CHAPTER ONE: INTRODUCTION
1.1 Background to the Study
Nigeria‘s economic development was anchored basically on agricultural and primary exports
before independence. A purposive effort was made to alter the structure of the economy by
increasing investment in other sectors on attainment of political independence in 1960. Since
then and, specifically from the early 1950s, virtually all the productive sectors of the Nigerian
economy were dominated by foreign investments and therefore ownership incentive measures
were, thus, directly aimed at attracting foreigners, their capital, technology and skills. (Garba,
1998:18). Over the last three decades Foreign Direct Investment (FDI) has emerged as one of the
most important sources of globalization and an important catalyst for economic growth,
transferring technology and knowledge between participating countries.
Foreign direct investment is a direct investment into production or business in a country by
an individual or company in another country, either by buying a company in the target country or
by expanding operations of an existing business in that country. Foreign direct investment also
provides opportunities and financial challenges around the world. In addition, gaps in
entrepreneurship, managerial and supervisory personnel, organizational experience and
expertise, innovation in products and production techniques in third world countries are
presumed to be partially or wholly filled by foreign investors.
The theories related to the types of FDI suggest two types of FDI: horizontal (market-seeking)
and vertical. The international market searching for the lowest cost of production is called
vertical FDI, which is mainly export oriented (Shatz and Venables, 2000:222-223). Horizontal
FDI refers to the establishment of homogenous plants in foreign locations as a means of
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supplying certain goods in a foreign country. This type of FDI replaces exports from the home
country to the host country.
Nigeria receives the largest amount of Foreign Direct Investment (FDI) in Africa. Foreign
Direct Investment inflows have been growing enormously over the course of the last decade:
from USD1.14 billion in 2001 and USD2.1 billion in 2004, Nigeria‘s FDI reached USD11 billion
in 2009 according to UNCTAD, making the country the nineteenth greatest recipient of FDI in
the world. The country experienced real GDP growth averaging 7.8 percent from 2004 to 2007,
and 6.4 percent in 2007. This was higher than those of the low-income sub-Saharan (LI-SSA)
countries with median (4.0 percent), the LI median (6.0 percent), and the rate in Indonesia (6.3
percent). Kenya however had a higher rate of 7.0 percent. Prior to 2001 40 percent of GDP came
mainly from oil which changed from 2001 to 2006 though in 2003 real growth in other sectors
exceeded growth in the oil sector (IMF, 2008). Some notable sectors in this respect include
telecommunications, wholesale and retail trade, and agriculture (Economist Intelligent
Unit,2008). Agricultures potentials are yet to be fully exploited.
In the year 2007, Nigeria had an estimated gross domestic product (GDP) of US$166.8 billion
according to the official exchange rate and US$292.7 billion according to Purchasing Power
Parity (PPP). GDP rose by 6.4 percent in real terms over the previous year.GDP per capita was
about US$1,200 using the official exchange rate and US$2,000 using the PPP method. About 60
percent of the population lives on less than US$1 per day. Also during the same period (2007)
the GDP was composed of the following sectors: agriculture, 17.6percent; industry, 53.1 percent;
and services, 29.3 percent. In 2006 Nigeria received a net inflow of US$5.4 billion of Foreign
Direct Investment (FDI), much of which came from the United States. FDI constituted 74.8
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percent of gross fixed capital formation, reflecting low levels of domestic investment. Almost all
the FDI is directed toward the energy sector.
Between 2008 and 2020, Nigeria hopes to attract US$600 billion of FDI to finance its vision.
FDI is considered as a strategic instrument for economic growth. Thus, this study assesses the
impact of FDI on economic growth in Nigeria within the period 1999-2013.
1.2 Statement of Problem
It is widely believed that economic growth depends critically on both domestic and foreign
investments (Andenyangtso, 2005: 305-323). Equally, the rate of inflow of foreign investment
depends on the rate of economic growth. Osaghale and Amenkhieman (1987: 383-403),
Ohiorheman (1993: 1185-1207), Fabayo (2003: 227-252) and Aremu (2005:2079-2085) establish
a relationship between investment and growth in Nigeria. However, empirical studies of the
impact of FDI on growth are concerned with either the overall effect on growth (or net welfare)
or with specific aspects of the FDI impact on employment, technology, trade, entrepreneurship
and other areas of the economy, such as, infrastructures, education and health. Thus, the impact
of FDI on economic growth remains unclear. It is, therefore, necessary to determine the impact
of FDI on the economic growth in Nigeria..
1.3 Research Objectives
The overall objective of this study is to examine the effect of foreign direct investment on the
economy of third world countries economies. Specific objectives of this study are:
i. To determine the rate of Foreign Direct Investment inflows into Nigeria;
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ii. To determine whether foreign direct investment has impacted positively or negatively
on the economy of the Nigeria; and ,
iii. To examine the relationship between foreign Direct Investment, exports and growth
in Nigeria.
1.4 Research Question
The following questions will be answered in the course of this study:
i. What is the rate of Foreign Direct Investment inflows into Nigeria? ;
ii. Does Foreign Direct Investment impact positively or negatively on the economy of
Nigeria? ; and,
iii. What are the relationship between Foreign Direct Investment, exports and growth in
Nigeria?
1.5 Significance of the Study
Foreign Direct Investment is an important source of growth for developing countries. Not only
can it add to investment resources and capital formation, it can also serve as an engine of
technological development with much of the benefits arising from positive spillover effects.
Such positive spillovers include transfers of production technology, skills, innovative capacity,
and organizational and managerial practices.
Finding from the study will be of immense benefits in a number of ways and to different groups
of persons.
i. For policy making, the expected result outcome shall serve as a useful guide for future
policies as it relates to stimulating growth within the economy.
ii. For further studies, it will serve as a reservoir of knowledge for such academic exercises.
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1.6 Scope of the Study
The primary objective of this paper is to find the impact of foreign direct investment on
exchange rate in Nigeria. In the process, a special effort is made to analyze the nexus between
policy environment and foreign investment inflow in Nigeria, and explain the pattern of foreign
investment flows since 1984. The study will basically cover a period of 15years (1999-2013).
This study is limited to the effect of foreign direct investment on third world countries
economies with particular emphasis on Nigeria.
1.7 Limitations of study
The study noted the following limitations:
I. Biasness and sentiments on the side of many publications, writers and respondents
was a limitation to the work
II. Finance: The cost of carrying out in a practical research a city like Lagos due to
transportation cost and other logistics is another major constraint to this research
1.8 Organisation of study
This research work has been divided into five chapters. The first chapter is the introduction
which discusses the background of the study, statement of the problem, objectives of the study,
research questions, significance of the study, and operational definition of terms. Also included
in this chapter is the scope of the study and limitations. The second chapter is devoted to
literature review and theoretical framework which explicitly expressed the concept as well as the
overview of Foreign Direct Investment in Nigeria The third chapter covers research methodology
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taking cognizance of the of the research design, research population, sample and sampling
technique(s), research instrument(s), validity and reliability of instruments, data collection
technique and finally the data analysis technique(s) employed in the research. On its part, the
fourth chapter discusses analysis, the assessment of data collected research findings. Finally, the
fifth chapter contains the summary and conclusion of research work, as well as recommendation
on how problems raised can be tackled .
1.9 Definition of terms
Foreign Direct Investment – FDI
According to FT Lexicon, .a foreign direct investment (FDI) is a controlling ownership in a
business enterprise in one country by an entity based in another country.
Based on this study, Foreign Direct Investment is defined as a company from one country
making a physical investment into building a factory in another country. Foreign direct
investments differ substantially from indirect investments such as portfolio flows, wherein
overseas institutions invest in equities listed on a nation’s stock exchange. Entities making direct
investments typically have a significant degree of influence and control over the company into
which the investment is made.
Third world country
The economically underdeveloped countries of Asia, Africa, Oceania, and Latin America,
considered as an entity with common characteristics, such as poverty, high birthrates, and
economic dependence on the advanced countries. (Gerard Chaliand, 2010:55)
Third World Countries are the technologically less advanced, or developing, nations of Asia,
Africa, and Latin America, generally characterized with poverty, having economies distorted by
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their dependence on the export of primary products to the developed countries in return for
finished products. Third world nations also tend to have high rates of illiteracy, disease, and
population growth and unstable governments
Gross Domestic Product
Gross domestic product (GDP) is defined by the Organisation for Economic Co-operation and
Development (OECD) as “an aggregate measure of production equal to the sum of the gross
values added of all resident, institutional units engaged in production (plus any taxes, and minus
any subsidies, on products not included in the value of their outputs).
Based on this study, Gross Domestic Product is the total market value of all the goods and
services produced within the borders of a nation during a specified period. It is the the monetary
value of all the finished goods and services produced within a country’s borders in a specific time
period, though GDP is usually calculated on an annual basis. It includes all of private and public
consumption, government outlays, investments and exports less imports that occur within a
defined territory.
Purchasing Power Parity
Purchasing power parity (PPP) is a component of some economic theories and is a technique
used to determine the relative value of different currencies.The whole idea of purchasing power
parity is that it allows one to estimate what the exchange rate between two currencies would have
to be in order for the exchange to be at par with the purchasing power of the two countries’
currencies.
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Economic Growth
According to Statistics on the Growth of the Global Gross Domestic Product (GDP) from 2003
to 2013, IMF, October 2012, Economic growth is the increase in the market value of the goods
and services produced by an economy over time. It is conventionally measured as the percent
rate of increase in real gross domestic product, or real GDP. Flowing from the study, Economic
growth is primarily the study of how countries can advance their economies.
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