in terms of the overall development of nations

The general rate of development and growth is thus limited by the shortage of productive factors. Development economists like Caircross ( 1955, 1962) ,Hicks (1965), Newlyn (1977) have gone further to single out capital as the critical missing ingredient in the development of the developing countries,. In this manner, Caircross (1955) forcefully illustrated this fact when he observed that the contribution of capital to economic progress embraces three distinct processes.

• A greater abundance of capital permits the introduction of more roundabout methods of production.
• The accumulation of capital is a normal process or feature of economic expansion however originating.
• Additional capital may be required to allow technical progress to take place.

On the basis of the foregoing, it is therefore not surprising that countries, especially the developing countries should strive to acquire capital. Most developing countries of which

Nigeria is one hardly meet the requirement of generating internal finance required for mobilization of an economic surplus derived from a growing surplus above current consumption.

The genesis of foreign investment in Nigeria cannot only be attributed to the desire by the country to fill the resources/savings gap and foreign exchange gap. This is because foreign investment in the country started with the imposition of British colonial rule in Nigeria in the

19th century. This category of foreign investment is referred to as the forced historical perspective. Foreign trade and investment dates as far back as the Smithian era (1776).

While the Mercantile system propagated hoarding and a close economy, Adam Smith was a proponent of free trade and open market system with the “popular invisible hand”.

The neo classicalists equally hold the view that free trade and investment enhances the accumulation of capital stock provided that adequate consideration is given to factor prices and technology. Alternative views have been expressed about the limitations to financing opportunities especially in the face of capital rationing and increasing cost of capital (Jerkins and Thomas, 2002) Since Independence, Nigerian foreign policy has been characterized by a focus on Africa and by attachment to several fundamental principles, African unity and independence; and regional economic cooperation and development. In pursuing the goal of regional economic cooperation development, Nigeria helped create the Economic Community of West African States (ECOWAS), which seeks to harmonize trade and investment practices for its 15 West African member countries and ultimately to achieve a full customs union. Over the past decade, Nigeria has played a pivotal role in support of peace in Africa. Nigeria has enjoyed generally, good relations with her immediate neighbors, she is a member of the following international organizations; UN, World Trade Organization (WTO), International Monetary Fund(IMF), World Bank, Economic Community of West African States (ECOWAS) among others. It was after independence in 1960 that conscious efforts were made to attract foreign investors. The earlier legislations were amended and/or new ones enacted as the case maybe. Foreign investments were substantial and subsequently received a boost at independence. In 1957, cumulative foreign investment was under #200million, it grew to #441.8million in 1962. Between 1960 and 1966, private foreign investment accounted for at least 70 percent of the total industrial investment. Foreign interests were equally dominant in Banking, Insurance and construction.

Foreign Direct Investment (FDI) as a form of development finance has been recognized as a preferred option to market loans. This is because; among other things, Foreign Direct Investment comes as a package-finance capital, technology and managerial expertise. As in many developing countries, inflow of FDI into Nigerian economy dates back to the 19th century. Many foreign investors that came into the country at that time concentrated their attention towards export-oriented mineral and agricultural production as well as on public utilities. At this period, it was customary to see mines and plantations as enclaves with little overall impact on the growth of largely subsistent agricultural economy of Nigeria. Foreign investors were often supported by their home governments to appropriate most of the economic rents in the country. For instance, the railway line that was constructed in the south and extended northwards in the country to Kano by 1914 was mainly financed by pressures on the colonial administration by the royal Niger company (later known as UAC), a famous Liverpool merchant (Mr John Holt) and the association of West African merchants (AWAM); a cartel organization operating as a monophony to buy Nigerian products under a price understanding arrangement. The British positively responded by funding the project through both the colonial loan raised on the London Capital Market and the colonial treasury loans.

As nationalist movements emerged, these foreign investors came to be regarded as exploiters. It must be noted that economic and political opposition to foreign investors is not limited to the colonial countries alone. There was growing opposition to their investments from Canada and Australia in the 1920s and 1930s respectively. The same was true in Europe in the 1950s.

Many of these foreign investors aggravated the opposition through their insisting that they prefer absolute control of their subsidiaries in Nigeria. Emerging political clans started to fear foreign investor’s excessive intrusiveness into Nigeria as they viewed them as a danger to the newly acquired independence because they possess some neo-imperialist connotations. Not minding the ambition of Nigerian leaders to industrialize the economy as fast as possible, the desires of the foreign investors were mainly to:

1. Safeguard their supplies of raw materials from Nigerian economy through mining operations, agricultural production, as well as light processing activities.
2. Maintain or enlarge their market share in the country with a policy of import substitution strategy through manufacturing and processing activities.
3. To undertake, where profitable activities that support their home countries firms in developing countries through banking, insurance and other trading and business services. To achieve these (and many more) objectives, foreign investors believe that they need to have firm control of their investments in Nigeria

1.2.      Statement of the Problem

FDI is desired by many countries especially the developing ones. Though desired, their determinants for countries such as Nigeria are yet to be fully ascertained. Most literature on foreign direct investment focused mainly on its applicability, effects and impact on various sectors of the economy, despite extensive literature on foreign direct investment and its gains, there were very few studies that investigate the determinants to foreign direct investments and how they were influenced by the macroeconomic situations of a particular country. The problem is whether these determinants are actually affecting the growth of the Nigerian economy. On one hand, some have argued that these determinants (INFLATION RATE, EXCHANGE RATE, GROSS DOMESTIC PRODUCT etc) have positively affected the growth of the economy. On the other hand, some have argued that they have not positively affected the growth of the economy. There is therefore need to empirically examine to find out whether in real sense, the economy is benefiting from this variables hence these study;

The principal driving force for this work is on those variables that attract direct investment into Nigeria. It is thus, of interest to investigate the macroeconomic situations in Nigeria as it affects FDI over the period under review.

1.3       . Objectives of the study

The main objective of this study is to evaluate the determinants of Foreign Direct Investment in Nigeria while specifically; the study sets out to achieve the following objectives

1. To Examine the relationship between GDP and FDI in Nigeria
2. To Ascertain the relationship between Inflation and FDI in Nigeria
3. To Examine the relationship between exchange rates and FDI in Nigeria

1.4       Research Questions

1. To what extent does Gross Domestic Product have impact on foreign direct Investment in Nigeria?
2. To what extent does inflation have impact on foreign direct Investment in Nigeria?
3. To what extent does Exchange rate have impact on foreign direct Investment in Nigeria?

1.5       Hypothesis of the study

To empirically examine the questions raised above, the following are the study’s research hypothesis in the null format

1. Gross Domestic Product does not have a positive and significant impact on Foreign Direct Investment in Nigeria.
2. Exchange rate does not have a positive and significant impact on Foreign Direct Investment in Nigeria.
3. Inflation does not have a positive and significant impact on Foreign Direct Investment in Nigeria.

1.6       Scope of the study

The study covered the period of 1985-2013. Nigeria in the past 15 years had experienced uninterrupted democracy and it is worthwhile to examine foreign direct Investment and its determinants under civilian rule as well as the era of military rule in Nigeria. It utilized annual data on real economic growth using indicators such as Gross Domestic Product, Exchange rate and Inflation as reported and published in the Central Bank of Nigeria’s Statistical Bulletin, World Bank Investment Report and publications from United Nations Conference on Trade and Development.

1.7       Limitations of the study

This study is limited to the determinants of foreign investment in Nigeria. Another limitation of this study is in the use of secondary data, which transfers errors or mistakes in the reporting of data that would affect the validity of the results A major constraint was fund. The work was capital intensive and required a lot of money due to multiple trips made to Central Bank to source for meaningful materials. Data in FDI inflows as well as that of GDP for the years under study review were not easy to get due to poor habit of data presentation in Nigeria. Even though there are write-ups on FDI, the researcher found it difficult to lay her hands on substantial local literature on FDI.

1.8       Significance of the study

The following group will benefit immensely from this research work

Reference Point/Academic Purpose

Most of the researches done in this area have been on FDI’s impact on various sectors on the nation’s economy. Not much work has been done on its determinants. This research will serve as a reference point for future researchers especially those likely to be interested in international trade and finance in general and inflow of funds (in particular).

Investment decisions

This study will enable investors know that the most important prerequisite for foreign direct investment to contribute to economic development is the presence of a well educated work force Moreover, Nigeria is one the countries in Africa that has benefited from FDI inflow in recent years, therefore, Investors would also find this work essentially rewarding, as they would understand the benefits of foreign direct investment to Nigeria economy.

Government/Policy Makers

Policy makers and practitioners will benefit from this research work. They make use of academic research which they find useful but have little time to study. The findings of this research exercise will benefit government and policy-makers in formulating policies that will enhance the growth of the economy

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