Foreign Direct Investment (FDI) And Its Effects On Economic Growth In Nigeria

Introduction

1.1 Background to the Study

In most developing countries, Foreign Direct Investment (FDI) serves as a means of earning foreign reserves via investments, businesses and foreign aids from advanced countries. FDI is considered a valuable source of finance and capital formation, Technology-Transfer and know-how, as well as a viable medium for trade among countries.

The Spillover effect also allows for the transfer of innovations and invention to the receiving countries, one of which Nigeria belongs. According to the requirement for accelerated growth in association with the Sustainable Development Goals is not completely clear, however, for economies to experience sustainable and inclusive development, cross-border trade is paramount (UNCTAD, 2019; Ebunoluwa & Nuri, 2021).

It is a fact that Nigeria is an import dependent country with heavy reliance on Oil as the main export product/activity. The flow of Foreign Direct Investment (FDI) in Nigeria has been mainly from the extractive industries (Oil and Gas) as a result of lack of productive investment activities that could integrate the Nigerian economy into the global market chain. The focus of our government on crude oil exports subsequent to the oil boom has led to the abandonment of the agricultural sector and made irrelevance of Nigeria’s agricultural sector in the global market, thus reducing the overall productive activities of the economy (Awa, 2021).

Presently, Nigeria is the first host economy of FDI in Sub- Saharan Africa, and the third in the continent. Recently, Nigeria has witnessed several trade policies which aim at diversifying the economy away from oil revenue. These policies are focused on improving the industrial sector, and of course, results in austerity. In 2018, the total FDI inflow to the country was around USD 1.9 billion, while in 2017, FDI inflow was around USD 3.5 billion, showing a decrease due to the consequence of the austerity measures imposed in 2018. At the third quarter of 2019, the FDI was only 3.37% (USD 200.08 million) of the total capital inflow for the period (Ebunoluwa & Nuri, 2021).

Most countries strive to attract foreign direct investment (FDI) because of its acknowledged advantages as a tool of economic growth. Africa in general and Nigeria in particular joined the rest of the world in seeking FDI as evidenced by the formation of the New Partnership for Africa’s Development (NEPAD), which has the attraction of foreign investment to Africa as a major component. The role of foreign direct investment in the development of Nigerian economy cannot be over emphasized. Foreign direct investment provides capital for investments, it enhances job creation and managerial skills, and possibly technology transfer (Bayo & Oyero, 2019).

Foreign Direct Investment is considered an encouraging impetus for economic growth by enhancing competitiveness through offering employment, transferring sophisticated technologies, boosting productivity and promoting infrastructure, etc. FDI is seen as a way of filling the gap between domestic available supplies of savings, government revenue, human capital skills and the desired level of resources needed to achieve growth and development targets (Bayo & Oyero, 2019).

One of the reasons that have been pointed out as the major cause of low investment, and consequently, low development in Nigeria is low saving. This has been said to be a result of the country’s low per capital income, and poor financial sector development (Danladi & Akomolafe, 2013). Economic growth as explained by the neoclassical growth theory emanates from increases in the quantity of factors of production as well as the efficiency in their allocation. In a simple world of two factors (i.e. labour and capital), it is known fact that developing economies (such as Nigeria) have abundant manpower but scarce capital due to shortage of domestic savings mobilization which places limitations on capital formation and economic development. Even when domestically generated capital and manpower are in abundant supply, increased production may be constrained by shortage of foreign input (machines) upon which manufacturing of goods and services in developing economies depend. This therefore makes international capital flow an important aspect of the efforts by developing countries to close their investment – savings gap (Ahmed & Mayowa, 2012).

The relevance of foreign direct investment cannot be overemphasized. Its significant influence on the provision of new technologies, products, management skills and competitive business environment, overtime has been a strong impetus for economic growth. Many countries of the world, especially emerging economies favour policies that encourage the inflow of foreign direct investment because of it positive spillover associated with the provision of funds and expertise that could help smaller companies to expand and increase international sales and transfer of technology thus, forming new varieties of capital input (i.e. flow of services available for production from the stock of capital goods e.g. equipment, structures, inventories etc) that cannot be achieved through financial investments or trade in goods and services alone (Asogwa & Manasseh, 2014).

Nigeria is one of the economies with great demand for goods and services and has attracted many FDI over the years since the discovery of crude oil. According to the World Bank, from 1970 to 1979, Nigeria recorded an average ratio of foreign direct investment net inflow of about 1.579 to GDP while from 1980 to 1989, the average ratio of FDI net inflow to GDP recorded stood at 1.947. Thus, in 1994 and 1993, the country made a remarkable record of 8.28 and 6.3 respectively. Since 1993 and 1994, the record was not an issue to contend with. To the greatest dismay, from 1995 to 2010, FDI, net inflow as % of GDP in Nigeria has not gone beyond 4.0 except in 1996, 1997, 2005 and 2009 the country made a record of 4.51, 4.25, 4.44 and 5.08 respectively (Asogwa & Manasseh, 2014).

Nigeria as an import dependent economy needs foreign investment to enhance her investment needs.
That is why since the emergence of democratic governance in May 1999, she has embarked on some concrete measures to encourage cross-border investors into her domestic economy. Some of these means are: the repeal of laws that are adverse to foreign investment increase, promulgation of investment laws, introduction of policies with favorable atmosphere like ease of businesses, fast export and import processing methods, fight against advanced fee frauds, instituting economic and financial crimes commission. These definite measures seem to have been making positive impact on Nigeria’s foreign capital inflows (Igwemeka et al., 2015).

A close survey of the Nigeria economy indicates that Nigeria has recorded trade imbalances in most fiscal years, indicating that total payments surpassed total receipts in relation to total imports and total exports. Overall balance of payments became worse in 1999, 2002 and 2008 mostly because of increased outflow from capital accounts (CBN, 2009). Most of the capital outflow must be attributed to increased importation, declining exports mainly non-oil subsector and particularly due to external debt servicing required in meeting up with resource gaps. Foreign investment inflows consist of the movement of investment resources from one country to another. In this context, investment inflows are a broad term which includes foreign direct investment (FDI) and foreign portfolio investment (FPI) (Igwemeka et al., 2015).

1.2 Statement of Research Problem

Nigeria being a developing economy has not been different from other developing economies in using foreign direct investment (FDI) as a strategy for achieving economic growth and development. However, Nigeria in spite of its 12 huge deposit of human, natural and material resources has failed to achieve rapid economic growth.

The World Bank Global Business Index of 2015 ranked Nigeria 169th position out of 189 countries ranked. Similarly The World Economic Global Competitive Index 2015, ranked Nigeria as 38th out 144 countries with 286.5 billion US dollar using gross domestic product as an indicator, while the same index ranked Nigeria, 111th out of 144 countries also using GDP/Per Capita Income as an indicator. These results showed that Nigeria lacks the capacity to grow its local industries let alone attract reasonable foreign direct investment especially in the face of dwindling oil price and exchange rate volatility. How foreign direct investment in Nigeria affects its economic growth, necessitated this research.

1.3 Aim and Objectives

1.3.1 Aim

The aim of the study is to evaluate foreign direct investment and its effects on economic growth in Nigeria over a period of 20 years (2001 to 2021).

1.3.2 Objectives

The objectives include;

• To study the effects of FDI on Nigerian economic growth.
• To investigate the relevance of FDI to economic growth in Nigeria.
• To determine the effects of Gross Domestic Product (GDP) on foreign direct investment in Nigeria.
• To offer recommendations on relevant policy options to attract foreign investors in Nigeria.

1.4 Research Questions

• To successfully carry out this research, the following research questions were formulated:
• How is foreign direct investment (FDI) related to economic growth?
• What effects does foreign direct investment (FDI) have on economic growth and development in Nigeria?
• What are the effects of foreign direct investment (FDI) on the growth of Gross Domestic Product in Nigeria?
• What are the effects of domestic investment on the economic growth in Nigeria?
• What are the necessary policies to attract foreign direct investment in Nigeria?

1.5 Statement of the Hypothesis

H01: FDI has no significant impact on the growth of the Nigeria economy

H02: The nature and magnitude of FDI on economics growth in Nigeria cannot be determined.

1.6 Scope of the Study

This study aims to focus on the impact of foreign direct investments on the economy of Nigeria from 2001 to 2021.

The variables under review are; Return on investment on capital, Infrastructural development, openness of the host economy to trade, political risk, Government size and Human capital.

1.7 Significance of the Study

This research seeks to highlight the well known importance of FDI to the growth of Nigeria’s economy. This gives a more detailed insight on the importance, it has on the economy.

Similarly, this study will put into focus, the factors preventing the emergence of more FDI in the country. These factors could be in the form of unfriendly policies, inflation, etc.