IMPACT OF FOREIGN DIRECT INVESTMENT ON THE ECONOMIC GROWTH IN NIGERIA (1986-2010)

IMPACT OF FOREIGN DIRECT INVESTMENT ON THE ECONOMIC GROWTH IN NIGERIA (1986-2010)

Chapter one

INTRODUCTION

1.1 Background of the Study.

Foreign Direct Investment (FDI) is classified in a variety of ways. For example, FDI has been defined as an investment made to acquire a long-term managerial interest (for example, 10% of voting stock) and at least 10% of equity shares in a company operating in a country other than the investor’s own (Mwillima, 2003). Policymakers believe that FDI has a positive impact on host economies.

Some of these advantages include externalities and the use of foreign technology (Alfaro et al, 2006). According to Alfaro et al. (2006), multinational companies (MNEs) transfer technology and management expertise to domestic firms.

When FDI is made in high-risk regions or new industries, economic rents are formed that benefit old technologies and new management styles. According to development economists, the integration of developing nations into the global economy rose dramatically in the 1990s as a result of changes in national economic policies and the removal of trade and investment obstacles.

Most governments aim to attract foreign direct investment (FDI) due to its well-known benefits as a tool for economic development. Africa, particularly Nigeria, has joined the rest of the globe in seeking FDI, as indicated by the development of the New Partnership for Africa’s Development (NEPAD), which includes attracting foreign investment to Africa as a major component.

FDI is expected to assist a poor country like Nigeria not only through greater domestic investment, but also through job creation, knowledge transfer, improved local competitiveness, and other positive externalities (Ayanwale, 2007).

Nigeria is one of the economies with high demand for products and services, and it has received some FDI over the years. FDI inflows into Nigeria were estimated at US$2.23 billion in 2003, rising to US$5.31 billion in 2004, marking a 138 percent rise. In 2005, the value increased to $9.92 billion, representing an 87 percent rise.

The sum, however, fell marginally to US$9.44 billion in 2010/11. The question is, does FDI contribute to Nigeria’s economic growth? If FDI actually contributes to growth, then FDI sustainability is a worthwhile activity, and one way to achieve it is to identify the factors that contribute to its growth and improve them.

This is especially true given that Africa, particularly Nigeria, is undoubtedly experiencing an economic crisis characterised by insufficient resources for long-term development, low capacity utilisation, a high level of unemployment, a high poverty rate, a high level of insecurity, and Millennium Development Goals (MDGs) that are becoming increasingly difficult to achieve by 2020.

In fact, one of the foundations of the New Partnership for Africa’s Development (NEPAD) was to boost accessible capital to US$64 billion through a combination of reforms, resource mobilisation, and an FDI-friendly environment (Funke and Nsouli, 2003).

Nigeria, with its natural resource base and vast market size, qualifies as a major recipient of FDI in Africa, and is among the top three main African countries that have continuously received FDI over the last decade.

Despite the vast amount of literature in this field of study, the empirical link between FDI and economic growth in Nigeria remains unclear (Akinlo 2004).