Abstract
This study examines the impact of foreign direct investment on economic growth inNigeria 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.
CHAPTER ONE:
INTRODUCTION
1.1 Background of TheStudy
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, and 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 (Borenszteinetal.,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 (2009), 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.
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.
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