ANALYSIS OF THE RELATIONSHIP BETWEEN FOREIGN DIRECT INVESTMENT (FDI) AND ECONOMIC GROWTH IN NIGERIA (1980-2020).

CHAPTER ONE

INTRODUCTION

1. Background to the Study

Over time, the importance of foreign direct investment (FDI) in the global economy has grown, and it is now seen as one of the most crucial methods for fostering economic growth and development in emerging economies like Nigeria (Musah, Gakpetor, Kyei, and Akomeah, 2018). According to Oludayo (2020), this is because foreign direct investment (FDI) can act as a growth catalyst by increasing the possibility of the country's integration into global financial and capital flows, expanding employment and export bases, creating technological capability building, efficiency spillovers to local firms and establishing investment arrangements that increase the potential for economic growth of the host countries. Furthermore, it has attracted the attention of policymakers, particularly in low-income countries, due to its capacity to overcome two (2) major challenges: lack of financial resources and shortage of technological advancements and skilled workers. Hence, Okoye (2015) posits that foreign direct investment (FDI) can provide the funding required to support long-term development projects and sustainable growth in a host country.

However, foreign direct investment (FDI) is defined as a category of international investment where a resident entity in one country obtains a lasting interest in an enterprise resident in another country, which can be in the form of equity capital, reinvested earnings, or other capital(Owutuamor and Arene, 2018).This investment entails not only the transfer of money but also a whole set of physical manufacturing methods, managerial and marketing know-how, goods, advertisements, and business procedures aimed at maximizing worldwide profits. Even though foreign direct investment includes not only mergers and acquisitions and new investment but also reinvested earnings, loans, and other similar capital transfers between parent companies and their affiliates, it is a form of investment that offers opportunities for the transfer of technology across borders and the development of human capacity in addition to fostering competition in domestic input markets (Ahmed, Jai, and Joti, 2020)

According to Rabiu and Adaramola (2021)foreign direct investment (FDI) is a strategy used by the majority of developing nations to increase their foreign exchange reserves through investments, economic ventures, and subsidies from developed nations. Hence, it is regarded as an effective means of trading between nations as well as a valuable source of capital formation, technological transfer, and know-how. Additionally, because to the spillover effect, breakthroughs and inventions can be transferred to recipient nations, one of which is Nigeria. It is unclear how the Sustainable Development Goals relate to the need for rapid growth, but cross-border trade is crucial for economies to experience sustainable and equitable development (UNCTAD, 2019).

According to Sabuur and Ismaila (2020), the governments of these emerging economies, particularly Nigeria, are now paying more attention to the potential inherent in drawing large foreign direct investment (FDI) levels to their economies, which is a result of the overwhelming benefits attributed to foreign direct investment (FDI). Thus, successive administrations in Nigeria over the years have employed a variety of economic policies in an effort to increase the inflow of foreign direct investment (FDI). For instance, the Structural Adjustment Programme (SAP), which was first implemented in 1986 and had multidimensional liberalization as its main goal, resulted in the attraction of capital flows into Nigeria while also improving its efficient allocation in the private sector (Ajibolaa, Isiakab, Ogunleyec and Adeyemid, 2018) citing (Central Bank of Nigeria, 2005). Additionally, the Nigerian government and the monetary authority have also over the past few decades implemented several policies, plans, and innovations to open up the economy, enhance infrastructure, and offer tax incentives like tax holidays for infant industries, reduced import tariffs, etc. in view of increasing the flow of foreign direct investment (FDI) in the country.

However, the crucial query here is whether these actions have enhanced foreign direct investment (FDI) favorable impact on the Nigerian economy. According to (Oumarou and Maiga, 2019)) the total foreign direct investment (FDI) inflow to the country in 2018 was around USD 1.9 billion, while in 2017, foreign direct investment (FDI) inflow was around USD 3.5 billion, showing a decrease due to the consequence of the austerity measures imposed in 2018. At the third quarter of 2019, the FDI was only 3.37% (USD 200.08 million) of the total capital inflow for the period.Yet despite the huge resource base of the country, Nigeria has not been able to attract a high level of foreign investors that is commensurate with its economic potentials (Oludayo, 2020). Though, the domestic economic constraints of a host country, which may include an underdeveloped financial market and deregulated domestic businesses, may limit its ability to capitalize on and profit from these externalities. However, since a significant amount of foreign direct investment (FDI) is acquired through mergers and acquisitions, a healthy stock market is better for the host economy. This according toMusah et al (2018) has the potential to broaden the pool of financing options available to businesses and, thus, to significantly contribute to the development of connections between domestic and foreign investors.

1.2 Statement of Research Problem

According to Sabuur et al (2020) Nigeria qualifies to be a major recipient offoreign direct investment (FDI)in Africa due to its natural resource base and sizable market, and also one of the top three African nations that have continuously received foreign direct investment (FDI) over the past decades. However, in contrast to its resource base and prospective need, Nigeria only draws a little amount of foreign direct investment (Ahmed,2020) citing (Asiedu, 2003). Furthermore, despite various studies that looked at the impact of foreign direct investment (FDI) on Nigeria's economic growth with conflicting results, the empirical relationship between foreign direct investment (FDI) and economic growth in Nigeria is still unclear (Oseghale and Amonkhienan, 1987; Odozi, 1995; Oyinlola, 1995; Adelegan, 2000; Akinlo, 2004; Okoye, 2015; Oludayo, 2020). Although the majority of the earlier studies, significant research on foreign direct investment (FDI) and growth in sub-Saharan Africa involve many countries, according to recent evidence, the association between foreign direct investment (FDI) and growth, however, may be country and time specific.

But Ajibolaaet al (2018) citing Asiedu (2001) posit that the factors which influence foreign direct investment (FDI) in one location could differ from those in other regions. Yet in a similar vein, the factors that influence foreign directinvestment (FDI)in various nations within a region can vary over time and between periods. Although studies on the connection between foreign directinvestment (FDI) and economic growth in Nigeria have produced a variety of conclusions, none of which are unanimity (Ekine, Ogorchukwu and Ameh, 2017). However, when these earlier studies are closely examined, it becomes clear that no conscious effort was made to account for the fact that more than 60% of foreign direct investment (FDI) inflows into Nigeria are made into the extractive (oil) industry. Hence, these studies modelled the influence of natural resources on Nigeria’s economic growth.

However, the value of productive investments, especially since the early 1980s, raises concern (Ekine et al, 2017). As such, several governments in Nigeria have at one time or another put forth different economic policies aimed at gaining economic independence through improved production capacity (Okoye, 2015). Such policies include the Industrial Inspectorate Act of 1970, the National Industrial Property Act of 1979, and the National Office for Technology Acquisition and Promotion (NOTAP) of 1992, and so on. To help the government achieve its goal of economic independence, it has been thoroughly investigated that the impact of FDI on the economy in the short run is negative while it has a positive relationship in the long run. Considering how foreign direct investment in Nigeria affects its economic growth, there is a need for further studies and analyses to be carried out on the relationship between foreign directinvestment (FDI) and economic growth in Nigeria.

1.3 Objectives of the Study

The main objective of this study is to examine the relationship between foreign direct investment (FDI) and economic growth in Nigeria. However, the specific objectives are to:

1. To examine therelationship between foreign direct investment (FDI) and economic growth in Nigeria.

2. To examine the long run relationship between foreign direct investment (FDI) and economic growth in Nigeria.

1.4 Research Questions

1. What is the relationship between foreign direct investment (FDI) and economic growth in Nigeria?

2. What is the long run relationship between foreign direct investment (FDI) and economic growth in Nigeria?

1.5 Research Hypothesis

The hypothesis of the study will be tested as follows:

H0: There is no significant relationship between foreign direct investment (FDI) and economic growth in Nigeria.

H1: There is a significant relationship between foreign direct investment (FDI) and economic growth in Nigeria.

1.6 Significance of the Study

Over the years, the Nigerian economy have been unable to meet up with the standards of developed nations in terms of economic growth rate due to the existing economic issues present in the economy and over-dependence on the oil and gas sector which has remained a major challenge to the economy. However, the findings of this study will give us the foundation for estimating and, increase the knowledge of policy makers on how to boost the inflow offoreign direct investment (FDI) on economic growth. Additionally, the findings from this study will help us to identify variables that are restricting the flow of foreign direct investment (FDI) into Nigeria economy.

Finally, this study will serve as a conceptual guideline and reference material to students, scholars and researchers who will be interested to conduct a study regarding the issue under investigation by providing useful information to their research work.

1.7 Scope of the Study...

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