FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH IN NIGERIA:AN EMPIRICAL EVIDENCE. Okeke, Rita Chika Anambra State University,Igbariam Campus,

FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH IN NIGERIA:AN EMPIRICAL EVIDENCE Okeke, Rita Chika Anambra State University,Igbariam Campus, Ezeabasili,...
Author: Rudolph Walters
0 downloads 1 Views 201KB Size
FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH IN NIGERIA:AN EMPIRICAL EVIDENCE Okeke, Rita Chika Anambra State University,Igbariam Campus, Ezeabasili,Vincent Nnanyereugo Anambra State University,Igbariam Campus, And Nwakoby,Clement Ndukaife Ikechukwu Nnamdi Azikiwe University Awka Abstract This study examines the impact of Foreign Direct Investment inflows on the growth of Nigerian economy. from 1977 – 2011. The ADF result shows that all the variable in the study are stationary. Again the cointegration test shows that there is a long run relationship between the variables in the study. The data for the study was tested for unit root using Augmented Dickey –Fuller (ADF) test. Econometric evidence further shows that FDI has positive relationship with economic growth in Nigeria. It is recommended that Nigeria evolve investor friendly policies that can attract foreign direct investments and enhanced the country’s productivity and growth. Key words: Foreign Direct Investment, Economic Growth and Regression. 1. INTRODUCTION Foreign direct investment (FDI) has is perceived as one of the most important strategies for the promotion of economic growth and development in developing countries such as Nigeria. This is because FDI can serve as catalyst for growth by increasing the opportunity for developing the countries integration into global financial and capital flows, expand employment and export base, generate technological capability-building and efficiency spillovers to local firms, as well as establish investment arrangements that increase the potential of host countries for economic growth (Olayiwola &Okodua, 2007). The perception of FDI role in retarding the development of domestic industries for export promotion had engendered hostility to multi-national companies and their direct investments in many countries. But this view started diminishing when it was obvious that savings rate in such developing countries is lower than the required investments that can induce higher growth rates in the economy. Consequently, the consensus now is that FDI is an engine of growth as it plays catalytic role by providing the much needed capital inflow for investment in the host country industries and aids local firms to become more productive by adopting more efficient technologies. The Nigeria government in its efforts to attract the inflow of FDI made several policies. For instance, in 1995 the laws deemed to be hostile to foreign investment growth such as Nigerian Enterprises Promotions Act which hitherto regulated the extent and limits of foreign participation in divers sectors of the economy were repealed in 1995. The federal government of Nigeria and the monetary authority have also adopted several policies, strategies and innovations to open up the economy improve infrastructural facilities, provide tax inducement like tax holiday for infant industries, reduction in import tariff etc, to improve the 30

inflow of foreign direct investment into the Nigerian economy. But the pertinent question here is whether these measures have improved the FDI’s impact positively on the Nigerian Economy. There is a general concession by economists and policy makers that the flow of FDI in an economy spurs economic activities which engenders growth in such economy. However, while some of the empirical studies in the literature such as ones conducted by Saibu, Wosa & Agbeluyi, (2011), Awe (2013), Saqib , Masnoon & Rafique (2013), Yaqub, Adam & Ayodele (2013 posit that there is a negative relationship between FDI and economic growth, some other studies conducted by Oyatoye, Arogundade, Adebisi & Oluwakayode (2011), Ahmed, Hayat, Luqman & Ullah (2012, Babalola, Dogon-Daji & Saka (2012), Osinubi and Amaonyeodiwe (2010), Izuchukwu and Huiping (2011) and Hassen and Anis (2012) show that there is positive relationship between FDI and economic growth. These conflicting views on the relationship FDI and economic growth further creates knowledge gap in this subject area and therefore necessitates further systematic examination of the relationship between the variables in the model specified. The rest of the paper is structured thus: following the introduction in section 1 is the theoretical framework and Literature in section II. Section III is the model specification and the analytical techniques; section IV contains data presentation and analysis while section V is conclusion. 2. Theoretical Framework Companies can enter a foreign market through exporting or foreign direct investment (FDI). Exporting is a relatively low-risk and simple vehicle with which to enter a foreign market because it does not involve actual presence in the target market. Foreign direct investment (FDI) involves investment in a manufacturing facility, service provision facility, or other assets in a foreign market over which the firm maintains control. (Anyanwu, 1993) Dudas (2010) identified three popular theories of FDI as follows: a. Capital Market Theory: This theory stressed that the level of FDI that flows to a country is a function of the prevailing interest rate in the country and changes in the macroeconomic environment. b. Exchange Rate Theory: Proponents of this theory opined that level of FDI that flows into a country is determined by the level of exchange risk prevailing in the country and accordingly, multinationals will direct their capital to geographical region they perceive that their exchange risk will be minimal hence FDI is provoked by innovation. c. Gravity Approach to FDI: This theory states that the level of FDI flows between the countries will be a function of how close these countries are to each other. Put differently, the closer (geographically, economically, and culturally) two countries are, the more the flow of FDI between them. d. Life Cycle Theory: This theory opined that there is positive correlation between product life cycle and the FDI flows. Here FDI can be seen mostly in the phases of maturity and decline. Terumoto Ozawa is a major figure among the proponents of Japanese FDI theories. Most of these theories were developed in the 1970s. (Dudas, 2010) analysed the relationship of FDI, competitiveness and economic development based on the ideas of Michael Porter. He identified three main phases of development in relation to the waves of FDI inflow and outflow from a country. They are: Phase I: At this phase, the country is underdeveloped and is targeted by foreign companies wanting to use its potential advantages (especially low labour costs) and there is almost no outgoing FDI 31

Phase II: Here new FDI is drawn by the growing internal markets and by the growing standards of living and the outgoing FDI are motivated by the rising labour costs Phase III: This phase is characterised by competition driven by innovation and incoming and outgoing FDI are motivated by market and technological factors. John Dunning developed what he called Five Stage Theory of FDI. The features of the stages are as follows: Stage I: At this stage, there are usually low incoming FDI, but foreign companies are beginning to discover the advantages of the country and no outgoing FDI – no specific advantages owned by the domestic firms Stage II: At this stage, the country will be witnessing growing incoming FDI due to the advantages of the country - especially the low labour costs. The standards of living are rising which is drawing more foreign companies to the country but there is still low outgoing FDI Stage III: There is still strong incoming FDI, but their nature is changing due to the rising wages. At this stage, the outgoing FDI are taking off as domestic companies are getting stronger and are developing their competitive advantages. Stage IV: At this stage, outgoing FDI seeking advantages abroad (low labour costs) are becoming stronger. Stage V: At this level, flows of outgoing and incoming FDI come into equilibrium. Types of FDIs Jere Behrman, using objectives as a criterion, identified four types of FDIs: they are: a. Resource seeking FDI: Here, the MNCs venture abroad in search of natural resources e.g. minerals, raw materials, or lower labour costs. For example, a German company opening a plant in Slovakia to produce and re-export to Germany due to availability and low cost of resource input in Slovakia. b. Market seeking FDI: In this type, the MNCs are driven by the need for new markets. Here they seek to identify and exploit new markets for their finished products. This type explained why companies like PZ and Unilever venture in Nigeria and other African countries c. Efficiency seeking FDI: here the MNCs seek to restructure its existing investments so as to achieve an efficient allocation of international economic activity of the firms. This can come in form of international specialization whereby firms seek to benefit from differences in product and factor prices and to diversify risk and resource saving and improved efficiency by rationalizing the structure of their global activities. d. Strategic asset/capabilities seeking FDI: MNCs pursue strategic operations through the purchase of existing firms and/or assets in order to protect some specific advantages and thereby sustain or advance its global competitive position. Empirical Literature The empirical works by Olayiwola & Okodua (2007) examined the dynamic interaction among FDI, non-oil exports, and growth of the Nigerian economy. Econometric evidence revealed that a unidirectional causality runs from FDI to non-oil exports. Macaulay (2009) examined how FDI impacts on economic growth in Nigeria. The result of the study shows that there exist a positive relationship between FDI and economic growth, hence it commended among other things, that there should be policies and programmes that will promote or improve FDI in the economy. Erhieyovwe and Jimoh (2012) assessed the direction of causality between foreign direct investment and Economic growth in Nigeria. The study found that economic growth (GDP) does not granger cause foreign direct investment (FDI) in Nigeria. Also Adeniyi, Omisakin, Eqwaikhide & Oyinlola (2012) further examined the causal linkage between foreign direct investment(FDI) and economic growth - in Cote’ d’Ivoire, Gambia, Ghana, Nigeria and Sierra Leone -with financial development accounted for over the period 32

1970-2005, within a trivariate framework which applies granger causality tests in a vector error correction(VEC) setting. It was discovered that the extent of financial sophistication matters for the benefits of foreign direct investment to register on economic growth in Ghana, Gambia and Sierra Leone depending on the financial indicator used. Nigeria, on the other hand, displays no evidence of any short- or long-run causal flow from FDI to growth. Oyatoye, Arogundade, Adebisi & Oluwakayode (2011) examined the possible impact and relationship between foreign direct investment, and economic growth in Nigeria from 1987 to 2006. The study revealed that there is a positive relationship between foreign direct investment and gross domestic product (GDP). The result further showed that one naira increase in the value of direct foreign investment (DFI) will lead to N104.749 increase in GDP. Siabu, Wosa & Agbeluyi (2011) examined the effects of financial development and foreign direct investment on economic growth in Nigeria. The study modified the standard endogenous model to incorporate foreign direct investment and financial development as the determinant of growth in the long run using time series data from 1970 to 2009. The result shows that financial development and foreign direct investment had negative effects on economic growth in Nigeria. The result further shows that the effect of foreign direct investment differed significant when different measures of financial market variables are used. Ahmed, Hayat, Luqman &Ullah (2012) investigates the relationship between foreign direct investment and economic growth in Pakistan. Econometric results of the study suggest that there is a positive relation between foreign direct investment and gross domestic product in short as well as long run. Imoudu (2012) investigated the relationship between foreign direct investment (FDI) and economic growth in Nigeria between 1980-2009 through the application of Johansen Cointegration technique and Vector Error Correction methodology in which FDI is disaggregated into various components. Similarly, it examines the determinants of FDI in Nigeria. The result of the study shows that the impact of the disaggregated FDI on real growth in Nigeria namely: agriculture, mining, manufacturing and petroleum sectors is very little with the exception of the telecommunication sector which has a good and promising future, especially in the long run. Another work by Awe (2013) examined the impact of foreign direct investment on economic growth in Nigeria during the period 1976 – 2006. The study reveals a negative relationship between economic growth and Foreign Direct Investment (FDI) as a result of insufficient FDI flow into the Nigerian economy. Saqib, Masnoon & Rafique (2013) investigated the nature of the relationship between FDI and economic growth using data from Pakistan that spanned over the period of 1981 to 2010. The result of the study revealed that Pakistan’s economic performance is negatively affected by foreign investment while its domestic investment has benefitted its economy. Again Babalola, Dogon-Daji & Saka (2012) examined the relationship among exports, Foreign Direct Investment (FDI) and economic growth in Nigeria over the period 1960-2009. It was recommended that Nigeria needs reforms/policies that will create enabling environment for FDI inflows and export growth. Osinubi and Amaghionyeodiwe (2010) study analyzed the direction and significance of the effect of foreign private investment on economic growth in Nigeria. It was found that Foreign Private Investment, Domestic Investment growth and Net Export growth were positively related to economic growth in Nigeria. Yaqub, Adam & Ayodele (2013) examined the impact of FDI on economic growth in Nigeria, using Vector Auto-regression (VAR) modeling to capture the structure of inter-relationships among relevant variables. The empirical evident shows that FDI does not granger cause economic growth. Moreover it could not be 33

established whether FDI is a statistically an important determinant of real GDP in Nigeria and that growth in real GDP is mostly explained by its own shocks. Dutse (2008) explored the link between FDI and technology transfer to foreign subsidiaries and spillover to Nigeria’s domestic firms. The study concludes that FDI can facilitate economic growth in Nigeria by generating both technological and efficiency spillovers to local firms, encouraging innovation, allowing technology adoption and development. Further studies by Izuchukwu and Huiping (2011) empirically analyzed the contribution of foreign direct investment to the Nigeria economy. The findings of the study reveal that there is a positive relationship between GDP and government expenditure, foreign direct investment and labor force between periods of 1980 to 2009. Hassen and Anis (2012) studied the impact of foreign direct investment (FDI) on the economic growth of Tunisia using recent techniques of time series analysis over the period 1975-2009. The results thus suggest that FDI could help boost the process of long-term economic growth. III. Analytical Techniques The study adopted the analytical research design to study the contributions of FDI inflows on Nigerian economic growth. To achieve the stated objectives of the study, annual time series data of the variables in the model adopted were used. The data were sourced from the Central Bank of Nigeria’s Statistical Bulletin (2012). The period covered by the study is 1977 –2011. Only the inflow of funds was considered for FDI whereas GDP alone was used as a measure of economic growth. Other variables considered in the study are; Rate of inflation, provision of infrastructure, government size in the economy represented by its expenditure, openness of the economy measured by total trade in the economy, and finally, the total export of goods in the economy. The variables are selected as they relate to foreign direct investment and economic growth in one way or the other. 3.5 Model Specification The model for the study is stated thus: GROWTH = F (FDI, INFRA, INF, TT, EXP, EXPEND) Where,  GROWTH = Growth represents National economic growth measured by the growth rate of real Gross Domestic Output (GDP)  FDI = foreign direct investment defined as (FDI/GDP*100), that is, FDI growth rate.  INF = Inflation rate  INFRA = government expenditure on the provision of infrastructure in the economy.  TT= Total trade in the economy.  EXPT= total export of the economy  EXPEND = Total Government expenditure The equation now becomes: GROWTH = β0 + β1FDIt + β2EXPt + β3 INFRAt + β4INFt + β5TTt + β6EXPENDt + εi -- -- --- -- -- -- -- -- eqn 1 Where, β0 = intercept β1, β2, β3, β4, β5, β6 are coefficients of the equation. Apriori expectation is that β1- β6 > 0 Method of Data Analysis The first stage in the analysis was graphical analysis of the trend in the inflow of FDI into the country. Bearing in mind that non-stationary data usually produce spurious result, the data for the study was tested for stationarity using Augmented Dickey Fuller test. There variables for 34

the study were also tested for long run relationship using Johasens Co integration test. The estimation of the model formulated for this study was done using Ordinary Least square Regression (OLS). IV. DATA PRESENTATION AND ANALYSIS Analysis of the Level of Foreign Direct Investment Inflow to Nigeria Figure 1 below is a graphical representation of the movement in the inflow of FDI into Nigeria from 1977 to 2011. In 1977 the value of FDI that was attracted to Nigeria was N829, 390,000.50. It increases to N 2,112,650,000.00. It then went up to N 3,857,620,000.00 in 1997 then it increased to N, 364,009,000,000.00 in year 2007. The trend in the movement of the FDI inflows from 1977 to 2011 suggests that there was a fluctuating pattern in the attraction of foreign investors into the economy. Level of FDI inflows into Nigeria from 1977 to 2011

Figure 1

35

The data collected for the study was tested for stationary using Augmented Dickey Fuller Test. The result of the test is recorded in Table 1. The result shows that all the variable of the study are stationary at difference except Foreign Direct Investment that was stationary at level hence the estimation of the model was done at difference. Testing for Long-Run Relationship among the variables for the Study Table 2 Unrestricted Cointegration Rank Test (Trace) Hypothesized Trace 0.05 Critical No. of CE(s) Eigenvalue Statistic Value Prob.** None * 0.824085 191.6777 125.6154 0.0000 At most 1 * 0.705062 136.0696 95.75366 0.0000 At most 2 * 0.641861 96.99784 69.81889 0.0001 At most 3 * 0.577355 64.13918 47.85613 0.0007 At most 4 * 0.459511 36.58008 29.79707 0.0071 At most 5 * 0.355042 16.89111 15.49471 0.0306 At most 6 0.085408 2.856881 3.841466 0.0910 Trace test indicates 6 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values Unrestricted Cointegration Rank Test (Maximum Eigenvalue) Table 3 MaxHypothesized Eigen 0.05 Critical No. of CE(s) Eigenvalue Statistic Value Prob.** None * 0.824085 55.60812 46.23142 0.0038 At most 1 0.705062 39.07173 40.07757 0.0646 At most 2 0.641861 32.85866 33.87687 0.0658 At most 3 0.577355 27.55910 27.58434 0.0504 At most 4 0.459511 19.68897 21.13162 0.0786 At most 5 0.355042 14.03423 14.26460 0.0543 At most 6 0.085408 2.856881 3.841466 0.0910 Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level * denotes rejection of the hypothesis at the 0.05 level **MacKinnon-Haug-Michelis (1999) p-values The co-integration test result reported in tables above shows that there is a long run relationship between the variables in the study. While Trace test shows that there are six cointegration equations, Eigen value test shows evidence of at least 1 co-integration equation.

36

Estimation of the Regression Model Table 4. - OLS RESULT Variable

Coefficient

Std. Error

t-Statistic

Prob.

EXP1

162753.7

46066.28

3.533033

0.0015

EXPEND1

-36222.94

56076.61

-0.64596

0.5238

FDI1

-42545.43

260713.2

-0.16319

0.8716

INF1

2585.079

18072.58

0.143039

0.8873

INFRA1

62067.05

289478.2

0.21441

0.8318

TT1

-117079.9

24424.43

-4.79356

0.0001

C

883653.5

270459.6

3.267229

0.003

R-squared Adjusted Rsquared

0.476495

Mean dependent var

1103167

0.360161

S.D. dependent var

1901854

S.E. of regression Sum squared resid

1521292

Akaike info criterion

31.48926

6.25E+13

Schwarz criterion

31.80351

Log likelihood

-528.3174

Hannan-Quinn criter.

31.59643

Durbin-Watson stat

1.019783

F-statistic Prob(F-statistic)

4.095906

0.004759

The ordinary least squares (OLS) results obtained using the model specified is shown in Table 4 above. From the result, it is evident that there is positive relationship between export, inflation rate and provision of infrastructure and economic growth in Nigeria. On the other hand, there is negative relationship between government expenditure, foreign direct investment and total trade and economic growth. These undoubtedly negate a priori expectation. The Durbin Watson value of 1.02 implies existence of serial correlation. There is likelihood of positive first order serial correlation. The results show that the adjusted coefficient of determination (AdjR2) is 0.36. This indicates that about 36% of changes in economic growth are accounted for by the variables in the model. 5. Conclusion The study examines the impact of FDI on economic growth in Nigeria between 1977 to 2011. After testing for the units root in the set of data used for the study, econometric results shows that Foreign Direct Investment and other variables in the study have no significant effect on Nigeria economy. This suggests that FDI inflows into Nigeria may not have been an economically viable investment or properly channelled to productive economic activities. Based on the findings of this study, the following recommendations are put forward: First, the government should ensure that the foreign investment into the country are ones that can lead to sustainable transfer of technology, creation of jobs, and improvement in the national income. Second, since infrastructural development has positive relationship with the GDP, improvement in the infrastructures that can reduce the cost of doing business in Nigeria is required to attract more FDI inflows and boost the rate of economic growth. Third,

37

appropriate policy measures should be formulated and implemented to boost increased economic growth and thereby bring about improvement in foreign direct investment REFERENCES Adeniyi O, and Omisakin O, Egwaikhide F.O & Oyinlola A (2012). Foreign Direct Investment, Economic Growth and Financial Sector Development in Small Open Developing Economies. Economic Analysis & Policy, Vol. 42 No. 1, pp. 105-127 Ahmad N, Hayat M.F ,Luqman M & Ullah S (2012). The Causal Links between Foreign Direct Investment and Economic Growth in Pakistan. European Journal of Business and Economics, Vol. 6, pp. 21-22 Anyanwu J.C (1993). Monetary Economics, Theory, Policy and Institutions. Hybrid Publisher Limited, Onitsha. Awe A.A (2013). The Impact of Foreign Direct Investment on Economic Growth in Nigeria. Journal of Economics and Sustainable Development, Vol.4, No.2, pp 122-133 Babalola S.J, Dogon-Daji S.D.H & Saka J.O (2012). Exports, Foreign Direct Investment and Economic Growth: An Empirical Application for Nigeria. International Journal of Economics and Finance Vol. 4, No. 4; pp. 95-105 Central Bank of Nigeria (2012) Statistical Bulletin Abuja: Central Bank of Nigeria, vol 12 Dudas I.C (2010). Main Theories of FDI Retrieved on 15th March 2013 from fmv.euba.sk/files/main_theories_of_fdi_ppt. Dutse A.Y (2008). Nigeria’s Economic Growth: Emphasizing the Role of Foreign Direct Investment in Transfer of Technology. Communications of the IBIMA Vol. 3, pp. 7683 Erhieyovwe E.K and Jimoh E.S (2012). Foreign Direct Investment Granger and Nigerian Growth. Journal of Innovative Research in Management and Humanities Vol. 3 No. 2, pp. 132-139. Hassen S & Anis O (2012).Foreign Direct Investment (FDI) and Economic Growth: an approach in terms of cointegration for the case of Tunisia. Journal of Applied Finance & Banking, vol.2, no.4, pp. 193-207 Imoudu E.C (2012). The Impact of Foreign Direct Investment on Nigeria’s Economic Growth 1980-2009: Evidence from the Johansen’s Cointegration Approach. International Journal of Business and Social Science Vol. 3 No. 6; [Special Issue -March 2012] pp. 122- 134 Izuchukwu O & Huiping H (2010). An Empirical Analysis on the Contribution of Foreign Direct Investment on Nigeria Economy. Proceedings of the 8th International Conference on Innovation & Management Retrieved 3/4/13 from Macaulay E. D (2009). Foreign Direct Investment and the Performance of the Nigerian Economy, Proceedings of the 1st International Technology, Education and Environment Conference published by African Society for Scientific Research (ASSR) and Human Resource Management Academic Research Society, pp 629 – 633

38

Olayiwola K & Okodua H (2007). Foreign Direct Investment, Non-Oil Exports, and Economic Growth in Nigeria: A Causality Analysis. Retrieved on 4/4/13 from http://www.unctad.org Osinubi T.S & Amaghionyeodiwe L.A (2010). Foreign Private Investment and Economic Growth in Nigeria. Review of Economics and Business Studies, Vol. 3, Issue 1, pp. 105-127 Oyatoye, E. O., Arogundade, K. K, Adebisi, S. O & Oluwakayode, E. F (2011). Foreign Direct Investment, Export and Economic Growth in Nigeria. European Journal of Humanities and Social Sciences Vol. 2, No.1, pp 67-86 Saibu O.M, Wosa P and Agbeluyi A.M (2011). Financial Development, Foreign Direct Investment and Economic Growth in Nigeria. Journal of Emerging Trends in Economics and Management Sciences (JETEMS) Vol. 2, No. 2, pp. 146-154 Saqib N, Masnoon M & Rafique N (2013). Impact of Foreign Direct Investment on Economic Growth of Pakistan. Advances in Management & Applied Economics, vol.3, No.1,pp. 35-45 Yaqub J.O, Adam S. L.& Ayodele J (2013). Foreign Direct Investment and Economic Growth in Nigeria: An Empirical Analysis. American Academic & Scholarly Research Journal Vol. 5, No. 1, pp. 74- 82

39

Suggest Documents