ABSTRACT
This study empirically examined impact of foreign direct investment on economic growth of Nigeria between 1981 and 2017. Auto Regressive Distributed Lag (ARDL) model and Bounds Test were adopted as the estimating techniques to verify the existence of long-run relationship between foreign direct investment and economic growth in Nigeria. Real gross domestic product was used as the dependent variable, while foreign direct investment, balance of trade and exchange rate were used as the explanatory or independent variables. Data used were extracted from the Central Bank of Nigeria statistical bulletin of 2018. The empirical results of Auto Regressive Distributed Lag (ARDL) model showed that all the variables except exchange rate had positive and significant impact on real gross domestic product. Exchange rate had a negative and insignificant impact on real gross domestic product. The government should create an enabling environment which would attract foreign investors into Nigeria, such as good, transparent and fair tax system, promotion of economic stability and the attainment of key macro-economic objectives. This is because foreign direct investment inflow has a significant impact on economic growth of Nigeria. Similarly, government should encourage and support local producers to produce standard products and services for local demands and exportation which will place Nigeria in a favourable balance of trade. This is as a result of balance of trade positive and significant impact on the economic growth of Nigeria. Mostly, government should bring out policies that will curb the importation of excess goods and services into Nigeria. This is attributed to the negative and insignificant impact of exchange rate on the economic growth of Nigeria. The higher the exchange rate of naira to dollar, the lower the economic growth of Nigeria.
TABLE OF
CONTENTS
TITLE PAGE i
DECLARATION ii
CERTIFICATION iii
DEDICATION iv
ACKNOWLEDGEMENT v
ABSTRACT vi
TABLE OF
CONTENTS vii
LIST OF
TABLES x
LIST OF
FIGURES xi
CHAPTER 1: INTRODUCTION
1.1 Background to the Study 1
1.2 Statement of the Problem 5
1.3 Objectives of the Study 7
1.4 Research Questions 7
1.5 Research Hypotheses 7
1.6 Significance of the Study 8
1.7 Scope of the Study 8
1.8 Limitations of the Study 9
CHAPTER
2: REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework 10
2.1.1 Types of foreign direct investment 10
2.1.2
Economic growth
11
2.1.3 Types of economic growth 12
2.1.4 Factors
affecting economic growth 12
2.1.5 Exchange
rate 13
2.1.6 Exchange rate and FDI 13
2.1.7 Balance
of trade 14
2.1.8 Factors
that influences foreign direct investment decision making 14
2.1.9 Factors
that determines foreign direct investment flow 16
2.1.10 The positive and
negative role of foreign direct investment 21
2.2 Theoretical
Review 24
2.2.1 Theories of foreign direct investment 24
2.2.1.1 Macroeconomic FDI theories 24
2.2.1.2 Capital market theory 25
2.2.1.3 Institutional FDI
fitness theory 26
2.2.1.4 The eclectic paradigm 28
2.2.1.5 Microeconomic FDI
theories 29
2.2.2 Theories of economic growth 33
2.2.2.1 The classical theory
of economic growth 33
2.2.2.2 Innovative growth
theory of Schumpeter 36
2.2.2.3 Keynesian and
post-Keynesian (neo-Keynesian) growth theories 37
2.2.2.4 Post-Keynesian
(neo-Keynesian) theory 39
2.2.2.5 Neoclassical growth
theories and the exogenous theory of Robert Solow 40
2.3 Empirical
Review 41
2.4 Summary
of Reviewed Literature 46
2.5
Research Gap 50
CHAPTER 3: METHODOLOGY
3.1 Research
Design 51
3.2 Sources of Data Collection 51
3.3 Data Estimation Technique 51
3.4 Model Specification 53
3.5 Description of Model Variables 55
3.5.1 Dependent variable 55
3.5.2 Independent variables 55
3.6 Expected Results 55
CHAPTER
4: DATA ANALYSIS AND INTERPRETATION OF
RESULTS
4.1 Data
Presentation 57
4.2 Descriptive Statistical Analysis 59
4.2.1 Descriptive statistic 59
4.2.2 Correlation matrix 60
4.3 Unit Root Test Results (Summary) 60
4.4 Inferential Statistical Analysis Results 61
4.4.1 Bound test 61
4.4.2 Results of auto regressive distributed lag
model (ARDLM) 62
4.4.3 Cointegration and long run diagnostic 63
4.4.3.1
Cointegration form of (ARDLM)
63
4.4.4 Long-run coefficients of the estimated
(ARDLM) 64
4.5 Test of Hypotheses 66
4.5.1 Test results for hypothesis 1 66
4.5.2 Test results for hypothesis 2 67
4.5.3 Test results for hypothesis 3 67
4.6 Discussion of Findings 68
CHAPTER 5: SUMMARY
OF FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS
5.1 Summary of Findings 70
5.2 Conclusion 71
5.3 Recommendations 72
5.4 Contribution to Knowledge 73
REFERENCES 74
APPENDICES 82
LIST OF TABLES
2.1
Summary of reviewed literature 47
4.1 Data presentation 57
4.2.1 Descriptive statistic
59
4.2.2 Correlation matrix
60
4.3 Unit root test
60
4.4.1. Result of bound test
61
4.4.2 Results of auto regressive distributed lag
model (ARDLM) 62
4.4.3.1
Cointegration form of (ARDLM)
63
4.4.4. Long-run coefficient of the estimated
(ARDLM) 64
LIST OF FIGURES
4.4.1 Actual, fitted and residual Model 65
4.4.2 Plot of the residual of the estimated graph 65
CHAPTER 1
INTRODUCTION
1.1
BACKGROUND TO THE STUDY
The term foreign direct investment
may be defined as a type of investment which is made into certain sectors of an
economy, which may include either the business or production sector from an
individual or a company of one country to another. This may be achieved either
through buying or acquiring a business firm in the country of interest that has
been established in another country. FDI is not very similar to Foreign
Portfolio Investment (FPI) which happens to act as a passive investment
securities attributed to a foreign country like investments that are made in
the capital market. World Bank (1996) defined FDI as an investment established
by an investor from another country in the host country for the purpose of full
ownership.
In
this era of global capital flows volatility, FDI sustainability or stability
and its existence as a vital source of foreign capital from the developed
economies to the developing economies have rekindled interest in its relation
with sustainable economic growth. The inflows of FDI into African countries
have significantly contributed to the better positioning of BOPs in many
African countries including Nigeria.
In
2017, foreign reserves in African countries comprised 2.9% of global FDI inflows
(in which Nigeria stood at 1.1%) compared to the 49.8% share for developed
economies, 33.3% share for developing Asia, and 10.6% share for Latin America
and the Caribbean (UNCTAD World Investment Report, 2018). FDI is now a major
channel used for the transfer of resources from the developed economy to the
developing economies.
Foreign
direct investment in particular is an essential asset to the investors, this is
because it is a mixture of both tangible and intangible assets and firms
operating in the economy under the ambit of FDI are known to be the dictates in
the world economy. FDI is thus seen as an important agent of economic growth
and development which also helps to increase domestic investment both by
capital inflows and facilities (Holger and Greenaway, 2004). The importance of
FDI as anticipated in the New Partnership for African's Development (NEPAD), is
to transform the NEPAD's dream for Africa into existence i.e for economic
growth and development. The inflow of FDI into Africa and other developing
countries becomes necessary because they expect or require large external
resources due to lack of internal savings thus, depending on foreign income for
development that will move them out of abject poverty (Ayayi, 1999, 2000,
2003).
One
important item of today's globalization is the fostering of business or
investment between two different countries using TNCs as frontiers. Many
countries including Nigeria now depend on FDI as a major source of income for
both economic growth and development. This is possible because FDI is an
embodiment of new capital, technology advancement and new management.
Sub-Saharan
African countries like Nigeria now build their hopes on FDI for many reasons
which are; natural resources, market size, government policy etc (Asiedu,
2011). Countries rely on FDI because of the benefits it brings to the host
country’s economy (Sjoholm, 1999 and Obwona, 2001, 2004). The commitment by
several African countries to standardize or increase their business standard,
economic growth and development leads to FDI. NEPAD was initially launched to
increase capital in African region to US$64 billion through a combination of
reforms, resource mobilization and creating an enabling and fertile environment
for the inflow of foreign direct investment (Funke and Nsouli, 2003).
Unfortunately,
the commitment by many African countries to attract and sustain FDI became
futile; bringing mix feelings in Africa as regards to FDI inflows. As all the
commitments to attract and sustain FDI became futile, FDI is discouraging in
Africa, showing minute hope of economic development and growth for Africa as a
continent. Nigeria experienced an increased in FDI by $1150.51m in the first
quarter of 2019, drop to $909.54m in the second quarter and also averaged $1240.22m
from 2007 until 2019, reaching an all-time high of $3084.90m in the fourth
quarter of 2012 and a record low of $314.44m in the fourth quarter of 2018
(Tradingeconomics.com/central bank of Nigeria).
For
many developing countries like Nigeria, FDI plays a vital role by bridging the
developed countries to the developing countries through technology transfer and
capital flows which in turn affect the domestic economy positively. According
to Yu, Tu and Tan (2011), FDI aid in technology transfer. Melnyk, Kubatko and Pysarenko
(2014), believed that when foreign direct investment comes to a domestic
country (in specific business), that firm receives a competitive advantage due
to the usage of new knowledge, experience, ways of production and management. Adding
that the present achievement in economic growth of developing countries could
be described as "catch up effect" in technology with other developed
countries.
Lahiri
and Ono (1998), observed that higher efficiency of foreign firms may help lower
prices and hence increase consumers' surplus. In addition, more new jobs are
created by attracting FDI both direct and indirect employment. According to
Koojaroenprasit (2012), FDI plays a very big role in economic growth
contribution via technology transfer. The increase in Capital and value
addition to human capital is also associated to FDI inflows (Buckley, Clegg,
Wang and Cross, 2002).
In
Nigeria, FDI is a business venture or a firm owned by a foreign investor or
partly owned domestically. The Nigerian Investment Promotion Commission (NIPC)
(Decree No. 16 of 1995) and the Foreign Exchange (Monitoring and Miscellaneous
Provision) Decree, also enacted in 1995, allows for the operation of FDI in the
country. In Nigeria, there are several measures instituted by the government
for smooth operation of FDI. Most countries of the world try very hard to
attract FDI because of the role it plays in economic development. Apparently,
countries in Africa including Nigeria, have accompanied other countries both
developed and developing to seek for FDI as envisioned by NEPAD, established
mainly for the attraction of FDI to Africa (Olokoyo, 2012).
Macaulay
(2012), asserted that Nigeria's foreign direct investment originated from the
colonial era, in which our resources were exploited by foreign government to
develop their own economy. In other to cover up their selfish ambition, they
established little investment in Nigeria. But Nigeria’s FDI became unstable the
moment crude oil was found. The Nigerian governments have identified FDI as one
of the major tools that could promote and foster economic growth and
development of the country and measures to promote the inflow of FDI such as
incentive policies and regulations were instituted for its accomplishment. As
cited by Lall (2002), one of the measures adopted was privatization to attract
and encourage foreign investments in the country.
Thus
privatization is the process of transferring public enterprises which were
owned and controlled by the government completely to private individuals or
companies that are completely or co-owned by the government. These include:
manufacturing industries, agricultural production industries and agro-allied,
public utility services such as telecommunication sector, transportation,
electricity and water supply. Shiro (2009), explained that the introduction of
democracy in 1999 as a system of government, brought laws that foster FDI
inflows into the country. These measures, as he cited, include laws and reforms
that were not encouraging foreign investors, announcement of new investment
laws, and various oversea business trips to rebrand the image of the country by
the Presidents among others.
1.2 STATEMENT OF THE PROBLEM
As
discussed earlier, FDI is considered globally as a medium in which resources
are channeled from developed economy to developing countries and foreign direct
investment could affect economic growth and development of the host countries
by increasing the strength of the domestic investment and facilities (Holger
and Greenway, 2004). Although, studies were carried out on FDI and economic
growth in Nigeria, but the causal relationship between FDI and economic growth
and the advantages associated with the relationship is very inconclusive
(Ayadi, 2009).
Many
studies have attempted to study impact of FDI on economic growth of Nigeria but
in spite of a seemingly positive association existing between foreign direct
investment and economic growth, the direction of this impact is yet to reach a
general consensus. This is because studies conducted by Oyinlola 1995 and,
Asogwa and Manasseh, 2014, recorded a negative result while studies conducted
by Ekpo 1995 and John 2016, was positive , leading to the notion that FDI could
either be helpful or disastrous to economic growth.
The
principal driving force for this work is that for developing economies and for
Nigeria in particular the issue of economic growth is an important one. This is
because Nigeria and other developing countries require a huge amount of
resources which could come from FDI to fill the saving and foreign exchange
gaps and move towards the attainment and sustainability of economic growth
which would lead to the elimination from its current abject poverty (Ayaji,
1999, 2000, 2003).
In
Nigeria today, there are many factors that inhibit the proper inflow of FDI. These
include: insurgency, kidnapping, corruption, tax rate, tariff, weak public
institutions and poor external image (Olokoyo, 2012). However, there is this
conception that, although foreign direct investment provides: capital, new
technology, marketing and management, they may also lower domestic savings,
entrepreneurship and investment rates thus stifling competition through
exclusive product agreements with host governments and also refusing to
reinvest much of their profits in the host country.
Nigeria
have been stimulating economic growth with the help of various technologies
including policies that would aim at foreign capital and technology transfer.
It is absolutely imperative to investigate if economic growth could be as a
result of an increased inflow of FDI into the country over the period
(1981-2017) under review. It becomes natural therefore to ask if the economic
growth which has been experienced in the economy for the past years was from
the proceeds of foreign direct investment inflow in the country or if the
country has already attained this economic growth level before attracting
foreign direct investment?
However, with all the FDI operating
in the country, the economy is still lagging behind in technology and in
knowledge transfer. Due to this reason, it becomes very difficult to describe
the actual direction of the relationship existing between foreign direct
investment and economic growth in Nigeria. With the existence of FDI, the rate
of unemployment is alarming and the federal government is seeking for loans
abroad which would have not been so considering the number of FDI operating in
the economy. This, invariably would give the motivation for embarking on this
study.
1.3
OBJECTIVES OF THE STUDY
The main objective of this research is to
examine the impact of foreign direct investment on economic growth of Nigeria,
while the specific objectives are:
i.
To determine effect of foreign
direct investment on economic growth of Nigeria.
ii.
To examine impact of exchange
rate on economic growth of Nigeria.
iii.
To examine the extent to
which balance of trade influences economic growth of Nigeria.
1.4
RESEARCH QUESTIONS
The
following research questions will be used as guide in the study.
i.
To what extent foreign direct
investment affects economic growth of Nigeria?
ii.
How does exchange rate
impact on economic growth of Nigeria?
iii.
To what extent is the impact of balance of
trade on economic growth of Nigeria?
1.5 HYPOTHESES
The
following hypotheses will be tested in the study.
HO1:
There is no significant effect of foreign
direct investment on economic growth of Nigeria.
HO2.:
Exchange
rate does not have any significant impact on economic growth of Nigeria.
HO3.:
There is no significant impact of balance
of trade on economic growth of Nigeria.
1.6
SIGNIFICANCE OF THE STUDY
The findings of this study when added
to other existing literature will be a valuable guide especially to policy
makers and a good source of literature and reference to future scholars
anticipating a similar research study. One noticeable important of an academic
research is the investigation of salient matters which practitioners and policy
makers find useful but do not have the time to research.
Policy
makers: This study will become a useful tool in the hands of the policy makers
and development partners because it will present them with proper information
to initiate, develop and manage long term economic strategies based on
empirical evidence. Body of academics: It will guide other scholars in the area
of FDI and economic growth they should understudy.
Because of its presumed advantages to
the host country, World Bank and International Monetary Fund is of opinion that
countries both developed and developing should attract more FDI so as to
stimulate and increase external resource allocation.
1.7
SCOPE OF THE STUDY
The Nigerian economy is large and
complex. However, specific attention will be given to the contribution of
Foreign Direct Investment on the economic growth of Nigeria. The study is
limited to Nigeria and was restricted to the period of 37 years (i.e from 1981
to 2017). The CBN statistical bulletin provided the data for this study. The
rationale behind the choice of 1981 is because the data for real gross domestic
product (proxy as economic growth) published by Central Bank of Nigeria was
first published in 1981. Therefore, this will give us a comprehensive study and
analysis of the impact of foreign direct investment on economic growth of
Nigeria for the period under review. Also, the choice of 2017 is because this
study started in 2018.
1.8
LIMITATIONS OF THE STUDY
It is uncommon in a research study
not to have certain factors that may militate against its accuracy. The major
limitation encountered in this study is the disparity in facts and figures as a
result of inconsistencies of data. Also, lack of financial resources and time. Despite
these challenges, the findings of this study remains valid and reliable.
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