IMPACT OF FOREIGN DIRECT INVESMENT (FDI) ON NIGERIA

ECONOMIC GROWTH (1990-2013)

CHARPTER ONE

1.0 Introduction

One of the accepted variables that stands as a catalyst in speeding up economic

growth of a nation economy has been identify as investment which is a function of

capital formation of the host economy and among other variables as its

determinants .In many less developed countries, there is this problem of capital for Commented [E1]: One of the variables considered as a catalyst
for speeding up economic growth in a country or in an economy is
investment, which is a function of capital formation of the host
economy, among other variables considered as its determinant.
investment which has affected the economic situation of these nations. In other to
Commented [E2]: conditions

the situation, various governments of these nations have now focused much Commented [E3]: In other to address this situation,

attention on investment, especially foreign direct investment which will not only

guarantee employment but will also impact positively on economic growth and

development. FDI is needed to reduce the difference between the desired gross Commented [E4]: Foreign Direct Investment (FDI)

domestic investment and domestic savings.

Jenkin and Thomas (2002), assert that FDI is expected to contribute to economic Commented [E5]: Foreign Direct Investment (FDI)

growth, not only by providing foreign capital but also by crowding in additional

domestic investment. By promoting both forward and backward linkages with the

domestic economy, additional employment is indirectly created and further Commented [E6]: Within the domestic economy,

economic activity stimulated.

1
According to Adegbite and Ayadi (2010) FDI helps fill the domestic revenue‐ Commented [E7]: Foreign Direct Investment (FDI)
Commented [E8]: Make up for domestic revenue generation
gap
generation gap in a developing economy, given that most developing countries’

governments do not seem to be able to generate sufficient revenue to meet their Commented [E9]: Since most Governments in developing
countries seem not generate sufficient revenue to meet their
expenditure requirements
expenditure needs. Other benefits are in the form of externalities and the adoption

of foreign technology. Externalities here can be in the form of licencing, imitation, Commented [E10]: Other benefits are comes in the form of
externalities and the introduction of foreign technology

employee training and the introduction of new processes by the foreign firms Commented [E11]: Introduction of new production processes

(Alfaro, Chanda, Kalemli‐ Ozean and Sayek 2006).

Foreign direct investment consists of external resources including technology,

managerial and marketing expertise and capital. All these generate a considerable

impact on host nation’s productive capabilities. The success of government Commented [E12]: Generates considerable impact on the host
nation’s productive capacity.

policies of stimulating the productive base of the economy depend largely on her Commented [E13]: In stimulating the productive base of the
economy depends largely on

ability to control adequate amount of FDI comprising of managerial, capital and

technological resources to boast the existing production capacity. Although the Commented [E14]: Boost

Nigerian government has being trying to provide a good investment climate for

foreign investment, the inflow of foreign investments into the country have not

been encouraging.

Given the Nigerian economy resource base, the country’s foreign investment Commented [E15]: Given the current economic resource base
of the Nigerian economy,

policy should move towards attracting and encouraging more inflow of foreign

capital. The need for foreign direct investment (FDI) is born out of the under

developed nature of the country’s economy that essentially hindered the pace of

2
her economic development. Generally, policy strategies of the Nigerian Commented [E16]: becomes necessary due to the
underdeveloped nature of the country and the slow pace of growth
in the real sector of the economy.
government towards foreign investments are shaped by two principal objectives of Commented [E17]: towards promoting

the desire for economic independence and the demand for economic development. Commented [E18]: GENERAL COMMENT ON YOUR
INTRODUCTION: there are no stylized facts about the trend of FDI
and Growth of the Nigerian economy over time (say from 1960 to
2014). Certain events and policies have taken place in the Nigerian
1.1 Statement of the Research Problem economy since independence and these events and policy
measures may have affected the flow and behavior of FDI and GDP
(growth). Make sure these facts are captured in your Intrroduction.
Over the years, series of programmes have been initiated by the Nigerian

Government which aimed at improving the productive capacity of the Nigerian Commented [E19]: Which were aimed at improving the
productive capacity of the Nigerian economy

economy. Some of these programmes includes: Structural Adjustment Programme Commented [E20]: which was aimed at improving the
productive base of the Nigerian economy

(SAP), National Poverty Eradication Programme (NAPEP), and National

Economic Empowerment and Development Strategies (NEEDS).Through these

policies and programmes, Government was supposed to provide the enabling

environment through the provision of essential services as means of boosting

economic growth.

These strategies have also not yielded the expected result of accelerating growth of

the real GDP. Nigeria has been battling to establish the part of sustained economic Commented [E21]: are yet to yield the desired growth in real
Gross Domestic Product (GDP)
Commented [E22]: itself on the path
growth. It is in respect to this that this study will be undertaken. In order to know Commented [E23]:
Commented [E24]: It is for this reasons that conduction this
the medium through which the expected economic growth rate that Nigeria desire study becomes necessary

to have can be achieve, it will be necessary to access whether or not (FDI) has any Commented [E25]: In other to reinforce the importance of FDI
on Economic Growth,

impact on the economic growth of Nigeria and the magnitude of its effect as well Commented [E26]: this study intends to examine whether or
not FDI impacts on the Economic Growth in Nigeria
Commented [E27]:
as its relationship on the growth of the Nigerian economy. Once the relationship Commented [E28]: and to determine whether a relationship
dos exist between them.

3
that exists is established, this influencing variable can be manipulated to achieve

the desired growth rate.

Therefore, the major problem that will require an answer is; did FDI have any

impact on economic growth of Nigeria or not? If yes, what then is the level of its

influence on Nigerian economic growth?

Commented [E29]: Where are your research questions?

Research questions should come first before the your research
objectives. Please include it. If you have problems with any of the
issues I have raised, you can meet Abubakar or Idoko. They will
1.2 Objectives Of The Study guide you better.

The objectives of the study will be as follows: Commented [E30]: From the research questions stated above,
the following research objectives can be derived:

a. To find out whether or not FDI has a significant impact on the growth of the

Nigeria economy.

b. To determine the nature and magnitude of the impact of FDI on economic

growth in Nigeria. Commented [E31]: To determine the relationship that exists

between FDI and Economic Growth.

1.3 Research Hypothesis

The following are the research hypothesis of the study:

(1) H0: FDI has no significant impact on the growth of the Nigeria economy

(2) H0 : The nature and magnitude of FDI on economics growth in Nigeria cannot

be determined. 6 Commented [E32]: There is no relationship between FDI and

Economic Growth.

4
1.4 Scope the Limitation of the Study

The focus of the study is to verify if there has been any contribution made toward

he economic growth and development of the Nigeria economics via gross domestic

product (GDP) through foreign direct investment for the period.(1990-2010). This

study will however be limited to investigate the impact of foreign direct investment

on the growth of the Nigeria economy. Commented [E33]:

1.5 Significance of the Study

Finding from the study will be of immense benefits in a number of ways and to

different groups of persons.

1. For policy making, the expected result outcome shall serve as a riseful guide for

future policies as it relates to stimulating growth within the economy.

2. For further studies, it will serve as a reservoir of knowledge for such academic

exercises.

5
CHARPTER TWO

2.0 LITERATURE REVIEW

This chapter includes relevant reviews on key concepts; important theories and

empirical literature of the nature of the level of impact foreign direct investment

has on Nigerian economic growth proxy by GDP.

2.1 Conceptual Reviews

2.2 Economic Growth

Meaning of economic growth

Economic growth (and development for underdeveloped countries) is one of the

four macroeconomic goals of any society. It should be noted that other

macroeconomic variables that play some crucial role in an economy are price

stability, full employment and a healthy balance of payments position; but for the

sake of study, emphasis will be much place on the growth.

Anyanwu and Hassan (1995), in a simple term define growth to refer to the over

time of an economic capacity to produce those goods and services needed to

improve on the wellbeing of citizen in increasing numbers and diversity. It is the

steady process by which the productive capacity of the economy is increased over

time to bring about rising level of national income.

6
Todaro(1977). Thus in discussing growth, it is important to examine the behavior

of the population overtime. This is because economic growth becomes a

meaningful concept if it leads to an improvement in the wellbeing of the society

over time and this can happen only if the rate of population growth lags behind that

of economic growth over time. Thus, growth is a steady process of increasing the

productive capacity of the economy and hence increasing national income, being

characterized by high rates of increase of per capital output and total factor

productivity, especially labor productivity. Anyanwu and Hassan,(1995).

2.3 Gross domestic product (GDP) and Economic growth

It’s difficult to ascertain the actual extent of economic growth in an economy but

despite this short coming, the most important economic variable that economist

normally use as proxy to measure economic growth is the gross domestic

product(GDP).

Gross domestic product (GDP) is the total market value of all final goods and

services produce in an economy in a year period. GDP is probably the single most

used economic measure. When Economist, journalist, and other analysts talk about

the economy, they continually discuss GDP, how much it has increased or

decreased, and what it’s likely to do; Colander (2001). It’s the economic variable

7
that measures the business activities that occur within the geographical boundary

of a country. It should be noted that GDP does not measure total transaction in an

economy; it measures final output –goods &services purchased for final use.

Colander,(2001). When one firm sells products to other firms for use in the

production of yet another goods, the first firms products aren’t considered final

output but are rather consider as intermediate products___ product used as input in

the production of some other product.

Economic growth is an increase in the amount of goods and services an economy

produces. The study of growth is the study of why that increased comes about;

assuming that both labor and capital are fully employed. Colander, (2001).

2.4 Foreign Direct Investment and Multinational Cooperation (FDI AND

MNCS)

According to Samsung Lai and Steeten, (2002) foreign direct investment is simply

defined as the act of having at least 25% participation in the share capital of the

foreign enterprise. Many firms or cooperation that normally embarks on FDI are all

multinational corporations (MNCs), thus, multinational corporation (MNC) is a

company, firm, or enterprise with its headquarters in a developed country such as

United States, Britain, Germany, Japan, etc and also operates in other countries

8
both developed and developing. They are spread not only in less developed

countries (LDCs) of Asia, Africa and Latin America but also on the continent of

Europe, Australia, New Zealand, and South America. They are engaged in mining

tea, coffee, rubber, and cocoa plantation; oil extraction and refining, manufacturing

for home production and export, etc. their operation also use such services as:

banking insurance, shipping, hotel and so on. MNCs overwhelmingly dominate not

only global investment but also international production, trade, finance and

technology. Thus, “like animals in Zoo, MNCs come in various shapes and sizes

distinctive functions differently and their individual impact on the environment”.

But adequate up to date data regarding the spread of MNCs in terms of subsidiary,

production, trade, finance and technology are rarely published and therefore is not

available (M. L. Jhingan, (2009). Sam Jay Lai and Streeten, (2002) defined MNCs

from economic, organizational, and multinational view point. The economic

definition lays emphasis on the size, geographical spread and extent of foreign

investment of an MNC. According to this definition, a typical multinational

company is one with net sales hundred million to several thousand millions of

dollars having DFI in manufacturing usually account for at least 15-20% of the

company’s total investment. FDI means at least 25% participation in the share

capital of the foreign enterprise.

9
The organizational definition stresses on some organizational aspect of an MNC

besides the economic ones. In this respect, a truly MNC is one that is:

(a) Acts as an organization maximizing one overall objective for all its units.

(b) Treats the whole world (or the parts open to it) as its operational area. And

(c) Is able to coordinate all its functions in any way necessary achieving (a) and

(b) above.

The motivational definition high lights “co-operate philosophy and motivation in

laying down criteria for multi-nationality. Therefore, true multi-nationality is

generally indicated by lack of nationalism, or a concern with the firm as a whole

rather than with any of its constituent unit or any country of it operation”. Sam Jay

Lai and Streeten, (2002), on this basis, distinguished firms between ethnocentric

(home-oriented), polycentric (host oriented), and geocentric (world oriented), on

the basis of attitude reviewed by their executive. Lai and Streeten defined MNCs in

general as very large firms with wide spread operations which clearly international

in character and have more five foreign subsidiaries or more than 15% of total

sales produced abroad, and acting in a cohesive manner to achieve maximum profit

or growth.

It should be also noted that MNCs are not simply only agents of exploitation; they

also act as agents of development. By establishing manufacturing plants, providing

production, managerial, technical, organizational and marketing skills, and by

10
harnessing their resources, MNCs have helped in augmenting the gross national

product (GNP) of Singapore, Hon Kong, Taiwan and Canada. But as pointed out

earlier, these benefits accruing to such countries have been the outcome of the self

interest of MNCs, that is, the need to meet the U.S domestic market M.L. Jhingan

(2009).

2.5 Investment

The second component of the Keynesian model of income determination is

investment. Investment can be defined from several perspectives depending on the

basis of the individual proffering the definition (Anyanwu and Hassan, 1995).

To an economist for example, investment refers to net capital formation. Hence, it

refers to such capital expenditure on consumer durables, residential construction

(buildings) and plant and machinery. Thus, investment from this perspective refers

to the purchasing of real tangible assets such as machines, factories or stocks of

inventories which are used in the production of goods and services for future use as

opposed to present consumption. From a broader perspective however, investment

can be view as the sacrifice of certain present value of consumption for future

value /consumption. It is the commitment of money in order to earn; financial

return of the purchase of financial assets such as stocks or bonds with future end

date in mind. One remarkable features of investment as a component of aggregate

11
spending is its fluctuatory nature. Investment is deemed to fluctuate more than any

other component of national income. Indeed, most business cycle theories anchor

their analysis of cyclical fluctuations on fluctuation in investment expenditure via

the multiplier effects; have a multiple effects on the aggregate level of national

income. Therefore, investment is considered to be the most dynamic and erratic

element of all the macroeconomics aggregates. Anyanwu and Hassan (1995) .

In discussing investment, emphasis usually is placed on firm’s expenditure on

durable equipment and structures. This is the concept of business fixed investment.

In the Nigeria context, the concept of investment is not different from the one

given above.

2.6 GROSS FIXED CAPITAL FORMATION (GFCF)

The national account defines gross fixed capital formation (GFCF) as consisting of

all capital expenditures on building (residential and nonresidential), land

improvement transport equipment, breeding stock and /or machinery and

equipment (business fixed investment).Anyanwu & Hassan (1995).

2.7 FOREIGN EXCHANGE RATE

Meaning of foreign exchange rate

Theforeign exchange rate or exchange rate is the rate at which one currency is

exchange for another currency. It is the price of one currency in terms of another
12
currency. It is customary to define the exchange rate as the price of one unit of the

foreign currency in terms of the domestic currency. M.L. Jhingan (2009).

The exchange rate between Nigeria and U.S, i.e between Naira and dollar refers to

the number of naira required to purchase a dollar. Therefore, the exchange rate

between the naira and the dollar from the Nigerian view point is for example

expressed as; #200=$1. The Americans would expressed it as the number of

dollars required to purchase one naira, and this is express as $1/#200 which is

$0.005= #1.The exchange rate of $0.005=#1 or #200=$1, will be maintained in

the world foreign exchange rate market by arbitrage. Arbitrage is simply the

purchase of a foreign currency in a market where its price is low and to sell it in

some other market where its price is high. The effect of arbitrage is to remove

differences in the foreign exchange rate of currencies so that there is a single

exchange rate in the world foreign exchange market. If the exchange rate is #178 in

USA exchange market and #180 in the Nigeria exchange market, foreign

speculators known as arbitrageurs will buy dollars in USA and sell them in

Nigeria, thereby making a profit of #2 on each dollar. As a result, the price of

dollar in terms of naira rises in the USA market and falls in the Nigeria market.

Ultimately, it will be equal in both the markets and arbitrage comes to an end. If

the exchange rate between the naira and the dollar rises to #190=$1 over time, the

naira is said to have depreciated with respect to dollar because now more naira is

13
required to purchase one dollar. If the value of the first currency depreciates, that

of the other appreciates, and vice-versa.

2.8 EXCHANGE RATE POLICY

The choice of reviewing the exchange rate policies that Nigeria has practiced so far

is to check whether the various exchange rate policies have any incentive package

for attracting foreign direct investment or not.

2.9 Exchange rate policy

Exchange rate refers to the price of one currency (domestic currency) in terms of

the other (foreign currency). Exchange rate plays a key role in international

economic transactions. The importance of exchange rate is derives from the fact

that it connects the price system of two different currencies, making for

international traders to make direct comparison of prices of traded goods. Through

its effect on the volume of imports and exports, exchange rate exerts a powerful

influence on a country’s balance of payment. This effect is a derivative of its

impact on relative prices of imports and exports. Consequently, nations; in the

pursuit of the macroeconomic goal of a healthy external balance as reflected in

their BOP position find it important to enunciate an exchange rate policy.

Anyanwu and Hassan (1995).

14
According to Barth (1992), exchange rate policy involves choosing an exchange

rate system and determining the particular rate at which foreign transaction will

take place. A country’s exchange rate policy should ideally reflect the underlying

economic and institutional features.

2.10 EVALUATION OF EXCHANGE RATE POLICIES IN NIGERIA

The evaluation of exchange rate policies in Nigeria can be conducted by analyzing

the behavior of exchange rate within a period in relation to the policy outlook

within that period. For example, from 1960-1970, the exchange rate remained

largely fixed at $2.80 to the pound sterling, translating into $1.40 to the Nigerian

pound, reflecting the policy stance of maintaining a fixed exchange rate regime;

moreover, the 10% point devaluation of the dollar in 1971 brought about the

appreciation of the dollar/Nigerian pound exchange rate to $1.52 to the Nigerian

pound. Again, reflecting the policy position of maintaining a fixed exchange rate

regime with the period, this rate was maintained up to 1973. Anyanwu and Hassan

(1995). Thus, the choice of doing noting saw the value of the local currency being

linked to the fortune or misfortune of the British pound sterling and US dollar. The

policy stance from 1974-1977 that was characterized by the determination of the

value of the naira through a weighted basket of currencies witnessed a fluctuation

in the naira/dollar and naira/pound sterling exchange rates. For example, from

$1.559/#1 in 1974; it appreciates to $1.623/#1 in 1975 but depreciated slightly to

15
$1.596/#1 in 1977. The depreciatory trend continued in 1977 and 1978 as the rate

stood at $1.5465/#1 and $0.623/#1 respectively; however, the discovery of the

crude oil in the 1978-1980 period quickly restored the value of the naira which had

fallen to an all time low against the dollar in 1978 to $1.659/#1 in 1979

2.11 Pre-Sap Exchange Rate Policys

Prior to the inception of SAP, Nigeria’s exchange rate policy was largely a passive

one, dating back to 1959 with the introduction of the Nigerian pound in that year.

The value of the Nigerian pound was fixed at par with the British pound sterling

which in turn has a declared value of $2.80 U.S dollar to the pound. Nigeria

accession into membership of the IMF on attaining independence in 1960 saw the

declaration of a parity of the Nigerian pound as being equal to 2.48828 grams of

fine gold in 1962 while the fixity of the value the Nigerian pound in relation to the

U.S. dollar was maintained. However, via cross rate, the exchange rate of the

Nigerian pound to the British pound could be determined. The devaluation of the

British pound sterling in 1967 however brought about an appreciation of the

Nigerian pound which then exchanged for 1.17 British pounds sterling, an

appreciation that was brought about by the refusal to devalue her currency

alongside the British pound sterling. Anyanwu, and Hassan (1995).

16
2.12 Exchange rate policy under SAP

The period beginning from September 1986 marked the second face of exchange

rate policy in Nigeria. The period is characterized by the inception of the structural

adjustment program (SAP) that was put in place in that year aimed at restructuring

the structural imbalances and hence attaining a structural transformation of the

economy. The exchange rate policy within this period was more dynamic than it

was until now. Policy was anchored on the determination of the exchange rate via

the forces of demand and supply. In this context, the regime of free market floating

exchange rate was embraced. The second tier foreign exchange market (SFEM) in

which the value of the country currency’s was to be determined was instituted.

SFEM with passage of time metamorphosed to foreign exchange market (FEM)and

thereafter to IFEM. The exchange rate regime adopted within this period was

largely in line with numerous of the policy. These objectives include the need to

obtain a realistic exchange rate of the naira via “gradual” depreciation of the

currency. Anyanwu, and Hassan (1995).

Anyanwu concluded that in general, Nigeria’s exchange rate policy under SAP was

more pragmatic and farsighted, aimed, as it were at effecting a structural

transformation of the economy as well as ensuring a viable BOP position in the

medium to long term.

17
2.13 THEORETICAL REVIEW

(A) Theory of growth

There have been series of economic growth theories that have been developed

over the past 60 years. These theories are as follows with their respective views

concerning economic growth.

(I) Harrod–Domar growth theory

The first growth perspective was developed by the hand work of Harrod (1947)

and Domar (1959) which emphasizes on the importance of saving and capital

accumulation. They emphasized that growth rate should be in line with population

growth and growth in equipment to allow for full employment.

This model has been criticized because of three lapses. First, the theory assumes

wrongly that key parameters are exogenous. Secondly, the theory ignores

technological change, and thirdly the theory ignores the theory of diminishing

return, which occurs when one factor is increasingly employed while holding the

other factors constant and output increase at a decreasing rate.

18
(II) The neoclassical growth theory

The second growth perspective began with the neoclassical work of Solow (1957),

which argues that growth depends on the rate of technological growth, the growth

in capital and in labour force. Gordon (1993) criticized Solow’s kind of model, for

three reasons. First, Solow assumed that technologies are given (exogenous) so that

a nation desiring it cannot acquire it. The second criticism is that the model has no

reason for technological change. Thirdly, since technological change comes

randomly, every nation will have equal access to it. Obviously, this does not reflect

reality; otherwise all countries will be at equal level of technological development.

(III) The theory of the big push

One of the early theories about how a country might create the conditions for

economic progress, where growth and development had not already arisen

spontaneously, wasformulated by Paul Rosenstein-Rodan on the basis of research

he had conducted during the Second World War. After analyzing the economic

structures of a number of poor

Eastern and South-East European nations, Rosenstein-Rodan drew a number of

conclusions which became basic building blocks for the field of development

economics emerging after the war.1

Rosenstein-Rodan was recognised for his effort to call attention to the hidden

potentialfor economic development in less-developed regions. Much of his work

19
centered on taking advantage of the increasing returns that could be realized from

large-scale planned industrializationprojects that comprises several major sectors

of the economy simultaneously.

A “big push” of simultaneously industrial investments could launch a chain

reaction of virtuous circles and complementary investments that would then ripple

in many directions throughthe economic system. Large-scale investments in

several branches of industry would lead toa favorable synergistic interaction

between these branches and across sectors. If economic development was to get a

start in the now less-developed nations, Rosenstein-Rodan argued, it would have to

come from a concerted and substantial “push” from government to create,

effectively, an entire industrial structure in one huge and interlocked undertaking.

Although Rosenstein-Rodan does not detail this point, one can sketch such

virtuous circle effects: large-scale investments in steel-making could lead to

research in metallurgy which would have “positive external” effects on companies

which use metal products. Perhaps stronger alloys could be found that could then

be used in the metal-fabricating industries, reducing wear and fatigue and

downtime for the machines in this sector. All this could reduce costs to another

branch of industry, perhaps in railway equipment manufacturing.

Lower costs in the rail equipment could then be passed on to farmers, in the form

of lower transport costs.

20
Farmers, in turn, would now be able to invest in better mechanical equipment from

the metal-manufacturing industry, creating a further surge of positive ripple

effects. Each branch of industry, or at least many branches of industry, would be

caught in a web of interacting and mutually complementary activities. The more

efficient are supply conditions, the lower costs of production will be and the

greater the demand for the product. Cross-sector positive externalities will also be

transmitted, for example, from industry to agriculture.

In recent years interest in Rosenstein-Rodan’s big-push theory has grown. His

ideas were formalized by Kevin Murphy, Andrei Shleifer and Robert Vishney

(1989) and his views are increasingly invoked by proponents of endogenous

growth theory. James M.C and James L. D; (2009). Commented [E34]: Plagiarism: You will have to re-phrase the
whole statement based on your understanding of the theory. It is
very wrong to lift it directly from the source you have used.
(IV) The endogenous growth theory

The third perspective is the new growth theories that have emerged which are the

endogenous models. The new growth explains why some countries are poor and

why others are rich. The first factor explaining the phenomena is the development

of ideas about a product or production process. Once this idea is developed, it is

protected by the patent and copyright laws, so that no nation can copy, thereby

enabling the initiator to become richer than other countries that cannot develop

new ideas. The second reason is international trade. International trade enables a

country to expand its market gaining maximally from its initiatives. Another factor

21
is that of technology. The existence of technology enables a country to exclusively

use its innovation to its advantage.

This is because if another country imports equipment and machineries to produce

the commodities being produced by the innovator it will lack the technical – know

how to produce. These explain why poor countries clamor for foreign investors.

The newer alternative growth theory embraces a diverse body of theoretical and

empirical work that emerged in the 1980s. This is the endogenous growth model. It

distinguishes itself from the neoclassical growth by emphasizing that economic

Growth is an endogenous outcome of an economic system, not the result of forces

that impinged from outside. Essen, (2001).

(B) Theories of Investment

(I) Keynesian theory of investment

In Keynesian terminology, investment refers to real investment which adds to

capital equipment. It leads to increase in level of income and production by

increasing the production and purchase of capital goods. Investment thus includes

new plant and equipment, construction of public works like roads, dams, buildings,

e.t.c In the words of John Robinson, “By investment, is meant an addition to

capital, such as addition to capital, like when a new house is being built or a new

factory is built. Investment means making an addition to the stock of goods in

existence.” Commented [E35]: Plagiarism: Do the same as advised above.

22
(II) Types of Investment

Types of investment in the literature includes

(1) Fixed investment

(2) Inventory investment. And

(3) Replacement investment

(4) Induced Investment

(5) Autonomous Investment

Fixed investment: thisis refers to the purchases by firms of newly produced Commented [E36]: This refers to

capital goods such as production of newly machinery, newly built structures, office

equipment, E.T.C.

Inventory investment: inventories on the other hand are stocks of goods which

have been produced by business but are yet unsold. Inventory investment refers to

changes in stock of finished products and raw materials firms keep in their

warehouse.

These are meant to act as a safety cushion or buffer between production and sales.

Firms avoid running out of stock so as to the risk of default in meeting customer’s

orders since this will expose them to the risk of losing those customers to their

competitors if they do. This is why inventories are regarded as investment because

rising stocks denote increases in inventory investment while a depletion of same

results in decreasing stock.

23
Replacement investment: The third types of investment refer to the investment

made to replace worn-out capital goods resulting from their use in the production

process. Replacement investment is also known as disposable investment. Another

type of investment is investment in real estate and residential construction.

Induced Investment: Induced investment is profit or income motivated. Factors

like prices, wages and interest changes which affect profits influence induced

investment. Similarly demand also influences it. When income increases,

consumption demand also increases and to meet this investment also increases.

Autonomous Investment: This investment is independent of the level of income

and is thus income inelastic. It is influenced by exogenous factors like innovations,

inventions, growth of population and labour force, e.t.c. But it is not influenced by

changes in demand; rather, it influences the demand. Commented [E37]: Plagiarism: Plagiarism: Do the same as
advised above.

The Keynesian Theory of investment places emphasis on the importance of interest

rates in investment decisions. But other factors also enter into the model-not least

the expected profitability of an investment project.

Changes in interest rates should have an effect on the level of planned investment

undertaken by private Sector businesses in the economy.

However, a fall in interest rates should decrease cost of investment relative to the

potential yield and as a result planned capital investment projects on the margin

may become worthwhile. There is inverse relationship between investment and rate

24
of interest.Taken together,these types constitute an economy‘s gross private

domestic investment. Anyanwu and Hassan (1995).

Acceleration Theories of Investment

The principle of acceleration is based on the fact that the demand for capital goods

is derived from the demand for consumer goods which the former helps to

produce. The acceleration principle explains the process by which an increase or

decrease in the demand for consumption goods leads to an increase or decrease in

investment on capital goods. The accelerator coefficient is the ratio between

induced investment and an initial change in consumption expenditure.

Symbolically, β=ΔI/ΔC or ΔI=βΔC where β is the accelerator coefficient, ΔI is net Commented [E38]: Plagiarism: Do the same as advised above.

change in investment and ΔC is net change in consumption expenditure.

2.14 EMPIRICAL REVIEW

The increasing interest in foreign direct investment (FDI), come from the

perceived benefits derivable from utilizing this form of foreign capital injection

into the economy, in order to augment domestic savings and further promote

economic development in most developing economies. According to Alex Ehimare

O, (2011) investigated the impact of exchange rate and inflation on foreign direct

investment and it’s Relationship with Economic Growth in Nigeria.

25
He made use of a linear regression analysis on 30 years time series data employed

to ascertain the existing relationship between inflation, exchange rate, FDI and

economic growth. His study reveals that FDI follow economic growth which is

cause by trade openness that allow the entrances of some major companies in

Nigeria especially the telecommunication companies while Inflation has no effect

on FDI but exchange rate has an effect on FDI. Samiullah, Syed Z. H and

Parvezazim, (2012).carried out a study on theimpact of foreign direct investment

FDI using Pakistan as a study .The study Opine that the set of the determinants of

FDI can be very large but exchange rate is one of the profound determinants. In

their study which employ different time series data for foreign direct investment,

exchange rate, exchange rate volatility, trade openness and inflation from 1980-

2010 for Pakistan. After collection of data on above stated variables, different time

series econometrics techniques (unit root test, volatility analysis, and cointegration

technique and causality analysis) were used to determine the impact of exchange

rate volatility on FDI and from his finding reveal that FDI is positively related

toRupee depreciation while exchange rate volatility deters FDI but not vice versa.

Based on the study of Mika’ilu Abubakar, (PhD) Fu’ad Abdul-Hameed Abdullahi,

(2013) on the determinant of foreign direct investment in Nigeria, stated that

Nigeria strives to attract Foreign Direct Investment (FDI) because of its

acknowledged advantage as a tool of economic development.

26
In order to establish the various determining factors of FDI in Nigeria, they make

use of Series of econometric techniques; unit root test, co integration test and

Granger causality test. The results of the Johansen co integration test, suggest that

availability of natural resources, market size, openness of the economy and

macroeconomic stability do not attract FDI in the long run in Nigeria. While the

results of the Granger causality test showed that market size and inflation

positively affect FDI in the short run. Inflation increases the market size in the

short run and availability of natural resources also leads to openness of the

economy in the short run. He advocated that Government policies should be

structure towards the creation of an enabling environment or should provide an

incentive for production activities as well as creating employment opportunities to

boost market size and attract FDI in the short run. He further added that proper

monetary policies should be employed to achieve an optimum inflation rate that

will attract FDI in the short run while reserves of natural resources should be

explored and efficiently utilized to diversify the economy.

Amassoma Ditimi,(2014).Examine the causal nexus between capital inflows

(foreign direct investment and foreign portfolio investment) and exchange rate in

Nigeria. He also examined the impact of these capital inflows on exchange rate in

Nigeria for the period spanning from 1986 to 2011. The study employed both

granger causality and error correction modeling techniques. From his empirical

27
study, the causality estimates showed no causal link between capital inflows

(foreign direct investment and foreign portfolio investment) and exchange rate

within this period. The long run regression estimate revealed that foreign direct

investment had negative effect on exchange rate while portfolio investment had

positive impact on exchange rate. However, the magnitude of the impacts was very

minute unlike the international oil price which had a strong negative effect on the

exchange rate. The result of the short run result was similar to the causality result,

indicating that neither foreign direct investment nor foreign portfolio investment

had significant impact on exchange rate. The study concluded that the relationship

between capital inflows and exchange rate in Nigeria is a long run phenomenon.

Elijah Udoh, and Festus O. Egwaikhide(2008).Examined the effect of exchange Commented [E39]: Plagiarism: Do the same as advised above.

rate volatility and inflation uncertainty on foreign direct investment in Nigeria

.Their investigation covers the period between 1970 to 2005. Exchange rate

volatility and inflation uncertainty were estimated using the GARCH model, values

for volatility in exchange rate and inflation uncertainty were estimated using the

GARCH modeling technique. The estimation was done in two stages. First, the

GARCH model was estimated usingthe relevant lags of the variables concerned.

Second, the residuals were obtained. Estimation results indicated that exchange

rate volatility and inflation uncertainty exerted significant negative effect on

foreign direct investment during the period. In addition, the results show that

28
infrastructural development, appropriate size of the government sector and

international competitiveness are crucial determinants of FDI inflow to the

country. The study supported the commitment of policymakers to exchange rate

and macroeconomic stability as key to FDI boom in Nigeria.

Ugwuegbe S. U, Okore A. O, and John Okey Onoh(2013), researched on the

impact of foreign direct investment on the Nigerian economy from 1981-2009 .

Their study which employ the ordinary least square techniques to ascertain the

relationship between growth rate and FDI in Nigeria with the Granger causality

test to determine the direction of causality between FDI and growth rate in Nigeria

reveal that based on the OLS techniques, FDI has a positive and insignificant

impact on the growth of Nigeria economy for the period under study .The study

further reveal that the gross capital formation(GCF) that was used as a proxy for

domestic investment has a positive and significant impact on Nigeria economic

growth. Interest rate was found to be positive and insignificant while exchange rate

positively and significantly affects the growth of Nigeria Economy. O. Oyeyemi, Commented [E40]: Plagiarism: Do the same as advised above.

A. Awujola (2014), inquired into some influencing factors of economic growth in

Nigeria which includes; interest rate, inflation rate, oil revenue, Federal

Government Expenditure, money supply, foreign private investment and foreign

exchange rate. Their study employed unit root test, co integration test and multiple

regression analysis. At the end, their result showed that there is a long run

29
relationship between GDP and all the determinants aforementioned. The study also

establishes that money supply, oil revenue,

Federal Government Expenditure and foreign private investment had significant

impact on economic growth while inflation rate, interest rate and foreign exchange

rates adopted so far by the government does not have significant impact on

economic growth (GDP.

The work of Nazima Ellahi (2011), on exchange rate volatility and foreign direct

investment (FDI) behavior in Pakistan using a time series analysis with auto

regressive distributed lag (ARDL) stated that exchange rate volatility has negative

impact on FDI inflow in short run while this impact is positive in the long run.

Michael I. Muoghalu, Chinedu B. Ezirim, and Uchenna Elike (2007) worked

on;foreign investment burden, exchange rates and external debt crises in Nigeria

using OLS and exact maximum likelihood (EML) techniques and opine that

foreign investment crisis or burden variable is found to associate positively and

significantly with the external debt crisis variable, previous spates of foreign

investment burden but negatively and significantly with exchange rates conditions

and international oil prices. Chiara Del Bo (2009) on Foreign Direct Investment,

Exchange Rate Volatility and Political Risk asserted that both exchange rate

variability and political risk have a dampening effect on FDI flows, and that the

30
interaction term is negative, indicating that the two effects reinforce each other.

Obiamaka P, (2009) carried out a study on bivariate Causality Analysis on the

impact of FDI Inflows and Economic Growth in Nigeria usingOrdinary Least

Square (OLS), the unit root test was used to test for stationarity of the time series,

the Johansen Cointegration test was used to test for the existence of long-run

relationship among the variables and finally, Granger causality test, to establish

the causal relationship between the variables. The work found out that during the

period under study, there was a positive relationship between FDI and GDP which

is a strong indication that FDI leads to economic growth in Nigeria. Eravwoke K. E. Commented [E41]: Plagiarism: Do the same as advised above.

and Eshanake S. J. (2012), looked intoForeign Direct Investment Granger and

Nigerian Growth. They argue that Economic growth (GDP) Does not granger cause

Foreign Direct Investment (FDI) in Nigeria. Adeolu B. Ayanwale (2008), worked

on FDI and economic growth with evidence from Nigeria. He established in his

augmented growth model via the ordinary least squares and the 2SLS method to

ascertain the relationship between the FDI, its components and economic growth

that although the overall effect of FDI on economic growth may not be significant;

however, FDI in Nigeria contributes positively to economic growth. According to Commented [E42]: Plagiarism: Do the same as advised above.

Ndem, Samuel O, Okoronkwo O., and Nwamuo C. (2014) on the determinants of

foreign direct investment and theirimpacts on Nigerian economy (1975 – 2010),

reveal thatMarket Size (GDP), openness, and exchange rate impact much on

31
FDI inflow while political risk was unfavorable to it. Investment in infrastructure

was discovered to be favorable but its level is inadequate to improve FDI required

for sustainable growth and development.

32
 CHAPTER THREE

3.0 RESEARCH METHODOLOGY

Time series data will be used for this study. An econometric model will be

employed to examine the impact of FDI on Nigeria’s Economic growth. The

variables to be used in building the model include the country’s gross domestic

product (GDP), foreign direct investment (FDI), exchange rate (EXR); gross fixed

capital formation (GFCF), and interest rate (INR).

3.1 Model specification

This study will be based on the assumption that the inflow of FDI affects Nigeria

economic growth (GDP). Considering the fact that the GDP of an economy are not

determined by FDI alone, the inclusion of three more growth determining variables

is made so as to get a more realistic model. Hence the model:

GDP = f (FDI, EXR, GFCF, INR)……………. (1)

Where:

GDP = Gross Domestic Product

FDI = inflow of Foreign Direct Investment

EXR. = Exchange rate

GFCF = Gross fixed capital formation

33
INR= Interest Rate

The econometric forms of the models are thus:

logGDP = αo + αIlogFDI + α2logEXR + α3logGfCF + α4logINR+ e …… (2)

Where:

α0 = the intercept for the equation

αI = the parameter estimate of FDI.

α2 = the parameter estimate of EXR.

α3 = the parameter estimate of GFCF.

α3 = the parameter estimate of INR.

e = the random variable or error term.

Log = natural logarithm.

The choice of introducing natural log into the model is to make the relationship

that exists more linear.

3.2 EMPIRICAL FRAMEWORK

Due to the crucial role play by FDI in economic development, many researchers

whom have delve into the impact of FDI on economic growth have identify some

of the variables that affect FDI inflows and economic growth (GDP) in Nigeria.

(Ugwuegbe S. Ugochukwu, etall, 2013) identify some of those variables that ought

to be built into the model as follow.

34
GDP=f(FDI,GFCF,INTR,EXR)…………………………………….................... (l)

This equation got transformed into a linear function thus:

GDP=b0 + b1INTR+ b2FDI + b3GFCF + b4EXR + Ut......................................

(2)Where:

GDP = Gross Domestic Product

GFCF= Gross Fixed Capital Formation

FDI = Foreign Direct Investment

EXR = Exchange Rate

INTR = Interest Rate

b0 = the constant

b1- b4 = the coefficients of the explanatory variables

Ut = Error term
3.3 A priori Expectations

Theoretically, the coefficients of the above equation are expected to take these

signs: α1 >0, 𝛼2>0, α3>0, α4 <0

3.4 A’priori Expectations table

Variables Nature of impact Magnitude of impact

FDI + >0

EXR + >0

GFCF + >0

INR − <0

35
3.5Discussion of Variables

I. Gross Domestic Product. (GDP):- This study takes the GDP as an important

indicator of economic growth because the GDP concentrates on the output

produced within the country.

II. Interest Rate (INT):- This is simply the rate paid to owners of money to induce

them to part with their money. The relationship between interest rate and economic

growth is negative. A fall in the rate of interest reduces the cost of investment and

stimulates investment, employment and output (Keynes, 1936).

III. Foreign Direct Investment (FDI):- David M. and Andrew S (2005), defined

FDI as the mechanism through which an emerging markets or economy can catch

up with more advanced nations through the increase in their capital stock, adoption

of more sophisticated technology, and the ability to move towards the total factors

productivity (TFP) frontier by utilizing more economically efficient means of

production and organization.

IV. Exchange Rate (EXR):- This is the rate at which one currency is exchange for

another Exchange rate is important to inflow of foreign direct investment. An

over‐valued exchange rate or highly distorted foreign exchange rate will

discourage exports and negatively affect foreign direct investment. The theoretical

literatures are ambiguous about the direction of the effect of exchange rate on the

36
rate of investment. On the one hand, a real depreciation raises the cost of imported

capital goods, and since a large chunk of investment goods in developing countries

is imported, domestic investment would be expected to fall on account of

significant depreciation. On the other hand, a significant depreciation, by raising

the profitability of activity in the tradable goods sector, would be expected to

stimulate private investment in this sector but it depresses investment in the

non‐tradable goods sector.

3.6Estimation procedure

The ordinary least squares equation technique is the estimation procedure that will

be use for this study. It will be used for estimating the equation specified. As a

justification for this method, Maddala (1977) identified that ordinary lest squares is

more robust against specification errors that many of simultaneous equation

methods and also that predictions from equation estimated by ordinary least

squares often compare favorably with those obtained from equations estimated by

the simultaneous equation method. Among other reasons is the simplicity of its

computational procedure in conjunction with optimal properties of the estimates

obtained and these properties are linearity, unbiased and minimum variance among

a class of unbiased estimators.

3.7Techniques to adopt in the analysis of data

37
The econometric method is the approach employed for the research. The reason for

chosen this techniques is because it will facilitate the model specification,

parameter estimation and appropriate econometric tests.

3.8Sources of data for the study

Annual time‐series data on the variables will be employing in this study for

estimation of functions. Foreign Direct Investment inflow (FDI), Gross Fixed

Capital Formation (GFCF), Exchange Rate (EXR), and Interest Rate (INR) are the

relevant explanatory variables.Equally, the Gross Domestic Product is the

quantitative variable that measures economic performance of a country.

38