Abstract
This study examines the impact of foreign direct investment on economic growth in
Nigeria during the period 2019 – 2021, using the two-stage least squares (2SLS) method of simultaneous equation model. The findings of the study revealed a negative relationship between economic growth proxied by Gross Domestic Product (GDP) and Foreign Direct Investment (FDI) as a result of insufficient FDI flow into the Nigerian economy. It is therefore, recommended that Nigeria should encourage domestic investment to accelerate growth rather than relying on FDI as a primer mover of the economy and develop a code of conduct on FDI to curb the restrictive business practice of multinationals and limit their repatriation of profits from Nigeria.
1.1 Background of The Study
There have been several revolutions throughout history that have altered the structure of relationships among states within the global environment. Because there was a need for them to join together and settle numerous concerns that may lead to another conflict among them, the First World War resulted in the establishment of the League of Nations, a
nd the War was considered as the War to End All Wars.
Unfortunately, the League of Nations was unable to prevent the outbreak of the Second World War, which lasted from 1939 to 1945. Following the war, there was a cold war in the global environment, which ended friendly relations between countries and made the issue of security prominent and important to them. There was no way for economic interdependence to exist in which a global corporation could spread out outside its sovereign state.
From the Second World War to the 1970s, Foreign Direct Investment (FDI) was unable to persuade many countries, particularly developing countries, of its benefits, and the fear of dominance, as well as the belief in national security, prevented foreign investors from penetrating beyond their political borders. In fact, there was no such thing as international economic relations at the time. However, starting in the 1970s, the necessity for economic connections and interdependence became increasingly important to governments throughout the world, particularly emerging ones.
Given the government’s varied efforts to attract foreign investors into the nation, the necessity for the Nigerian government to follow this trend has become critical. Nigeria has been dubbed the “African Giant” owing to its leadership responsibilities on the continent, yet the nation remains impoverished and undeveloped. The country’s failure to develop economically requires the necessity to attract efficient FDI into the country. However, due to the region’s failing economy, African countries in general have not been able to draw much attention from global investors, as well as lack of various determinants of FDI inflow in host countries.
For both rich and developing nations, the research on the FDI–growth link is extensive. The majority of the empirical work relies on neoclassical and endogenous growth models as a foundation. It is frequently asserted that FDI is a significant source of capital, that it complements domestic investment, generates new employment possibilities, and is, in most circumstances, linked to improved technology transfer, which, of course, improves economic growth. While the positive FDI–growth relationship is not universally recognized, macroeconomic research indicate FDI’s positive effect, particularly in specific settings. According to existing research, there are three primary ways via which FDI might promote economic growth. The first is that it allows domestic savings to be released from a binding limitation. In this scenario, foreign direct investment helps to supplement domestic savings in the capital accumulation process. Second, FDI is the primary means through which technology is transferred. Technology transfer and technical spillover result in an improvement in factor productivity and resource usage efficiency, which leads to growth. Third, higher capacity and competitiveness in domestic production arise from FDI. This leads to increasing exports. The level of human capital development, the kind of trade regimes, and the degree of openness are all factors that are frequently mentioned in empirical analyses of the positive connection (Borensztein et al., 1995, 1998).
African governments, especially Nigeria, have made many attempts to entice foreign investors, but despite their efforts, they have not been able to fully realize their objectives. The problem of infrastructure facilities as a key impediment to FDI entry into the area, particularly to Nigeria, will be the subject of this study. Railways, telecommunications, a reliable power supply, transportation, and adequate health care are examples of proper infrastructure. Foreign investors have found it difficult to enter the region due to Nigeria’s and Africa’s incapacity to improve infrastructural development. According to several writers, there are additional characteristics that might make a nation more appealing to FDI inflows. According to Dinda (2021), Natural resources, openness, and macroeconomic risk factors such as inflation and currency rates all have a role in FDI influx to Nigeria. Natural resources, a big market size, reduced inflation, strong infrastructure, an educated population, openness to FDI, less corruption, political stability, and a trustworthy legal system are all important drivers of FDI flows, according to Asiedu (2006).
Changes in domestic investment, domestic output or market size, indigenization policy, and the economy’s openness are all important drivers of FDI, according to Anyanwu (1998). However, this discovery must be followed up with a thorough examination of the impact of infrastructure on FDI inflows in Nigeria.
Nigeria is officially known as the Federal Republic of Nigeria. It is made up of thirty-six (36) states, with Abuja as the federal capital. It is bordered on the east by Cameroun and Chad, on the west by Benin, and on the north by Niger. It is located in West Africa. According to the World Bank, the country was classified as a mixed economy emerging market in 2011, and it has already achieved middle income status due to its abundant natural resources, well-developed financial, legal, communications, and transportation sectors, and the second-largest stock exchange in Africa.
The country is ranked as the world’s 12th biggest producer of petroleum and eighth largest exporter, with the tenth greatest known oil reserves. Petroleum contributes significantly to the Nigerian economy, accounting for 40% of GDP and 80% of government revenue (United States Energy Information Administration Independent Statistics and Analysis, 2010). (2010). The country is endowed with abundant natural resources as well as a diverse range of agricultural goods produced on huge swaths of land.
Nigeria has long been plagued by economic stagnation and a decline in living standards, which has pushed the country into the poorest area of the world. The country has ample natural resources, but its economy is unable to meet the needs of the majority of its citizens, which has been attributed to a variety of causes. The ‘resource curse’ or ‘Dutch sickness’ refers to the coexistence of great natural resource riches with acute personal poverty in developing nations like Nigeria. (Auty, 1993).
Nigeria is a country that is blessed with abundant natural resources and arable land. Government policies must be aimed at improving the country, which leads to the government inviting foreign investors to invest in the country. Nigeria’s foreign direct investment policies and plans are guided by two main goals: the desire for economic independence and the requirement for economic growth (Garba, 1998).
The Nigerian government acknowledges the importance of foreign direct investment and has devised a number of initiatives to increase FDI inflows by enacting favorable laws and regulations (Onu, 2012). In developing nations like Nigeria, FDI is seen as a strategic tool for economic progress.
Foreign Direct Investment adds positively to the economy of host nations, according to empirical research findings. According to Mansfield and Romeo (1980), foreign direct investment technology is younger than technology sold through license. Foreign Direct Investment is also helpful, according to Romer (1993), since it bridges the “idea or knowledge gap” between developed and developing nations and expands growth prospects.
In addition, FDI inflows offer a variety of physical and intangible advantages that have a significant influence on economic growth and development. Inflows of Foreign Direct Investment (FDI) through mergers and acquisitions, for example, might improve management and organizational abilities. Corporate governance is rapidly becoming a crucial characteristic for cross-border investment decisions, according to Fortanier and Maher (2001), and effective corporate governance boosts investor trust.
While some empirical studies suggest that foreign direct investments help host nations expand economically, others have shown conflicting effects. In certain cases, it has been discovered that economic growth or the expectation of economic growth causes a rise in Foreign Direct Investment, rather than the other way around. Foreign Direct Investment produces detrimental rather than positive spillovers in transition economies, according to Gorg and Greenaway (2002). The lack of beneficial spillovers is due to the economies’ small size.
In his paper, Joze (2003) indicates that the assertion that Foreign Direct Investment bolsters business competition in host economies may either be true or false. He indicates that sometimes multinational enterprises “crowd out” or force out domestic firms thus reducing competition.
Because of its well-known benefits as a tool for economic growth, most nations try to attract Foreign Direct Investment (FDI). As shown by the creation of the New Partnership for Africa’s Development (NEPAD), which includes the attraction of foreign investment to Africa as a significant component, Africa – and Nigeria in particular – has joined the rest of the globe in pursuing FDI. FDI may alternatively be described as an investment undertaken to obtain a long-term management stake (often 10% of voting shares) in a company that operates in a nation other than the investor’s, as specified by the World Bank’s residence criteria (1996). Such investments can be either “greenfield” (also known as “mortar and brick”) or merger and acquisition (M&A), which involves the purchase of an existing stake rather than a fresh venture. Ownership of at least 10% of the ordinary shares or voting stock is the requirement for the existence of a direct investment relationship in corporate governance. Portfolio investment is defined as ownership of less than 10%. FDI includes not just mergers and acquisitions and fresh investments, but also earnings reinvested, loans, and other forms of capital transfer between parent firms and their subsidiaries. Nations may host FDI projects in their own countries as well as participate in FDI initiatives in other countries. The inbound FDI position of a country is made up of hosted FDI projects, whereas outbound FDI is made up of foreign-owned investment projects.
For decades, the relationship between FDI and economic growth has been the topic of debate and extensive research. The globalisation of the international economy, as well as the awareness that multinational businesses play an increasingly crucial role in trade, capital accumulation, and economic progress in developing nations, has reignited interest in the field in recent years. Three recent discoveries have given a new wrinkle to the literature on FDI-led growth, notably in empirical research.
Three recent discoveries have given a new wrinkle to the literature on FDI-led growth, notably in empirical research. First, prior econometrics studies based on the premise that FDI causes economic growth in one direction have been noticed and criticized in the study of (Kholdy, 1995). In other words, not only may FDI influence economic growth (both positively and negatively), but economic growth can also influence FDI inflows. Failure to incorporate either direction of such causation might result in inefficient assessment of the effects of FDI/GDP on GDP/FDI, resulting in the problem of simultaneity bias. Second, Paul Romer’s so-called “new growth theory” has led to some reassessment of the drivers of growth in terms of modeling the role of FDI in the economic process (Romer,1994). Third, new breakthroughs in econometric theory, like as time series cointegration and causality testing, have widened the FDI-growth debate.
- Statement of the Problem
Despite a slew of research on FDI and economic growth in Nigeria, the empirical evidence on the causal link between FDI and economic growth and the advantages that come with it is mostly ambiguous. Despite the apparent positive relationship between FDI and economic growth, the empirical research has not established an agreement on the direction of this influence, implying that FDI might be helpful or destructive to economic progress. Furthermore, very little study has been done on the subject in underdeveloped nations like ours. The main motivating reason behind this effort is the fact that economic growth is a critical issue for emerging economies, particularly Nigeria. These nations have boosted growth through a variety of strategies, including policies aimed at attracting foreign money and transferring technology. It would be interesting to see if the start of growth can be linked to an increase in FDI influx into the nation over the time under consideration. As a result, it’s only logical to wonder if the recent economic growth was due to the contribution of Foreign Direct Investment or if the country had already reached this level of growth prior to receiving Foreign Direct Investment?
According to recent theoretical advancements in the field of economic growth, successful emerging nations were able to expand in large part as a result of a “catch up” process in terms of technological level Borenzstein et al (1998). Foreign Direct Investment is one of the most important ways to gain access to breakthrough technology. As a result, studying how sophisticated technology may boost economic growth is strongly linked to modeling the relationship between growth and foreign direct investment. Researchers can now analyze and evaluate not just the short-run, but also the long-run influence of Foreign Direct Investment on GDP, thanks to recent theoretical advances. A deeper analysis of these prior research indicates that no intentional attempt was made to account for the fact that the extractive (oil) industry receives more than 60% of FDI inflows into Nigeria.
Many nations, particularly developing ones, now regard FDI as a vital component of economic growth, according to Ayanwale (2021). Foreign direct investment (FDI) is defined as a mix of capital, technology, marketing, and management. Many African countries are working to improve their business climate in order to attract foreign direct investment. Nigeria is a significant beneficiary of FDI in Africa, because to its huge natural resources and large market size. It is one of the top three African nations that routinely gets FDI. However, when compared to Nigeria’s resource base and prospective demand, the volume of FDI garnered by the country is not promising (Asiedu, 2003).
As a result, these research simulated the impact of natural resources on Nigeria’s economic growth. The majority of other empirical research in this field has relied on panel data for a number of nations to demonstrate causal links. The findings of research on the relationship between foreign direct investment and economic growth in Nigeria are mixed. As a result, determining the direction of the link between FDI and economic growth in Nigeria is challenging. As a result, these research simulated the impact of natural resources on Nigeria’s economic growth. The majority of other empirical research in this field has relied on panel data for a number of nations to demonstrate causal links. The findings of research on the relationship between foreign direct investment and economic growth in Nigeria are mixed. As a result, determining the direction of the link between FDI and economic growth in Nigeria is challenging.
- Objectives of the Study
The main objective of this study is to examine the impact of FDI on economic growth in Nigeria
The specific objectives include:
- To determine the impact of Foreign Direct Investment on economic growth in
- To establish whether there is any kind of relationship between economic growth and Foreign Direct Investments in
- Research Questions
The questions the study seeks to answer include:
- What is the impact of Foreign Direct Investment on economic growth?
- Is there a long-run causal relationship between Foreign Direct Investment and economic growth?
- Research Hypotheses
The following hypotheses are relevant for our study, and stated in null form.
Ho1 Foreign Direct Investment inflow is not a major determinant of economic growth in Nigeria.
Ho2 There is no long-run causal relationship between FDI and economic growth in Nigeria.
- Scope of the Study
The research spanned the years 2019 to 2021. This era was chosen because the researchers believed it would be better to utilize a period of steady democratic dispensation in Nigeria, which indicates that investors must have taken a careful look at the country’s investment climate before deciding to conduct business there. Most research on foreign direct investment and economic growth appeared to be centered on developing nations, however this study is based on the instance of Nigeria. This research couldn’t have come at a better time. Because Nigeria is seeing a massive infusion of money, it would be useful to investigate the impact of this inflow on the economy’s growth.
- Significance of the Study
Because there is no comprehensive empirical evidence on the causal relationship between Foreign Direct Investment and economic growth in Nigeria, the researcher determined that a country-specific research study was necessary to establish the causal relationship and interaction between Foreign Direct Investment and economic growth. Chowdhury and Mavrotas (Chowdhury and Mavrotas, 2005) recommended that individual country studies be conducted to determine this causal link. As a result, this study has a lot of motivation.
This study will complement existing research on the issue and address any gaps that may exist in past studies attempting to determine if foreign direct investment contributes to economic growth or vice versa in Nigeria. Previous research, such as (Adeolu, 2021), focused on the empirical relationship between non-extractive FDI and economic growth in Nigeria, as well as the drivers of FDI into the Nigerian economy, but did not go so far as to establish a link between the two.
This study adds to the body of knowledge by studying the link between FDI inflows and Nigeria’s economic growth and development, thereby addressing the country’s unique perspective on the FDI issue. The study’s scope differs from prior research in terms of the number of years studied.
When combined with the current body of literature, the findings of this study will be a helpful guide for policymakers and an excellent source of reference for future academic research. Academic research has the benefit of looking into topics that practitioners and policymakers find valuable but don’t have time to research. The study is crucial for policymakers and development partners because it allows them to create, implement, and monitor long-term economic policies based on empirical facts.
- Limitations of the Study
The major limitation of this research was fund. A substantial amount was committed to this work in terms of data gathering. In reviewing of the related literature, the researcher faced some challenges of accessing journals with relevant materials. Some internet sites were secured and could not be accessed, in some cases, subscription were made in order to gain access to needed materials. The researcher also faced a big challenge in acquiring the econometric software that was used for the analysis. The lack of funds was the most significant drawback of this study. In terms of data collection, a significant amount of effort was put into this project.
The researcher had some difficulties in locating journals that contained relevant information when conducting a review of the associated literature. Some websites were password-protected and couldn’t be viewed; in other situations, subscriptions were required to obtain access to necessary content. Obtaining the econometric software needed for the analysis was also a major difficulty for the researcher. The work’s timeliness was further hampered since it took the researcher many months to master the program and apply it to the project.
- Definition of Terms
Nigeria: Nigeria, officially the Federal Republic of Nigeria, is a federal constitutional republic comprising 36 states and its federal capital territory, Abuja. The country is located in West Africa and regarded as the most populous black nation in the world.
Foreign Direct Investment: FDI is an investment made to acquire a lasting management interest in a business enterprise operating in a country other than that of the investor
Economic growth: It is the increase in the amount of the goods and services produced by a country over time. It is normally measured as the percent rate of increase in real gross domestic product (GDP).
Gross National Product (GNP): Is the monetary value the total annual flow of goods and services in the economy of a nation. The GNP is normally measured by totalling all personal spending, all government spending, and all investment spending by a nation’s industry both domestically and all over the world.
Gross Domestic Product (GDP): Is the total value of goods and services produced in a country over a period of time. GDP may be calculated in three ways:
(1) by adding up the value of all goods and services produced, (2) by adding up the expenditure on goods and services at the time of sale, or (3) by adding up producers’ incomes from the sale of goods or services.
Capital formation: Capital formation is a statistical concept used in national accounts statistics, econometrics and macroeconomics. It is sometimes also used in corporate business accounts. It is a measure of the net additions to the (physical) capital stock in an accounting period, or, a measure of the amount by which the total physical capital stock increased during an accounting period; though it may occasionally also refer to the total stock of capital formed, or to the growth of this total stock.
Host country: A nation in which representatives or organizations of another state are present because of government invitation and/or international agreement.
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