EFFECTS OF FOREIGN INVESTMENT INFLOWS ON MACROECONOMIC PERFORMANCE IN NIGERIA (1987-2012)

ABSTRACT

This study investigated the causal relationship between foreign investment inflows disaggregated into foreign direct investment and foreign portfolio investment inflows and macroeconomic performance in Nigeria. Most emerging economies around the world strive to attract foreign investment inflows because of the gap between the domestic savings and investment especially into the real sectors of theireconomies. This ismost probably because, foreign investment inflows are seen as an amalgamation of capital, technology, marketing and management of resources which are useful in harnessing host country resources. Since globalization, the flow of foreign investments into emerging economies has increased and the debate on the effect of these foreign investment inflows on macro economic performance has also intensified. Nigeria is one of the largest beneficiaries of foreign direct investment (FDI) and foreign portfolio investment (FPI) in sub-Saharan Africa. Yet their impact on macroeconomic performance has not been fully ascertained. It is, therefore, against the foregoing that this study sought to examine the effect of total foreign investment inflows on gross domestic product, exchange rate, inflation rate and interest rate in Nigeria. The study adopted the ex-post facto research design. Annual time series data for 26 years for the period, 1987 – 2012 were sourced from the Central Bank of Nigeria (CBN) statistical bulletin. Four hypotheses were formulated and tested using the ordinary least square (OLS) regression method. The results revealed that total foreign investment inflows had positive and significant effect on gross domestic product in Nigeria;foreign direct investment had negative impact on exchange rate while foreign portfolio investment had positive impact on exchange rate. Again, total foreign investment inflows have positive and insignificant impact on inflation whereas foreign direct investment had positive impact on interest rate and foreign portfolio investment had a negative impact on interest rate. The study recommends, among others, that incentives such as tax holidays should be used to direct foreign investment inflows towards non-oil real sectors of the economy in order to boost export. This will obviously lead to strongerexchange rate, lower inflation, and encourage competitive interest rate which will encourage savings and sustainable economic growth.

CHAPTER ONE

INTRODUCTION

1.2      BACKGROUND TO THE STUDY

Globalization is the process through which economies, societies and cultures relate through trade, transportation and communication. Economic theory clearly points to the tremendous potential advantages of cross-border capital flows.Neoclassical economists support the view that capital flow is beneficial because they create new resources for capital accumulation and stimulate growth in developing economies with capital shortages. Various types of these flows are welcomed to bridge the gap between domestic saving and investment that accelerate growth. Capital flow play significant role in economics. Finance is the life blood of any enterprise. With sufficient finance, an entrepreneur can get other factors of production such as labor, machinery/technology, management as well as raw materials and be involved in any other business activity (Okafor and Arowshegbe, 2011). According to Fuch-Schtindekn and Herbert (2001), foreign investments usually have absolute impact on domestic investment, and the productivity of investment, technology overflow, and household financial development. Fitzgerald (1998) theoretically argues that higher capital inflows lower interest rates, which help increase investment and economic growth. On the empirical side, using data from seventeen emerging economics, Bekaert and Harvey (1998) find a positive relationship between equity capital flows and key macroeconomic indicators, including growth and inflation. Evidence from Latin America and far Eastern economies shows that capital inflows tend to appreciate real exchange rates, lower interest rates, and increase consumption, investment and economic growth (Antzolatus 1996; Calvo 1994; Carbo and Hernandez 1994; Fernandez-Arias and Montiel 1995, Khan and Reinhart 1995).

In contrast, the financial crisis that came up in Asia, Russia and Latin America have created doubts about the benefits of capital inflows and emphasized the necessity of capital controls. Agosin (1994) argues that capital inflows are used to finance imports and domestic consumption. Rodrik (1998) contends that capital flows have no significant impact on economic performance once the impact of other variable, such as education level, the initial level of income, the quality of government institutions, and regional dummies, are controlled for. Foreign investment comes in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). The former entails a controlling authority over the concerned enterprise; at times it means setting up of new projects. Portfolio investment by contrast is essentially a financial transaction - purchase of stocks, bonds and currencies as assets. Many developing economies have over the years depended heavily on the attraction of financial resources from outside in different ways. Official and private capital flows including FDI and FPI as a way of accelerating their economic growth (Odozi, 1988; Ekpo, 1997; Uremadu, 2008). Some nations exhibited a choice for FDI since they regard it as an avenue for overcoming the slow trend in official and private portfolio capital flow (Uremadu, 2008). The need to draw foreign capital in non-debt constituting way is one of the reasons, why emerging economies wish to encourage private capital flows. Thus, there has been a dramatic increase in the magnitude of capital flows from countries in the North to emerging economies across the South where the need is high. According to Siamwalla (1999) the relative low yields in industrial countries together with impressive economic growth and attractive returns in developing, countries motivated investors to relocate their funds to direct investments. He assumes that the growth in international foreign investment inflow is an aftermath of good mixture of macroeconomic variables as well as the drift towards trade globalization, international financial linkages and expansion of production bases overseas. He further states that macroeconomic variables are indicators or main signposts indicating the current trends in the economy. Some main macroeconomic variables identified by Keynes (1930), that study foreign inflows into an economy are gross domestic product (GDP), exchange rate, interest rate, inflation rate and money supply.

Nigeria as an import dependent economy needs foreign investment to enhance her investment needs. That is why since the emergence of democratic governance in May 1999, she has embarked on some concrete means to encourage cross-border investors into her domestic economy. Some of these means are: the repeal of laws that are adverse to foreign investment increase, promulgation of investment laws, introduction of policies with favorable atmosphere like ease of businesses, fast export and import processing methods, fight against advanced fee frauds, instituting.....

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Item Type: Project Material  |  Size: 188 pages  |  Chapters: 1-5

Format: MS Word  |  Delivery: Within 30Mins.

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