FDI and Economic Development in Nigeria

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Outline

Research question

  • What are the positive and negative effects of FDI in Nigeria?

Methodology

  • Descriptive and argumentative analyses based on current literature review

  • Review of some empirical studies

Delimitation and scope of the study

  • The contribution of FDI on the following drivers of development will be analyzed technology, infrastructure, education and employment.

  • Our analysis will cover a period of more than 10 years (2000-2015)

  1. Theoretical part

  • The concept of FDI

  • Current trends of FDI in the world

  • Volume and structure of FDI in Nigeria

  • Literature and empirical review on the linkage between FDI and economic development(drivers mentioned above) in Nigeria

  1. Assessment of arguments and empirical analysis

  • Motivation of FDI in Nigeria

  • Positive and negative effects of FDI on development in Nigeria

  • Empirical analysis

  1. Conclusions and recommendations

Foreign Direct Investment, FDI, refers to investing directly in theproduction or enterprise in a nation by a person or organization froma different country. It can happen through purchasing a company fromthe target nation, or via expansion of operations to a business thatis already in operation in the host country. The World Bank definesFDI as an investment made with the intention of establishing along-lasting management intention in a business, as well as operatingin a nation different from the investors. Generally, FDI entailsmergers in addition to acquisitions, construction of new facilities,reinvestment of gains from foreign business and intra organizationloans. It endorses the exchange of technology and expertise.

Nigeria’s foreign direct investment dates back to the colonialperiod. Colonists exploited natural resources to ensure developmentin their mother nations. Currently, the Nigerian administrationrealizes the relevance of FDI in improving economic development. As aresult, several approaches including incentive plans and regulatoryapproaches have been implemented to enhance the movement of foreigninvestment to Nigeria. Since the country acquired its sovereignty, ithas put in place measures to draw foreign direct investors to thenation. The measures involve repealing of rules, which limit foreigninvestment development and, proliferation of investment laws. FDI islargely associated with resulting in economic development.

Research Question

The paper discusses the positive and negative effects of FDI inNigeria.

Methodology

The research uses available literature on foreign direct investmentto conduct a descriptive and argumentative analysis on how FDIcontributes to economic development. FDI has empirically been notedto encourage economic development by several researchers. Themethodology also involves reviewing the empirical study of differentresearchers.

Delimitation and scope of study

In order to determine the effectiveness or ineffectiveness of FDI,researchers access its impact on drivers of development. For thisresearch, the drivers of development employed in discussing theimpact of FDI on economic development in Nigeria are technology,infrastructure, education and employment. The analysis covers FDI inNigeria for the period 2000-2015.

Theoretical Part

The concept of FDI

FDI refers to an absolute source of foreign exchange, specificallyin developing nations such as Nigeria. It is possible to assessforeign direct investment “in terms of inflow of new equitycapital, re-invested earning, trade and supplier’s credit, netinflow of borrowing and other obligations from the parent company orits affiliates” (Kunle, Olowe and Oluwafolakemi 2014, p.235). Itcan be viewed as an additional production aspect as well as anaddition to the national savings endeavor by the country importingcapital. In addition, the concept of FDI as an endeavor by persons,groups, organizations and administration to transfer productiveresources from one country to another with the objective of gainingsurplus. It has become an integral source of external resource flowsto developing nations over the years, becoming an important sectionof creating capital in the nations, although their global share inFDI distribution progresses to be small.

Current trends of FDI in the world

In recent years, many nations have ensured their businessenvironment become investment friendly, which makes it possible toadopt international opportunities (Economy Watch 2010, p.1).This is made possible through attracting funds that are investable tothe nation. Whereas developed nations have faced a decline in theinflow and outflow of FDI, the drop in world FDI flows has minimallyaffected developing nations. Developing nations seem to be drawingmore FDI compared to developed ones, in addition to contributing toclose to a third of international investment outflows (ForeignDirect Investment Trends and Developments 2013, p.39). ThePacific and Asia are the leading investment destination for theglobe’s developing areas. Additionally, the region is advancing tobecome a progressively relevant investor on an international level.

Volume and Structure of FDI in Nigeria

Due to the large natural resource base as well as market size,Nigeria succeeds in becoming a main receiver of FDI. It is among themain African nations, which have been constantly gaining FDI in theprevious decade. Nevertheless, “the level of FDI attracted byNigeria is mediocre compared with the resource base and potentialneed” (Omowunmi 2012, p.7). Although various investment promotionendeavors are possibly encouraged by transitory macroeconomicchallenges like slow growth rates and increasing joblessness, thereare as well more basic clarifications for the enhancing insistence onencouraging investment in current years. In specific, it seems thatthe globalization as well as regionalization of the global economyhas resulted in increasing interest in FDI incentives. FDI has beendepicted as a relevant growth promoter by improving the level ofcapital creation. As a result, it is presumed to enhance the amountof domestic capital creation. This also refers to large-scalemanufacture that leads to advantages of economies of scale, enhancingjob opportunities and export. The inflow of FDI to Nigeria beginning2003 onwards has been impressive. The FDI value was $2.23billion in2003, rising by 87% in 2006 to $9.44billion (Abdallah &amp Abdullahi2013, p.153). Research demonstrates that the inflow of FDI to Nigeriahas been increasing for the previous two decades (Abdallah &ampAbdullahi 2013, p.153).

Linkage between FDI and economic development in Nigeria

FDI results in economic development in Nigeria by affecting variousdevelopment areas. These include creating employment and generatingincome – FDI acts as an avenue for persons looking for work to getemployment via the multinational companies. At the same time, thereare organized wage groups, which are available for skilled employeesnot comparable to those provided by local Nigerian companies (Salami&amp Oyewale 2013, p.70). FDI and technology – as multinationalsinvest in Nigeria, they transfer the technology used in production tothe host nation. Spillover effects also influence positivedevelopment of technology as the host country becomes aware of newmethods of production. FDI and infrastructure – many recipientnations employ the money they get from FDI to expand theirinfrastructural facilities (Economy Watch 2010, p.1). Thefinances may be invested in the construction or roads or railways andother infrastructure. Countries are able to advance their industries.Health infrastructure also develops through the provision of improvedequipments from investing nations. FDI and education – Nigeria asthe receiving nation of FDI may use the money it receives to educatethe unskilled workforce, in their nation. Investors invest in thetraining of people they hire to work in the multinationals (EconomyWatch 2010, p.1).

Assessment of Arguments and Empirical Analysis

Motivation of FDI in Nigeria

FDI has numerous natural resources in addition to being an oilproducing country (African Forum&amp Network on Debt &amp Development2005,p.16). Hence, has been able to attract foreign investors inthe country. In addition, the Nigerian administration encourages andsupports FDI by availing foreign investors with a healthy surroundingin addition to a charitable tax incentive. The country as well relieson assistance from overseas investors in natural resourcesmanagement, technical and business expertise, which go along withFDI. FDI is an efficient approach, which is employed by developingnations in attaining economic growth. Nigeria, owing to its massivereserves in both natural and human resources presents investors withan exceptional market for investing their resources (Salami &ampOyewale 2013, p.73). However, such investment though resulting inmajor economic gains to several groups, it may fail to ascertainsustainable growth in the end. In order for FDI to result in apositive influence on sustainable growth, the public as well asprivate sectors ought to pursue corporate social accountability.

Positive and negative effects

There are both positive and negative impacts of FDI on the economicgrowth of Nigeria.

The impacts include stimulating the national economy – FDI hasresulted in gains to Nigeria’s national economy. It contributes togross fixed capital creation and domestic product and paymentsbalancing. Empirical research depicts a positive association amidenhanced GDP as well as FDI inflows (Asiedu 2003, p. 493). Foreigndirect investment has also led to debt servicing settlements,encouraged export markets and resulted in the creation of foreignexchange returns. Subordinates of Trans-National Companies thatcontribute more to FDI are approximated to result in close to a thirdof the entire international exports. Conversely, FDI levels do notinevitably provide the clue of the domestic advantage. Corporateapproaches like protective taxes may minimize the amount of corporatetax gained by host administrations. In addition, the importation oftransitional goods, management expenses, royalties, proceedsrepatriation, and the repayment of loan interests may restrict theeconomic development to Nigeria (Asiedu 2003, p. 495). Hence, theimpact on economic growth largely relies on the host nationsituations. These include the amount of domestic savings, entrymethod and sectors engaged, in addition to a nation’s capability tocontrol overseas investment.

FDI stability – FDI inflows are less likely to be impacted bychange in national exchange rates when compared to differing privatesources, like loans. This is since currency devaluation implies adecline in the relative production expense and assets for overseasorganizations and hence enhances the relative attraction of a hostnation (Dupasquier &amp Osakwe 2005, p.6). FDI can encourage productdiversification via investment to advent enterprises, thus minimizingmarket dependence on a restricted figure of sectors or goods. Yet, ifglobal flows of trade as well as investment fall internationally andfor a prolonged time, then stability is not possible to guarantee.Advent inflows of FDI are specifically impacted by internationaltrends, since it is difficult for an overseas nation to de-invest orinvalidate from overseas affiliates when contrasted to portfolioinvestment. Organizations are hence more probable to be cautious inguaranteeing they will build up gains prior to making any adventinvestments.

Social growth – in cases where FDI results in the generation andexpansion of enterprises in Nigeria, it in turn results in jobcreation, increased salaries, and makes replacement to droppingmarket sectors (Abdallah &amp Abdullahi 2013, p.157). Thedisadvantage is that such gains might only be experienced by a smallsection of the population, for instance where employment is offeredto just the educated, rich elites, salary differentials amid incomegroups increase. Culture and social effects might surface withinvestment directed towards non-conventional goods. For instance, ifmonetary resources are swayed from food and subsistence manufactureto more goods that are complicated and endorsing a consumerismculture may result in negative environmental effects. Within regionaleconomies, rural and small enterprises of FDI host nations is minimalcapability to draw overseas investment and bank credit/ loans, hencespecific domestic enterprises might be pushed out of operation.

The development of infrastructure and technology transfer – parentorganizations are able to support their overseas subsidiaries throughguaranteeing ample human resources as well as infrastructure areimplemented (Gujarati &amp Porter 2009, p. 19). Such investment toadvent enterprise sectors may encourage new infrastructureadvancement as well as technologies in Nigeria. The advancement mayalso lead to social and environmental gains, however, only when theyspillover to host societies and enterprises. Investment in R&ampDfrom parent organizations may encourage improvement in manufactureand processing methods in Nigeria. Nevertheless, this presumes thatin-house investment leads to developments. Overseas technology ororganizational methods might essentially be unsuitable to Nigeria’sneeds, capital intensive as well as result in a negative impact onregional competitors, specifically smaller enterprises that areincapable of making corresponding adoptions. In the similar manner,external alteration in suppliers, clients and different competingorganizations are unavoidably an enhancement on the initialdomestic-founded strategies.

Crowding in and out – crowding in happens when FDI organization canencourage development in up/down stream domestic enterprises in thestate economies. Crowding out happens when parent organizations takeover regional markets, stifling regional competition as well as freeenterprise. Crowding out happens due to administrative restrictions,like labor and environmental regulations being kept artificially lowto draw overseas investors (Hsiao &amp Shen 2003, p. 887). This isbecause reduced standards may minimize the short-term operativeexpenses for enterprises in Nigeria. Exclusive manufacturingacknowledgments and partisan treatment towards TNCs by hostadministrations may limit different overseas investors and motivateoligopolistic market system. For instance, in businesses where demandor product supply is greatly price elastic as well as capitalintensive. Thus, restriction results in extra expenses of complianceand is hence more probable to have an impact on an organizationsresolution to invest in the country.

Pace and scale of investment – it might be hard for the Nigerianadministration to control and absorb fast and huge FDI inflows, withreference to controlling the negative effects of large-scaleproduction development on social and surrounding aspects (Dutse 2008,p.1). In addition, a high level of FDI inflows to Nigeria’sdeveloping economy targets primary sectors, like mining, petroleum,utilities and agriculture. Primary sectors are capital as well asresource intensive, with more entry in economies of scale. Hence, hasa slow effect in the production of economic spill over positiveimpacts. As a result, in the short term Nigeria’s economy will haveminimal capability to alleviate environmental harm or employprotective measures.

Empirical analysis

Previous research is inconclusive regarding the positive andnegative impacts of FDI on Nigeria’s economic growth. Kunle, Oloweand Oluwafolakemi (2014, p. 236) assert that past research on theimpact of FDI and economic advancement in Nigeria has resulted ininconclusive proof. The authors also note that FDI inflow haspositive impact on numerous economic aspects, which then influenceeconomic growth. The empirical analysis demonstrates that theargument on the effect of FDI is far from becoming conclusive. Thefunction of FDI appears to be nation particular and may be positive,negative or irrelevant, which relies on the technological, economicand institutional situations in the receiving nations. For instance,Eka and Solomon (2013, p.197) explored the empirical association amidFDI and economic development from 2000-2009 employing a yearly dataobtained from the Central Bank of Nigeria statistics officialstatement. The outcome of the research demonstrated that FDI resultedin a positive yet insignificant effect on Nigeria’s economicadvancement.

Contrary, Alejandro (2010, p.33) clarifies that FDI plays a crucialfunction in international business and economics. It can result inthe emergence of advent markets, affordable manufacture facilities,ability to access advent technological products, expertise as well asfunding for the host nation or the overseas country that invest.Zhang (2001, p.181) also supports the existence of a positiverelationship between FDI and economic development. He argues thatthrough the transfer of technology as well as spillovereffectiveness, inflowing direct investment may boost a nation’seconomic performance. Further, Otepola (2002, p.1) as well evaluatedthe significance of FDI in Nigeria. The empirical analysis evaluatedthe effect of FDI on development and concluded that growth isattained via exports. This is because FDI creates a channel fordeveloping countries to export products that are sold by developednations, in turn enhancing export sophistication. Most developingnations seek FDI as a means for promoting exports, instead ofmanufacture for domestic economy. Foreign investors create plants incountries where it is possible to manufacture and export products atreduces prices.

Further studies demonstrate that the impact of FDI relies on theeconomic sector where it functions (Kunle, Olowe &amp Oluwafolakemi2014, p. 237). When there is FDI inflow within primary sectors, theoutcome is a negative impact of economic development. Nwankwo,Ademola and Kehinde (2013, p.13) explored the effect of globalizationon FDI in Nigeria from the start of globalization. He employed adescriptive approach as well as secondary data sources. The outcomeof the research was that foreign direct investment has resulted innotable advantages in Nigeria in the employment sector, technologytransfer and endorsing local enterprises among other gains. However,there are various drawbacks in achieving the complete realization ofthe gains of FDI. For instance, Adelegan (2000, p.7) notes thatforeign direct investment and its impact on Nigeria’s economicgrowth has a negative relation to gross domestic investment. Althoughit may be beneficial in the short run, FDI lacks a lasting impactaccording to Durham (2004, p.290). For instance, his analysis findsno positive association amid FDI and development rather supposes thatthe impacts are conditional on the absorptive ability of hostnations.

Conclusions and Recommendations

Research demonstrates that there exists a direct relation to inflowof FDI and economic growth in Nigeria. This means that properperformance of the economy is a positive sign of FDI inflow. However,FDI does not necessary result in a positive impact on economicdevelopment. Nigeria’s administration needs to free up its foreignsector to ensure trade barriers, import duties and different leviesare minimized and at the same time draw investors.

References

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