FOREIGN DIRECT INVESTMENT (FDI) AND ECONOMIC GROWTH IN NIGERIA.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Over time, foreign direct investment (FDI) has become increasingly important in the global economy and is now considered a vital tool for promoting economic growth and development, particularly in emerging economies like Nigeria, as noted by (Musah et Al 2018). (Oludayo 2020) explains that FDI can serve as a catalyst for growth by enabling greater integration into global financial and capital flows, expanding job opportunities and export potential, building technological know-how, promoting efficiency spillovers to local businesses, and creating investment arrangements that enhance the economic potential of host countries. Policymakers, particularly in low-income nations, have taken an interest in FDI due to its ability to address major challenges like lack of financial resources, technological gaps, and skill shortages. Therefore, (Okoye 2015) suggests that FDI can provide the necessary funding to support sustained growth and long-term development projects in host countries.

According to (Muntah et al 2015), foreign direct investment (FDI) has a positive impact on the development of human resources, capital formation and the enhancement of organization and managerial skills within an economy. Moreover , the advent of globalization has prompted many countries to open up their economies to attract foreign capital inflows thereby supplementing their insufficient domestic financial resources, (Akinwale and Adekunle 2019).

Foreign direct investment refers to an investment that establishes a durable and enduring connection, indicating a long-term commitment and displaying lower volatility. It is commonly perceived as a combination of capital stocks and technology, which has the potential to directly and indirectly contribute to economic growth through various channels and spillover effects (Almfraji and Almsafir, 2014). Another way to define FDI is as a type of international investment where a domestic entity in one country acquires a lasting interest in an enterprise located in another country. This interest can take the form of equity capital, reinvested earnings, or other forms of capital (Owntuamor and Arene, 2018). Foreign direct investment (FDI) encompasses more than just financial transactions; it involves the transfer of a comprehensive set of manufacturing techniques, managerial and marketing expertise, goods, advertisements, and business practices aimed at maximizing global profits.

Developing nations often utilize FDI as a strategy to increase their foreign exchange reserves through investments, economic ventures, and subsidies from developed nations. It is considered an effective method of international trade and a valuable source of capital formation, technology transfer, and expertise. FDI can facilitate the transfer of breakthroughs and innovations to recipient countries, including Nigeria, due to its spillover effects. Cross-border trade is essential for sustainable and equitable development, although the relationship between the Sustainable Development Goals and the need for rapid growth is not clearly defined (UNCTAD, 2019).

Emerging economies, such as Nigeria, have recognized the potential benefits associated with attracting high levels of FDI and are prioritizing efforts to attract such investments. Successive Nigerian administrations have implemented various economic policies to increase FDI inflows. For example, the Structural Adjustment Programme (SAP) implemented in 1986 aimed to liberalize the economy, attract capital flows, and improve resource allocation in the private sector (Ajibolaa et al., 2018). The Nigerian government and monetary authorities have also implemented policies, plans, and incentives, such as infrastructure enhancements and tax incentives, to encourage FDI over the past few decades.

However, the key question remains as to whether these actions have effectively impacted the Nigerian economy in terms of FDI inflows and their positive effects. According to Nigeria foreign direct investment historical data, the total foreign investment inflow to Nigeria economy were, for 2020 it was USD -0.19billion a 105.64% decline from 2021. For 2021 it was USD 3.31billion, a 38.9% increase from 2020 and in 2020 it was 2.39billion a 3.48% increase from 2019. Also according to UNCTAD 2022 World Investment Report, FDI flows to Nigeria totalled USD 4.8billion in 2021 more than doubling from the previous year (USD 2.3 billion in 2020) total capital inflow for the period despite the large resources base , Nigeria are still struggling to attract a high level of investors that will be measurable with the standard of it's economic potential.

Developing countries such as Nigeria have a primary goal of fostering economic growth by stimulating domestic production activities. However, these countries face a shortage of investment opportunities and require capital from developed Nations, therefore the Impact of foreign direct investment (FDI) on the economic growth of Developing countries is of significant and should not be underestimated, ( Okonkwo 2016). In light of the anti-globalization movement, which opposes the continued liberalization of international trade and investment, the significance of this subject has grown. Foreign Direct Investment (FDI) and it's Developmental Impact has thus become a topic that garners significant attention and interest from academia and policymakers.

1.2 Statement of Problem

Nigeria possesses the necessary qualifications to be a significant recipient of foreign direct investment (FDI) in Africa. This is attributed to the country's abundant natural resources, infrastructure development, manpower development, improvement in the ease of doing business and other intangible assets etc. and its consistent position as one of the top three African nations that have continuously attracted FDI in recent years, (Sabuur et al 2020). Development economists recognize that achieving rapid growth necessitates a substantial level of investment, which can only be facilitated by high savings, particularly in the absence of FDI and aids (Anochiwa et Al 2018). Developing economies like Nigeria where there are challenges of lack of adequate capital resources higher inflationary rates and high rate in poverty level due to corruption and mismanagement affects savings and investment, makes the economy difficult to work without foreign direct investment (FDI). The researcher is concerned having observed the government giving incentives like tax holiday in order to attract FDI into the country, if this incentives have actually attracted FDI, and also as we seek for more FDI in the country, having seen how it has helped countries like China, Malaysia, Taiwan etc to grow, it is equally important to examine the extent of the Impact of the existing FDI in the economy. Such knowledge will help the country and private sector.

1.3 Objective of the Study

The specific objectives of this study are as follows:

To examine impact of foreign direct investment on gross domestic product in Nigeria.
To examine the impact of if human capital on gross domestic product in Nigeria.
To empirically examine if a long run relationship exist between foreign direct investment and gross domestic product in Nigeria.

1.4 Research questions

In with the research objectives, this research work tends to answer the following questions:

What is the impact of foreign direct investment on economic growth in Nigeria?
What is the impact of human capital on gross domestic product Nigeria?
Does a long-run relationship exist between foreign direct investment and gross domestic product in Nigeria?

1.5 Statement of Hypothesis

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