Effect of Foreign Direct Investment (FDI) on Economic Growth in Nigerian

CHAPTER ONE

INTRODUCTION

1.1             Background to the Study

It is difficult for a developing country to support itself with only domestic financial resources because these resources are limited. The dual gap framework identified the need for financial resources from foreign sources to augment available limited domestic financial resources in order to achieve sustainable economic growth in a country especially for a developing country. Foreign direct investment (FDI) is required by developing nations like Nigeria to attain the economic status that allows them to compete globally (Azeez, Oladapo and Aluko, 2015).

FDI is a macroeconomic variable that tends to bolster the economy. This is because it represents capital inflow and likely to increase the rate of capital formation which is necessary to propel economic growth. A generic problem existing in less developed countries (LDCs) is low capital formation to bring to reality investments and infrastructural facilities necessary for economic growth. It has been argued that the capital flows from foreign direct investment can bridge the gap between desired investments and savings mobilised internally (Azeez, Oladapo and Aluko, 2015).

The integration of the Nigerian economy with the global economy increased sharply in the 1990s with the changing economic policies and lowering of barriers to trade and investment. This has led to increased inflow of foreign capital in form of foreign direct investment (FDI) and others. The increased inflows of FDI are expected to result in faster economic growth through trade and investment. Over the years, the inflow of foreign capital to Nigeria has increased tremendously. It rose from N542.3million in 1981 to N2.01 billion in 2005, with the average growth rate of FDI inflows being 10.8% between 1981 and 2006. Despite the phenomenal inflow of foreign capital to Nigeria over the years, the performance of the economy has been epileptic. The economy has remained monocultural, with oil contributing over 60% of GDP on the average since the 1990 and over 90% of the export (Yaqub, Adam and Jimoh, 2013).

Foreign direct investment (FDI) is perceived to have a positive impact on economic growth of a host country through various direct and indirect channels. It augments domestic investment, which is crucial to the attainment of sustained growth and deployment. Consequently, many developing countries, Nigeria inclusive, have offered general incentives to attract FDI inflows and, in addition, undertaken macroeconomic reforms geared towards the same end creating an investor-friendly environment (Melnyk, Kubatko and Pysarenko, 2014).

Literature has it that some foreign firms have taken advantage of the incentives to satisfy their various motives of ensuring stable monopolistic control over sources of raw materials for their parent companies, access to control of local markets, utilizing low cost labour and realizing the possibility of higher returns and until the last five years. Nigeria also received very low proportions of global FDI inflows, in spite of it having enormous human and natural resources. Attempts at attracting FDI into Nigerian economy have been based on the need to maximize the potential benefits derived from them; and to minimize the negative effects their operations could impose on the country.

Studies like Behname (2012), Sulaiman and Azeez (2012), Yagoob and Zhengming (2013), and Iqbal, Ahmad, Haider and Anwar (2014) reported that foreign direct investment (FDI) has growth-stimulating effect on the economy. Osinubi and Amaghionyediwe (2010) assert that FDI supplements domestic financial resources in order to empower a country to effectually perform her development programmes as well as elevate living standards of her populace.

This study seeks to investigate the effect of Foreign Direct Investment (FDI) on  economic growth in Nigerian.

1.2             Statement of the Problem

Nigeria like most highly indebted poor countries has low economic growth and low per capita income, with domestic savings insufficient to meet developmental and other national goals. Nigerian exports are mainly primary commodities with export earnings too small to finance imports capital intensive goods which are comparably more expensive (Siddique, Selvanathan and Selvanathan, 2015).

Compounding the problem is Nigeria’s drift to mono economy with the discovery of oil. The oil sector generates about 95% of foreign exchange earnings and about 80 percent of budgetary revenue. The inability to diversify her revenue sources coupled with corruption and mismanagement compels Nigeria to have inadequate fund for growth and developmental projects such as roads, electricity pipe borne water and so on that could create an enabling environment for foreign direct investment (FDI).

Nigeria as a developing nation has adopted a number of policies such as the Structural Adjustment Programme (SAP) of 1986 to liberalize her economy and boost Gross Domestic product (GDP) growth. In a bid to ensure the implementation of these policies the government embarked upon massive borrowings from multilateral sources which resulted in a high external debt service burden and by 1992 Nigeria was classified among the heavily indebted poor countries (HIPC) by the World Bank.

FDI is assumed to be beneficial, but, inherent problems in Nigeria such as capital flight, poor governance, macroeconomic instability, corruption, weak exchange rate, and weak export base among others make the effects of foreign direct investment on economic growth in the country to be demanding empirical answers. Hence, this study is motivated to empirically investigate how inflows from FDI affect the growth of the Nigerian economy.

1.3             Aims and Objectives of the Study

The general aim of this study is examine the effect of foreign direct investment on economic growth in Nigeria. The specific objectives are.

(a)              To investigate the impact of foreign direct investment on gross domestic product in Nigeria.

(b)              To find out the impact of exchange rate on gross domestic product in Nigeria.

(c)              To examine the effect of external debt on economic growth in Nigeria.

(d)              To analyse the determinants of foreign direct investment in Nigeria.

1.4    Research Questions

This study was guided by the following research questions:

        i.            What is the impact of foreign direct investment on gross domestic product in Nigeria?

     ii.            To what extent does exchange rate impact on gross domestic product in Nigeria?

   iii.            What is the effect of external debt on economic growth in Nigeria?

   iv.            What are the determinants of foreign direct investment in Nigeria?

1.5       Research Hypotheses

The research was intended to test the following hypotheses:

Hypothesis One

Ho:      There is no significant effect of foreign direct investment on gross domestic          product in Nigeria.

Hypothesis Two

Ho:  There is no significant effect of exchange rate on gross domestic product in   Nigeria

Hypothesis Three

Ho:      There is no significant effect of external debt on economic growth in Nigeria.

1.6       Significance of the Study