THE EFFECT OF INSECURITY ON
FOREIGN DIRECT INVESTMENT IN NIGERIA (2002 – 2024)
ABSTRACT
Insecurity is a well-known economic vise which have threatened human living conditions at all level of which trades, production, investments both locally and internationally are threatened. Insecurity have notably punctured the efficacies of the business environments of the foreign direct investments in Nigeria in the recent pasts which have drew the attention of scholars in great number. Insecurity drying-out investments, increases unemployment, dwindles government revenue, prevent future investors from investing and hinder the progress of already existing investments amongst others. Thus, with recent high records of insecurity in Nigeria, we carried out this study focusing on examining the effects of insecurity on foreign direct investment in Nigeria using annual time series data covering the period of 2002 to 2022 as well as the autoregressive distributed lag model (ARDL) for the analysis. Insecurity was robustly measured with national security index, global terrorism index and insurgencies in Nigeria unlike as observed in other previous studies. Findings the results of the bounds test revealed that long-run relationships exists between insecurity and foreign direct investment in Nigeria. The results of the ARDL revealed that insecurity have significant negative long-run effects on the foreign direct investment in Nigeria. In the short-run, the long-run speed of adjustment was corrected 36% magnitude in the short-run since the coefficient of the error correction model (ECM) possess negative sign and was statistically significant. The study therefore recommended liberalization of the Nigerian economy with the rest of the world, militating against all form of terrorism attacks metered on the government to improve the conduciveness of foreign and local businesses and providing job opportunities to the youths to reduce the increase in criminalities that is committed in Nigeria which chases the foreign investors away.
Table of Contents
Abstract
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
1.2 Statement of Problem
1.3 Objective of the Study
1.4 Research Questions
1.5 Research Hypotheses
1.6 Scope of the Study
1.7 Significance of the Study
CHAPTER TWO
REVIEW OF RELATED LITERATURE
2.1 CONCEPTUAL REVIEW
2.1.1 Concept of Foreign Direct
Investment
2.1.2 Determinants of Foreign
Direct Investment (FDI)
2.1.3 The Benefits of Foreign Direct
Investment (FDI)
2.1.4 Concept of Insecurity
2.1.5 Insecurity in Nigeria
2.1.6 Forms of Insecurity
Challenges in Nigeria
2.1.7 Effects of Insecurity on
Foreign Direct Investment in Nigeria
2.2 THEORETICAL REVIEW
2.2.1 The Internalization Theory
of Foreign Direct Investment
2.2.2 The Production Cycle Theory
of Foreign Direct Investment
2.2.3 Theory of Democratic Peace
2.3 EMPIRICAL REVIEW
2.4 STUDY GAP
CHAPTER THREE
METHODOLOGY
3.1 Research Design
3.2 Definitions of the Variables
3.3 Model Specification
CHAPTER FOUR
EMPIRICAL RESULTS AND DISCUSSION
OF FINDINGS
4.1 Presentation and Description
of Data
4.2 Testing for Stationarity
4.3 Testing for Long-Run
Relationships
4.4 Testing for Stability
4.5. Estimation of the ARDL
Long-Run Impact
4.6 Estimation of ARDL Short-Run
Dynamics
4.7 Discussion of Findings
CHAPTER FIVE
SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1 Summary
5.2 Conclusion
5.3 Recommendations
Reference
Appendixes: Regression Results
CHAPTER ONE
INTRODUCTION
1.1
Background of the Study
Foreign direct investment (FDI) is a great
contributor to economic growth and development in any nation. The United
Nations defines FDI as investment in enterprise located in one country but
effectively controlled by residents of another country (United Nations
Conference on Trade and Development, 2009). FDI contributes to the economic
development of host country in two main ways which include the augmentation of
domestic capital and the enhancement of efficiency through the transfer of new
technology, marketing and managerial skills, innovation, and best practices.
Secondly, FDI has both benefits and costs, and its impact is determined by the
country’s specific conditions in general and the policy environment in
particular. This is in terms of the ability to diversify, the level of
absorption capacity, targeting of FDI, and the various opportunities for
linkages between FDI and domestic investment. As the pillar of growth in the
national economies, Todero (2001) bewails that infrastructural development acquired
from FDI are generally inadequate and of poor quality in most countries of
Sub-Saharan Africa like Nigeria when compared to developed nations of the
world. Foreign capital has long been accepted as an inevitable input in the
development process, given the fact that no country is an island with
self-sufficiency on her in terms of needed resources, to stimulate economic
growth and development Orji (2004).
However, despite the unquantifiable roles FDI plays
in developing national economies, many developing countries like Nigeria are
still lagging behind in all ramifications due to poor economic and political
landscape, weak level and quality of governance in the country and the nature
of macroeconomic policies made by policymakers in the country which have made
the FDI to remain insignificant on economic growth and development in Nigeria
(Radi 2018). According to World Bank, “foreign direct investment in Nigeria
remains low because of limited forex availability, security concerns, and other
structural challenges, which have also affected the net withdrawal of equity by
foreign investors” (World Bank, 2009). Another recent stylized facts shows that
as of 2020, over $40.6 billion worth of foreign investments were diverted from
the Nigerian economy as a result of insecurity according to the global
terrorism index and this had implications for job creation and economic
prosperity as purchasing power declined. Nigeria is now regarded as the world’s
poverty capital and has an estimated 91 million people living in extreme
poverty which is projected to reach 106.6 million by 2030. Also, rising
violence in the country have cost Nigeria over 11% of her GDP ranging in N119
billion and projects worth N12 trillion were abandoned across Nigeria due to
insecurity and other challenges (Thecable, 2022). More especially, insecurity
has threaten the success of foreign direct investments in Nigeria which have
made some multinational companies to windup their activities in Nigeria and
relocate to a well-secured safer environment for business operation. Typical
examples are Berec Batteries; Exide Batteries; Okin Biscuits; Osogbo Steel
Rolling Mills; Nigeria Sugar Company; Bacita; Tate and Lyle Sugar Company;
Matches Manufacturing Company, Ilorin; Nigeria Paper Mill Limited located in
Jebba, Kwara State; and Nigerian Newsprint Manufacturing Company Limited, among
others (Punch, January, 22, 2020).
The above discussions have attracted the attention
of the scholars around the world to host survey on the relationships between
security threats and foreign direct investment in both cross-country and
country-specific paradigms (see: Jelilov, Ozden, and Briggs 2018, Meyer and
Habanabakize 2018, Maja, et al., 2019, Radi 2018, Kasasbeh et al. 2018, Obiekwe
and Onyebuchi 2018, Blundel-Wignall and Roulet 2017, Epaphra and Massawe 2017,
and Canare 2017) among others. This present study re-joined the existing study
by investigating the effects of insecurity on foreign direct investment (FDI)
in Nigeria from 2002 to 2024. However, this study distinguished itself from the
existing studies by investigating both long-run and short-run relationships
between insecurity and foreign direct investment using the autoregressive
distributed lag model. Thus, the remaining sections of the study was organized as
follows: chapter two takes care of literature review, chapter three handles the
methodology, chapter four discusses the analysis and discussion of findings,
while chapter four handles the summary, conclusion, and policy recommendations.
1.2
Statement of Problem
Rising insecurity in Nigeria, characterized by
terrorism, insurgency, kidnappings, and communal clashes, severely strains the
country's investment climate. This hostile environment deters both foreign and
domestic investments, with investors concerned about personal safety, property
damage, and potential business disruptions. This insecurity leads to a decline
in Foreign Direct Investment (FDI), impeding capital flow, job creation, and
economic growth. Domestic businesses also face significant challenges,
including asset protection and operational continuity, escalating costs and
stifling economic diversification. Moreover, Nigeria's perceived insecurity
creates a reputational risk, potentially dissuading international partnerships
and financial support. Thus, understanding the effect of insecurity on
investments in Nigeria is essential (Olubunmi, 2018). Insecurity leads to
disruption of economic activities, decreased consumer confidence, lead to
decrease in foreign direct investment (FDI), increased government spending on
defense undermine government efforts for economic innovation, lead to brain
drain, and low productivity.
Pervasive insecurity comes with internal
displacement of people and the crippling of economic activities in the
worst-affected areas, can depress consumer confidence, which in turn reduces
consumer spending and reduce the confidence of foreign investors. According to
the United Nations Conference on Trade and Development (UNCTAD), FDI flows to
Nigeria averaged $5.3 billion annually from 2005-2007. However, UNCTAD data
shows FDI to Nigeria averaged $3.3 billion from 2015-2019, a period that has
been marked by heightened and widespread insecurity in the country. Insecurity
is one of the major reasons for Nigeria’s unattractiveness for inward foreign
investment in the last five years, amongst other factors such as policy
dysfunctions, including multiple exchange rates of the Central Bank of Nigeria.
Poor transport infrastructure, unreliable grid-electricity supply (which
exacerbates high operating costs), inefficient judicial system, and unreliable
alternative dispute resolution mechanisms are some of the other factors
accounting for the decline in FDI flows into the country. Thus, this study aims
at investigating the effects of insccurity on the foreign direct investment in
Nigeria.
1.3
Objective of the Study
The main objective of this study is to examine the
effect of insecurity on foreign direct investment in Nigeria for the period
2002 to 2024. However, the specific objectives are to:
1. Investigate the effects of the national security
index on foreign direct investment in Nigeria.
2.
Examine the
effect of the terrorism index on foreign direct investment in Nigeria.
3.
Investigate the
impact of insurgency on foreign direct investment in Nigeria.
1.4 Research
Questions
1.
How does the national
security index impact foreign direct investment in Nigeria?
2.
To what extent
does the terrorism index affect the foreign direct investment in Nigeria?
3.
How far has
insurgency affected the foreign direct investment in Nigeria?
1.5 Research
Hypotheses
Ho1:
There is no significant relationship between the national security index affect
and foreign direct investment in Nigeria
H02:
There is no significant relationship between terrorism index and foreign direct
investment in Nigeria.
H03:
There is no significant relationship between insurgency and foreign direct
investment in Nigeria.
1.6 Scope of the
Study
The scope for this study is limited to the impact of
insecurity on foreign direct investment (FDI) in Nigeria. The variable adopted
includes the terrorism index, the number of injuries and number of fatalities.
The study was carried out for the period of 24 years (2002 to 2022). This base
period of study is significant because the year 2002 was when the Boko Haram’s
initial uprising failed, and its leader Mohammed Yusuf was killed by the
Nigerian government. He began the group with a view of opposing Western
Education with his followers, until another uprising in 2009 which has weakened
the flow of foreign direct investment (FDI) into Nigeria.
1.7 Significance
of the Study
Policy Makers
Findings from this study will provide policy makers
with the needed information (supported by empirical evidence) on how to sustain
foreign direct investment by building a proactive law enforcement agency, solid
leadership development and ensuring good government, hence increasing economic
growth.
General Public
There is a great need for public awareness
concerning insecurity and its consequences on the economy to educate and to
discourage those who would have the desire for terrorism of any sort. Thus,
this study will educate the public about insecurity and its impact on foreign
direct investment.
Academia
It is intended that the study will further enrich
the literature on the effect of insecurity variables on Foreign Direct
Investment (FDI) in Nigeria and provide a basis for future studies in this very
important area.
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