AHAM NZENWATA
ABSTRACT
The main issues in this paper relates to understanding
the effects and impact of foreign direct investments on the Nigerian economy as
well as our ability to attract adequate amounts, sufficient enough to
accelerate economic growth and development.
From related research and studies, it was revealed that multinational
corporations are highly adaptive social agents and therefore, the degree to
which they can help in improving economic activities through foreign direct
investment will be heavily influenced by the policy choice of the host country.
Secondary data was collected for the period 1987 to 2006. In order to analyse the data, both
econometric and statistical method were used. Regression model of ordinary
least square was applied in evaluating the relationship between foreign direct
investment and Gross Domestic Product (GDP). The model revealed a positive
relationship between foreign direct investment and GDP. The study thus suggest
that in order to further improve the economic climate for foreign direct
investments 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.
1.0 INTRODUCTION
Since the enthronement of democracy in 1999, the government of Nigeria
has taken a number of measures necessary to attract foreign investors into
Nigeria. These measures includes the
repeal of laws that are inimical to foreign investment growth, promulgation of
investment law, various overseas trips for image laundry by the president,
among others.
The need for foreign direct investment is born out of the underdeveloped
nature of the Nigeria’s economy that essentially hindered the pace of her
economic development. Generally,
policies and strategies of the Nigerian government towards foreign investments
are shaped by two principal objectives of the desire for economic independence
and the demand for economic development.
There are four basic requirements for economic development namely.
i) Investment Capital
ii) Technical Skills
iii) Enterprise
iv) Natural Resources
Without these components, economic and social development of the country
would be a process lasting for many years.
The provisions of these first three necessary components present
problems for developing countries like Nigeria.
This is because of the fact that there is a low level of income that
prevents savings, big enough to stimulate investment capital domestically or,
to finance training in modern techniques and methods. The only way out of this problem is through
acceleration of the economy by external sources of money (foreign investment)
and technical expertise. Foreign direct
investment is therefore supposed to serve as means of augmenting Nigeria’s
domestic resources in order to carryout effectively, her development programmes
and raise the standard of living of her people.
According to Nwankwo (1988) factors responsible for the increased need
for foreign direct investment by developing countries are:
· High real interest rate in the international capital
market, which adversely affected external indebtedness of these developing
countries.
· The high external debt burden.
· Bad macroeconomic management
· Fall in per capital income and
· Fall in domestic savings.
At the
current level of gross Domestic Product, the success of governments policies of
stimulating the productive base of the economy depends largely on her ability
to control adequate amount of foreign direct investments comprising of
managerial, capital and
technological resources to boost the existing production capabilities. The Nigerian government had in the past
endeavored to provide foreign investors with a healthy climate as well as
generous tax incentives, but the result had not been sufficiently encouraging
(as we shall see in this research).
Nigeria still requires foreign assistance in the form of managerial,
entrepreneurial and technical skills that often accompany foreign direct
investments.
2.0 LITERATURE REVIEW AND THEORETICAL REVIEW
Most
analysts believe that
national and foreign private sector enterprise, if permitted to operate in a competitive market condition will offer developing
countries the best prospects for speedy national economic growth. These
analysts however do not view multinational capital as panacea to developing
countries.
Harry
Johnson argued that foreign investments bring to the home country, “a package
of cheap capital, advanced technology. Superior knowledge of foreign market for
final products and capital goods, immediate inputs and raw materials”.
Similarly, Drucker has argued that developing countries need to employ export
oriented development strategies in order to meet their foreign exchange and
employment requirements and that such orientation is much more likely to
succeed if these countries can acquire “capital export markets”. Such markets
he maintained are precisely what multinational companies with their worldwide
sourcing and marketing can offer.
Gerald Mier contends that from the
stand profit of national economic benefit, the essence of the case of
encouraging the inflow of capital is that the increase in real income resulting
from the act of investment is greater than the resultant increase on the income
of the investor. This is also the view held by Mactougal when he stated that a
moderate inflow of investment in an economy is beneficial.
The chief benefit of foreign direct
investment, according to these writers, is the accompanying “package deal” of
technical and managerial skill. This may be costly, difficult or impossible to
obtain in other alternative investment means. The less developed a country is,
the less able it is as a rule to utilize patents, technical advice and contract
management assistance without taking the whole package. This view was supported
by Penrose (1961) and Chenery (1966).
However, some analysts (known as the dependence school) are
strongly opposed to pro foreign direct investment perspectives. Their arguments
are based on series of studies and research carried out. Theofonio Dos Santos
argued that developing countries’ economic difficulties do not originate in
their isolation from advanced countries, but that the most powerful obstacle to
their development came from the way they are joined to their international
system. Multer, R maintained that multinational corporations transfer
technologies to developing countries that result in mass unemployment; that
they monopolize rather than inject new capital resources; that they displace
rather than generate local business and that they worsen rather than ameliorate
the country’s balance of payment.
Overall, the dependence school
rejects the pro-foreign direct investment analysts’ depiction of the benefits
derived from participation in the international economy. Dr Fashola, for
example argued that most of the policies adopted by Nigeria since the SAP era
are qualitative in nature and as such are yet to be effective in turning round
for the better economic fortunes of the nation.
More recently, a new body of
literature emerged and challenged the pro-foreign direct investment optimist
about the long-term negotiating and benefiting prospects of the world. What
might be labeled the structuralized school has argued that developing countries
may in fact experience a long-term decrease in their power over high technology
manufacturing system. Their arguments were based on what scholars learnt
empirically about the behaviour and effects of multinational companies in
developing countries. Results of some of their studies are.
i) Bornshier and Jean in a multiple regression analysis
of variance in growth of GNP per capital in 76 developing countries (Nigeria
inclusive) between 1960 to 1975, found out that their flow of foreign direct
investment were associated negatively with growth in income per capital. Other
studies by Michael Dolan and Brain Tomlin appeared basically to confirm
Bormshier’s observations. Also, Robert Johnson in his
regression analysis of growth per GNP in 72 countries between 1960 to 1978,
found stocks of foreign direct investment to be positively associated with
economic growth at statistically significant level for relatively advanced
economies. He therefore concluded that once the size of a developing country is
taken into account, the level of direct investment has no consistent effect on
growth.
ii) Mahler (1976) carried out an analysis of 68 least
developed countries and found a statistically significant association between
income concentrated in the 6 percent to 20 percent of the population and
foreign direct investment in manufacturing but not in mining and agriculture.
iii) Several studies were also conducted to estimate the
economic desirability of the technology brought to developing countries by
multinational corporations. It was found that royalty payments, technical tees,
tie-in-clause leading to the purchase of over priced immediate goods, export
restrictions and other limitations had resulted in technology acquisition
during most of the sixties to become major burden
In
conclusion, considering the wide range of conflicting empirical studies on how
foreign direct investment in developing countries affect the rate of aggregate
growth, distribution of income, employment and some non-economic indicators
like culture and political structures, one cannot draw conclusions from them
with any minimal acceptable level of confidence. Perhaps the warning of Arthur
Nwankwo is appropriate in this context where he warned that no nation could
provide for the welfare of its citizens as long as its economy is fettered.
More so, many studies have shown that multinational corporations are highly
adaptive social agents and therefore, the degree to which foreign direct investment
helps or hurts a developing country will be heavily influenced by the policy
choice of the host country.
3.0 RESEARCH METHODOLGY
3.1 Model Specification
The under listed variables are used in building the
model.
Foreign
Direct Investments (FDI)
Gross
Domestic Product (GDP)
The model will therefore be:
GPD = b0 + b1FDI + u
This model, which is used in gauging and assessing the
performance of the economy, make the economic indicators a function of the
level of cumulative foreign direct investment.
3.2 Data Presentation and Analysis
PERIOD
|
GDP
|
FDI
INFLOWS
|
1987
|
105222.84
|
9993.60
|
1988
|
139085.3
|
11339.20
|
1989
|
216797.54
|
10899.60
|
1990
|
267549.99
|
10436.10
|
1991
|
312139.74
|
12243.50
|
1992
|
532613.83
|
20512.70
|
1993
|
683869.79
|
66787.00
|
1994
|
899863.22
|
70714.60
|
1995
|
1933211.55
|
119391.60
|
1996
|
2702719.13
|
122600.90
|
1997
|
2801972.58
|
128331.90
|
1998
|
2708430.86
|
152410.90
|
1999
|
3194014.97
|
154190.40
|
2000
|
4582127.29
|
157508.60
|
2001
|
4725086.00
|
161441.60
|
2002
|
6912381.25
|
166631.60
|
2003
|
8487031.57
|
178478.60
|
2004
|
11411066.91
|
249220.60
|
2005
|
14572239.12
|
324656.70
|
2006
|
18564594.73
|
481239.10
|
Thus,
GPD = b0 + b1FDI + u
From the model
GDP = b0 + b1
FDI
GDP = 0.159
+ 1.237FDI
Standard Error (Se) = 0.158
Correlation coefficient (r)= 0.99
3.2
Interpretation of Results
The
first noticeable thing about the above result is that Gross Domestic Product is
positively related to foreign direct investments. The responsiveness of GDP to FDI to 1.237
indicates that a one percent increase in foreign direct investment leads to a
more than proportionate increase of 1.24 percent in gross domestic product.
A correlation coefficient of 0.99 indicates
a very strong relationship between economic growth (measured by GDP) and
foreign direct investments, thus leading to the rejection of our alternative
hypothesis and acceptance of our null hypothesis, which states that there is a
relationship between foreign, direct investment and economic growth.
4.0 CONCLUSIONS
AND POLICY RECOMMENDATIONS
4.1 Conclusion
Given the above situation and the fact
that Nigeria’s economic recovery efforts and growth requires major private
sector investment in modern equipments that can industrialize the agricultural
sector and the economy as a whole, then the Nigeria’s foreign investment policy
should move towards attracting and encouraging more inflows of foreign capital
by moving ahead with economic programmes that includes measures easier set-up
and expansion of businesses.
In
the years ahead, Nigeria (and many other African and third world countries) in
trying to pave way for more foreign direct investment faces greater problems,
especially with poor external image problem and particularly the concept of
European Economic Unity that includes Eastern Europe. This translate to the
fact that investment flows that would ordinarily have come from countries of
surplus capital like Western Europe to capital deficient countries like Nigeria
would now be going to poor European Economic Communities which includes Eastern
Europe. Except African countries are able to adopt new strategies, this
development will further compound the crises of under-development confronting
countries like Nigeria. A very important challenge of management in the coming
years would therefore be the development of indigenous technology and
entrepreneurial capabilities as the involvement of multinational companies in
our economy may dwindle as a result of new bigger and attractive opportunities
that are likely to emerge from Europe.
With
the up and down movement of foreign direct investment, Nigeria needs to
juxtapose foreign investment with domestic investment in order to maintain high
levels of income and employment. The problem therefore does not lie so much
with the magnitude of investment flows to Nigeria as with the form in which it is
given. We could emphasize that foreign investment cannot contribute much to the
economic development of Nigeria if it is directed primarily to capital supply
than to investment projects. Foreign investment can be very effective if it is
directed at improving and expanding managerial and labour skills.
In conclusion, in order to further improve the climate for foreign
investment in Nigeria, the government must appreciate the fact that the basic
element in any successful development strategy should be to encourage domestic
investors first before going after foreign investors, considering the fact that
they constitute the bulk of investment activities in the economy. Thus, the
most effective strategy for attracting foreign investment is to make the
Nigerian economy very attractive to Nigerian investors first.
4.2 POLICY RECOMMENDATIONS
The
following policies are hereby recommended to policy makers and government, if
it is desired that foreign investment contribute to the growth and development
of Nigeria.
i) The Nigerian government should encourage the inflows
of foreign direct investment and contact policy institutions that can ensure
the transparency of the operations of foreign companies within the economy.
ii) Efforts should continue, this time with more vigor at
ensuring consistency in policy objectives and instruments through a good
implementation strategy as well as good sense of discipline, understanding and
cooperation among the policy makers.
iii) The Nigerian government needs to come up with more
friendly economic policies and business environment, which will, attracts FDI
into virtually all the sectors of the economy.
iv) The Nigerian government needs to embark on capital
projects, which will enhance the infrastructural facilities with which foreign
investors can build on.
REFERENCE
Ahmed A. (1993) Strategies for foreign investment in
Nigeria. A central Bank perspective Economic and Financial Review volume 26.
Ajayi S. I. (1992) An Economic Analysis of Capital flight from
Nigeria: World Bank Working Paper series No 993.
Aremu, J. A (1997) Foreign private investment: Issues,
determinants and performance. Paper presented at a workshop on foreign
investment policy and practice, organized by the Nigeria institute of Advance
legal studies, Lagos, March
Arthur, Nwankwo (1981) Can Nigeria
survive 4th dimension publication.
Enugu.
Berham N. J. (1970) National
Interests and Multinational Enterprise: Tensions among the North – Atlantic Counties. Engle
Wood Clifts: Prentize Hall.
Bhattachary A, Montie P.J and Shame
(1997): How can sub-saharan African attract more private capital in-flow.
Buckley P & Casson M. (1976)
The future of multination enterprises: Macmillan press Limited, London.
Caves R. E. (1988) Exchange
rate movement and foreign direct investment in the United State, New York
University Press.
Classens S. (1993) Portfolio
Capital flows: Hot or Cold? The World Bank Economic Review Vol. 9, No1 page
153-174.
Drucker P. F. (1974)
Multinationals and developing countries: myths and Realities. Foreign affairs
No. 53.
Dunning J. H. (1994)
Re-evaluating the benefits of foreign direct investment, Transnational
Corporations, Vol. 3, February, No 1, 23-51.
Federal Republic of Nigeria (1988) industrial policy of Nigeria: Policies,
Incentives, Guidelines and Institutional frame work. Federal Ministry of
Industries, Abuja.
Fernandez – Arias, E. (1996) The
new wave of capital inflows: push or poll?
Journal of Development Economics Vol. 48, 389 – 418.
Frost K. and Stein J. C (1991)
Exchange rates and foreign direct investment: an imperfect capital market
approach. Quarterly Journal of Economics, Vol. 4, No 4, 1191-1217.
Hartman D. G. (1984) Tax Policy
and foreign direct investment in the United States. National tax journal, Vol.
34, No 4, December, 175 – 488.
International Monetary Fund
(1985) Foreign private investment in developing countries. A study by the
international monetary fund research Department. Occasional paper No 33.
Meier G. M. (1984) leading
issues in economic Development. Oxford University Press, 4th edition.
Mahmoud M. I. (1986) The
Determinants of foreign investment in African countries, Dakar, Senegal.
Nigerian Economic Society (1988)
Rekindling Investment for economic Development in Nigeria. Selected papers for the annual conference.
Nwankwo . O. (1988) foreign
Private Capital flows to Nigeria 1970 – 1983, Economic and financial Review.
Volume 28, March.
Ojo .M. O. (188) Nigeria
Economic Crisis: Causes, Solutions and Prospects. A paper delivered at the AHQ garrison annual
officers training, April.
Stephen J. K. (1997) Foreign
Direct investment, Industrialization and social change. Contemporary studies in Economic and
financial Analysis. Vol. 9, JAI Press, Greenwich Connecticut.
APPENDIX
REGRESSION
/MISSING LISTWISE
/STATISTICS COEFF OUTS R ANOVA
/CRITERIA=PIN(.05) POUT(.10)
/NOORIGIN
/DEPENDENT GDP
/METHOD=ENTER FDI.
Regression
Notes
|
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Output Created
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26-Mar-2012 11:49:30
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Comments
|
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Input
|
Active Dataset
|
DataSet0
|
Filter
|
<none>
|
|
Weight
|
<none>
|
|
Split File
|
<none>
|
|
N of Rows in
Working Data File
|
20
|
|
Missing Value
Handling
|
Definition of
Missing
|
User-defined
missing values are treated as missing.
|
Cases Used
|
Statistics are
based on cases with no missing values for any variable used.
|
|
Syntax
|
REGRESSION
/MISSING LISTWISE
/STATISTICS COEFF OUTS R ANOVA
/CRITERIA=PIN(.05) POUT(.10)
/NOORIGIN
/DEPENDENT GDP
/METHOD=ENTER FDI.
|
|
Resources
|
Processor Time
|
00:00:00.062
|
Elapsed Time
|
00:00:00.187
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Memory Required
|
1348 bytes
|
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Additional
Memory Required for Residual Plots
|
0 bytes
|
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[DataSet0]
Variables Entered/Removedb
|
|||
Model
|
Variables Entered
|
Variables Removed
|
Method
|
1
|
FDIa
|
.
|
Enter
|
a. All requested
variables entered.
|
|||
b. Dependent
Variable: GDP
|
|||
Model Summary
|
||||
Model
|
R
|
R Square
|
Adjusted R Square
|
Std. Error of the Estimate
|
1
|
.99a
|
.963
|
.916
|
1.51405E6
|
a. Predictors:
(Constant), FDI
|
||||
ANOVAb
|
||||||
Model
|
Sum of Squares
|
df
|
Mean Square
|
F
|
Sig.
|
|
1
|
Regression
|
4.796E14
|
1
|
4.796E14
|
209.237
|
.000a
|
Residual
|
4.126E13
|
18
|
2.292E12
|
|||
Total
|
5.209E14
|
19
|
||||
a. Predictors:
(Constant), FDI
|
||||||
b. Dependent
Variable: GDP
|
||||||
Coefficientsa
|
||||||
Model
|
Unstandardized Coefficients
|
Standardized Coefficients
|
t
|
Sig.
|
||
B
|
Std. Error
|
Beta
|
||||
1
|
(Constant)
|
0.159
|
507719.905
|
-2.335
|
.031
|
|
FDI
|
1.237
|
2.900
|
.960
|
14.465
|
.000
|
|
a. Dependent
Variable: GDP
|
||||||
For comments, inquiries on research assistance or general feedback you can communicate with the author via E-mail researchmidas@gmail.com or call/Whatsapp +2348035446622
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