SECTION ONE 1.1 INTRODUCTION
Growth in neoclassical theory is brought about by increases in the quantity of factors of production and in the efficiency of their allocation. In a simple world of two factors, labour and capital, it is often presumed that low-income countries have abundant labour but less capital. This situation arises owing to shortage of domestic savings in these countries, which places constraint on capital formation and hence growth. Even where domestic inputs in addition to labour, are readily available and hence no problem of input supply, increased production may be limited by scarcity of imported inputs upon which production processes in low-income countries are based. International capital flows (ICFs) readily become an important means of helping developing countries to overcome their capital shortage problem. One of the components of international capital flows is foreign private investment (FPI).
Other components are:
v Official flows from bilateral sources (e.g. developed and OPEC countries) and multilateral sources (such as the World Bank and its two affiliates: the international development Association (IDA), and the International Finance Corporation (IFC), on concessional and non-concessional terms
v Commercial bank loans including export credits).
Economic theory suggests that capital will move from countries where it is abundant to countries where it is scarce. This pattern of movement will be informed by the returns on new investment opportunities, which are considered higher where capital is limited. The resultant capital relocation will boost investment in the recipient country and, as Summers 2000) suggests, bring enormous social benefits. Underlying this theory is the premise that returns to capital decrease as more machinery is installed and new structures are built, although, in practice, this is not always, or even generally true.
With the advent of the third millennium, the pace of globalisation has continued to accelerate. In the areas of international trade and finance, has been pushed by many factors including accelerated privatization and economic liberalization in almost every country in the world.
One important economic consequence of globalisation for developing countries has been the massive and unprecedented inflows of foreign private capital during the final decades of the 20 th century. Indeed during the last decade of the last century, private capital flows wrested primacy place from public flows , seizing the pre-eminent position as the source of foreign investment and development finance for developing countries. According to Weitz and Lijane(1998):
“While official flows totaled $56 billion in 1990, compared to $44 billion in private flows, by 19996, public flows had declined to $41 billion and private flows grew to $244 billion"(1998;p.4).
UNCTAD figures show that in 1997, FDI inflows amounted to US$400 billion and in 1998, reached an unprecedented level of US$440 billion. Mallampally and sauvant (1999, p3.).
Although GDI have become more widely dispersed among recipient countries in recent years, the distribution is still skewed with Asia receiving the lion’s share of FDI flows going to developing countries and Africa receiving very little. According to Mallampally and sauvant:
“Among developing countries, though the distribution of world FDI inflows is uneven. In 1997, for example, developing Asia received 22percent; Latin America and the Caribbean, 14 percent and Africa , 1 percent". Mallampally and sauvant(1999 p.35).
Another perspective on the skewness of the distribution is obtained when it is realized that in 1995, 81% percent of global FDI flows to developing countries went to 12 countries while 89% of all portfolio flows went to almost the same dozen countries. Weitz and Lijane (1998;p.13).
Clearly, therefore the challenge to attract more inflows for investment in development projects has become acute in Sub-Saharan Africa, where only a small proportion of new inflows have gone. Note, the needs of developing countries particularly those in Sub-Saharan Africa has sharply increased in recent years due to the accelerating process of globalization. According to Weitz and Lijane (1998,p.6): “ opening up a country requires investment for connecting the necessary infrastructure – roads, telecommunication, power plants, financial system." Given the low incomes and low savings in many African countries, the investment-savings gap has widen and there is little hope of closing it without the active involvement of the private sector – both domestic and foreign. Thus, increasingly, in order to finance the investment gap, it is becoming imperative to attract foreign investment.
There is an emerging consensus that a conducive macroeconomic policy environment is not only a desideration but is in fact a sine qua non for attracting substantial amounts of foreign investment inflow in a liberalizing and globalizing world economy. Nigeria needs a massive inflow of foreign investment in order to transform its economy, upgrade dilapidated infrastructure and plug on to the electronic age of computers and the Internet. An absolute prerequisite for success is the design and implementation of policies and measures that would make the policy environment investment friendly.
1.2 OBJECTIVES OF THE STUDY
The study specifically seeks to:
i. To evaluate determinant of foreign investment in Nigeria
ii. To trace the impact of foreign investment in Nigeria
1.3 METHODLOGY OF THE STUDY
The source of collection of data for this study will be secondary source such as central bank of Nigeria (CBN) publications and statistical bulletin. The ordinary least squares regression techniques will be used to analyze the impact of the exogenous variables on the endogenous variables of the model.
1.4 HYPOTHESIS OF THE STUDY To carry out this study, the following hypothesis would be formulated;
1. H 0 (Null Hypothesis): That Nigeria’s foreign investment inflow has no significant impact on the development of the Nigeria economy.
H 1 (Alterative Hypothesis): That foreign investment inflow has a significant impact on the development of the Nigeria economy
1.5 SCOPE AND LIMITATION OF THE STUDY
The primary objective of this paper is to find the main determinants of foreign investment 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 21years (1984-2004).
This study is limited to the determinants of foreign investment in Nigeria . A major constraint of the study is the short time needed to complete this study and problem of consistent and accurate data.
SECTION TWO 2.1 FOREIGN PRIVATE INVESTMENT: MEANING AND RATIONALE
Foreign private investment (FPI) is a major component of international capital flows. According to Thirwall (1994), FPI refers to investment by multinational companies with headquarters in developed countries. This investment involves not only a transfer of funds (including reinvestment of profits) but also a whole package of physical capital, techniques of production, managerial and marketing expertise, products, advertising and business practices for maximization of global profits.
It is common in literature to observe that foreign direct investment (FDI) and foreign private investment (FPI) are used interchangeably. This perhaps explains why the International Monetary Fund’s Balance of Payment Manual defines foreign direct investment as ‘investment made to acquire a lasting interest in a foreign enterprise with the purpose of having effective voice in its management’. Another institution, WTO(1996) also observes that FDI occurs when investor based in one country acquires an asset in another country with the intent to manage that asset. FPI, therefore, should be seen as the sum of the following components;
a. New equity from the foreign company in the one country to the company in the host country.
b. Reinvested profits earned from the company; and
c. Long and short term net loans from the foreign to host country.
FPI is a two- way flow. The rationale must equally be two-dimensional recognizing the fact that two sets of interest are involved in FPI: interest of the foreign investors, and that of the host countries. World Bank (1997) observes that both domestic and international structure forces were driving private investment to developing countries since the early 1990s. In industrial countries, the primary forces revolve around the search for higher returns, and opportunities for risk diversification. While looking out for higher returns as well as avenues to diversify their risk at home, two other key developments in industrial countries reinforce the desire of foreign investors to look outwardly. First, competition and rising cost in domestic markets, along with falling transport and communications costs encourage foreign firms to look for opportunities to increase efficiency and returns by producing abroad. This has led to the progressive globalization of production and to the growth of “efficiency-seeking" FPI flows. Second, the transformation of financial markets from relatively insulated and regulated national markets to a more globally integrated market. This happens as a result of a mutually reinforcing process of advances in communications, information, and financial instruments and by progressive internal and external deregulation of financial markets. In developing countries, enabling environment for FPI has equally developed. Since the mid-1980s, a lot of countries have embarked on structural reform programs leading to increased openness of their economies. Examples of these reforms include: the progressive lowering of barriers to trade and foreign investment; the liberalization of domestic financial markets and removal of restrictions on capital movements; and the implementation of privatization programs, thus strengthening the relevance of private sector in economic growth and development process in developing countries.
Apart from the creation of enabling environment for FPI in both industrial and developing countries, Feldstein (2000) argues that a number of advantages accrue to developing countries through FDI inflows. They include:
a. FDI allows the transfer of technology, particularly in the form of new varieties of capital inputs, which cannot be achieved through financial investment or trade in goods and services. Consequent upon technology transfer, it is possible also that FDI can promote competition in the domestic input market.
b. Recipients of FDI often gain employee training in the course of operating the new businesses, which directly contributes to human capital development in the host country.
c. Profits generated y FDI contributes to corporate tax revenues in the host country.
Despite the rationales behind FPI, particularly those that are on the side of the developing countries, some studies have revealed that developing countries should be cautious about taking too uncritical an attitude toward the benefits of FPI. It is sometimes feared whether FPI contributes to the broader aspect of development and the distribution of income in host economies. Likely reasons for caution are better examined within the framework of the link between FPI and economic growth. This is the concern of the next section.
2.2 FOREIGN PRIVATE INVESTMENT AND ECONOMIC GROWTH
Economic growth results from accumulation of factors of production of from improvements in technology or both. Economic theory provides two approaches to studying the link between FPI and economic growth of the host countries. The first approach is rooted in the standard theory of international dates back to macdougall (1960). It involves a partial equilibrium comparative- static approach put in place to examine how marginal increments in investment from abroad are distributed. From this approach, it is believed that inflows of foreign capital–whether in the form of FPI or portfolio capital will raise the marginal product of labour and reduce the marginal product of capital in the host country. Beyond this, Macdougall argues that FDI may be connected to other potentially important benefits:
The most important direct gains…from more rather than less private investment from abroad seem likely to come through higher tax revenue from foreign profits (at least if the higher investment is not induced by lower tax rates), through economies of scale and through external economies generally, especially where (domestic) firms acquire ‘know-how’ or are forced by foreign competition to adopt more efficient methods. (Macdougall 1960:34)
The second approach departs from trade theory of industrial organization, and was pioneered by Hymer (1960). Other contributors include Kindleberger (1969), Vernon (1966), Caves (1971), Dunning (1973), and Buckley and Casson (1976), among others. This approach begins with an examination of why firms undertake investment abroad to produce the same goods as they produce at home. Kindleberger (1966) argue that for direct investment to thrive, there must be some imperfections in markets for goods and factors, including technology, or some interference in competition by government or by firms, which separates markets. This is being so, to be able to invest in production in foreign markets, a firm must possess some asset(for example, product and process technology or management and marketing skills) that can be used to profitably in the foreign affiliates. Firms investing abroad therefore represent something more than a simple import of capital into a host country to include diffusion of technology and knowledge, as well as impacting on market structure and competition in host countries. This sums up the indirect effects of FPI inflows.
Noorbakhsh et al.(2001) observed that, the less developed a country is, the greater are usually the expectations it places on FDI to alleviate it resource and skill constraints. Incidentally, Saggi (2002) observe that there are several important caveats to the expectation of positive impact of FDI on most countries. First, a positive correlation between the extent of FPI and economic growth in cross-country regressions may simply reflect this fact: that countries that are expected to grow faster attract FDI because it yields higher returns there. This implies that the causation could run from growth to FDI suggesting the need to estimate a simultaneous equation system to resolve the issue of which one causes the other.
Second, Multinational Corporation are in the habit of raising the required capital in the host country. When this is done, capital inflows with FDI may not be substantial after all. An optimistic view of FDI would then be restricted to technology transfer and/or spillover as the likely mechanism through which FDI may affect growth. Along this line, it is also argued that FDI can have a positive effect o growth in developing countries by helping them bridge the idea gap with respect to industrial countries.
Although, economic theory and empirical evidence suggest that FDI has a beneficial impact on developing host countries, a number of studies have equally observed some potential risks associated with FDI. For example, Hausmann and Fernandez-Arias (2000) connect a high share of FDI in total capital inflows to a sign of a host countries weakness rather than strength. They observe that the share of FDI flows in total inflows is higher in riskier countries, with risk measured by countries credit ratings for government debt or by other indicators of country risk. This supports the argument put forward earlier that, FDI is more likely than other forms of capital flows in countries with missing or inefficient markets since such phenomenon creates rent- seeking opportunities to foreign investors.
It is obvious that there is no consensus yet in the literature regarding the growth or welfare effect of FDI, particularly in the host economies. It is indeed worthy to mention that many studies of African economies show that the impact of FDI is limited or even negative sometimes. In studies of countries such as Cote d’Ivore (Mansini et al. 1971) or Nigeria (Onimode et al. 1983) where FDI were directed to import substituting firms, the value of imports was observed to be greater than the value added produced. This type of FDI would have given rise two a twofold foreign exchange cost: outflows of investment income and the cost of imported inputs.
SECTION THREE
3.1 DETERMINANTS OF FOREIGN INVESTMENT
Existing literature on FDI shows that several frameworks have been employed to analyze the determinants of FDI. To date, the most comprehensive framework is the one known as ‘eclectic theory’ of Dunning (1981) because of its flexibility and increasing popularity. The theory argues that FDI is determined by three sets of advantages namely:
a. Firm specific (or ownership) advantages (Hymer1960): this set of advantages gives a firm competitive advantage in global markets, including, technological assets, product differentiation, management skills, production efficiencies, size and concentration.
b. Internalization advantages (Buckley and Casson, 1976): these advantage exist when the internalization of cross-border transactions within a firm becomes more efficient form of servicing markets than arm’s length transaction. Put differently, it is the sum of commercial benefits accruing from an FDI or intra-firm activity rather than an arm’s length or licensing relationship.
c. Location advantages ( Vernon , 1966): these occur when the local conditions of potential host countries make them a more attractive site for FDI operations than the home country. These advantages include large markets, lower costs of resources or superior infrastructure, among others.
Akinkugbe (2003) argues that locational advantages constitute what earlier theoretical and empirical studies classified as ‘pull-factor’. The ‘pull-factor’ examines the relationship between host-country specific conditions and the inflow of FDI. At the center of locational advantages is the belief that, there is some specific advantage to the investor, which makes the return on investment sufficient to warrant the additional risk and uncertainty that accompanies investment outside the familiar home environment. In the case of natural resources, the incentives to FDI is clear: mineral deposit, forests and fisheries do not move to world financial centers, companies must move to them. This explains the belief that FDI is a product of rent-seeking on a global scale. Under this ‘pull-factor’, FDI is either classified as import-substituting; export-increasing or government initiated (Moosa 2002).
As to the ‘pull-factor’, Akher (1993) posits that host-country specific conditions might embrace a number of socioeconomic and political factors within a country where FDI is made. These factors tend to determine available business opportunities and pending political threats within the host countries. Among others the socioeconomic and political factors commonly cited in this strand of the FDI literature include:
v Availability of natural resources
v Infrastructure
v Market size
v Level of human capital development
v Distance from major markets
v Labour cost
v Openness of the economy of international trade
v Exchange rate
v Fiscal and non-tax incentives
v Political stability
v Monetary policies and the extent of liberalization of otherwise of the financial sector
v Availability of modern information and communication technology
However, there are new FDI determinants:
Ø A favourable FDI environment: this is essentially a transparent and non-discriminatory regulatory environment, effective competition policies and an efficient judicial system. Low and stable tax rates are also important. Fiscal incentives may increase the attractiveness of a country but cannot substitute for lack of a healthy FDI environment.
Ø Low transactions and business costs: these cover investment, labour and trade regulations, entry and exit rules, location and environment regulations, and tax and legal systems. They depend not so much on the rules but on the way rules are implemented in practice and on the skills of the bureaucracy in dealing with the investors, as well as on the legal and judicial system.
Ø Supplier networks and cluster: countries with dynamic local firms have an advantage in that they can attract better ‘quality’ FDI that subcontracts services and components of their production process to local firms.
Ø Support institution and technical services: essential infrastructure facilities include effective quality assurance and testing bodies, meteorology and calibration services, contract research and technical extension help for small and medium scale enterprises.
Ø Human capital: low-cost, unskilled labor is becoming less important. There is a greater demand for qualified human capital with diverse modern skills that can cope with emerging technologies. Equally important are labour market flexibility including the use of expatriate personnel.
Ø Low cost infrastructure: an efficient communication system as well as transportation links within and outside the country are essential to make a country attractive.
3.2 MODEL SPECIFICATION
The specification used follows the theoretical exposition of the various school of thought analyzed in the literature review. But the equation that specify the relationships between foreign investment inflow and economic development is based on the study conducted by Iyoha (2002), using a univariate model which expresses GDP as a specification of foreign investment, the model for this study can be expressed thus;
GDP = a +bFII
Where
GDP = Gross domestic product (a measure of the performance of Nigeria economic).
FII=Foreign investment inflow
SECTION FOUR
4.1 EMPIRICAL ANALYSIS
In the empirical analysis of the impact of international trade as an engine of growth in Nigeria , the method used in the empirical analysis is the Ordinary Least Square (OLS) regression techniques. The data used in this analysis are the Gross Domestic Product (GDP) and foreign investment inflow.
The data for different variables were compiled for a period (1980-2003). To analyze the relationship, we shall make the hypothesis;
i. H 0 (Null Hypothesis): That Nigeria’s foreign investment inflow has no significant impact on the development of the Nigeria economy.
H 1 (Alterative Hypothesis): That foreign investment inflow has a significant impact on the development of the Nigeria economy
4.2 RESULT PRESENTATION
From preliminary Ordinary Least Squares (OLS) regression calculations using the Microfit 4.1 for windows econometric software for PCs and annual regression data for the 1980-2003 period. The final result are reported below, together with the standard diagnostic test result:
LnGDP=6.911 + 0.9316LnEXPT - 0.7331LnEXR - 0.3302LnIMP-0.182LnINF
(5.68) (3.83) (5.03) (2.55) (8.14)
R 2 =0.90635
SEE=0.25255 DW Statistic= 2.1726
F(10,7) = 6.7743 4.3 INTERPRETATION OF RESULT
From the result above, after the first regression using the Microfit 4.1 software for windows, it was found that the partial regression coefficient of all the variables does conform to a priori expectation and fluctuated in different direction.
Clearly from the above result, which was corrected using the cochrane-orcutt method and it converges after 31 iterations.
From the value of the R 2 , it can be concluded that the 4 regressors in the equation explained about 91% of the systematic variation in the dependent variable GDP during the period 1980 – 2003.this, thus represent a good fit.
The F-value of 6.7743 passes the significance test at the 1% level. Thus there is no doubt that there exists a significant linear relationship between GDP and the regressors used.
The signs of the coefficient of the openness (OPN) and inflation (INF) variable conforms to a priori expectation, thus, the more open an economy to the outside world in terms of trade the higher the growth rate of its GDP and also the higher the inflation rate, the lower the growth rate of the GDP.
However, the coefficient of the Export (EXPT), Exchange Rate (EXR), Inflation (INF) and Import (IMP) does conforms to a priori expectation. The positive sign of the export coefficient implies that a 100% growth in GDP will bring about a 93% growth in export, also a 100% growth in GDP will bring about a 73% fall in exchange rate. A 100% growth in GDP will bring about a 33% fall in import, lastly a 100% growth in GDP will bring about an 18% fall in inflation.
The t-values are in parentheses below the coefficients
Testing at a 1% level of significance, all the coefficient of the variables passes the t-test at a 1% level of significance.
This implies that, at a 1% level we shall reject the null hypothesis that Nigeria’s export value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade, that Nigeria’s import value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade, That Nigeria’s exchange rate value does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade, That Nigeria’s inflation rate does not act as an engine of growth in Nigeria i.e. it has no significant impact on international trade.
The computed DW statistic of 2.1 fell in the grey region suggesting that there is no serial correlation.
SECTION FIVE
5.1 SUMMARY AND CONCLUSION
In this paper, an attempt has been made to establish, empirically, the determinants of foreign investment in Nigeria . In addition, the paper systematically examined the relationship between foreign investment and economic growth in a global scale. In the introductory section, the global pattern and trends in foreign private investment flows were analyzed. It was found that sub-Saharan Africa has been receiving only a negligible percentage of foreign private investment flows of developing countries while the east countries have been receiving the lion‘s share.
Section two discusses the concept of foreign investment and the rationale for foreign investment.
In the next section the paper identified and discusses the major macroeconomics issues germane to increasing the quantum of foreign private investment flows into Nigeria in the years ahead.
In the section four, an econometric study of the determinants of foreign investment in Nigeria was undertaken using time series data for the 1984-2003. it was found that…………………
These issues include; implementation of sound macroeconomic policies in the areas of fiscal, monetary, trade, and exchange policies; reduction of the debt overhang; deregulation and liberalization of economic policies; removal of trade and capital controls; increased openness; investment promotion and increased investment incentives; and a resolute attempt to promote political and social stability.
Reference:
Ekpo, A.H. 1997 “foreign direct investment in Nigeria : Evidence from time series data". CBN Economic and financial review, vol 35, no. 1 march
Iyoha, M.A.2000 “policy environment and foreign investment inflow: the nigerian experienced". CBN
Odozi, V.A. 1995. “ An overview of foreign investment in Nigeria : 1960- 1995".
CBN Research Dept occasional paper no. June.
Oyeranti, O.A.(2003) “ foreign private investment: conceptual and theoretical issues". CBN Research Dept occasional paper no. June
CBN statistical bulletin, 2003.
www.cenbank.org
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