The Determinants of Foreign Direct Investment and Their Impacts On Nigerian Economy (1975 - 2010)

In this study, we examined the determinants of forei gn direct investment and their impact in Nigeria from 1975 – 2010. Specifically, we determined how exchange rate, market size (GDP), investment in infrastructure, openness and pol itical risks have impacted on the flow of FDI in Nigeria from 1975 – 2010. The fluctuating and sluggish nature of the nation’s economic growth and development coupled with increase in corruption rate makes it necessary to investigate the effectiveness of the r ole played by foreign resources inflow in Nigerian development process, and the factors that h ave influenced its inflow. In analyzing the data using Ordinary Least Square (OLS), and co-i ntegration Error Correction Method (ECM) we found out that Market Size (GDP), openness, and exchange rate impact much on FDI inflow while political risk was unfavorable to it. Investment in infrastructure was discovered to be favorable but its level is inadequ ate to improve FDI required for sustainable growth and development. We therefore recommend impro vement in infrastructural development and technological development through k nowledge spillover, maintaining a conducive political and social environment for deve lopment. Introduction Since the early 1980s, world foreign direct investme nt flows has grown rapidly. Developing countries received two-thirds of the increase in for eign direct investment world-wide between the late 1980s and 1990s, a sharp change fro m the previous decade, when flows to industrial countries dominate, World Bank (2001). Ge nerally, the composition of capital inflows to developing countries has shifted away from bank loans towards foreign direct investment, and portfolio investment. Nigeria like m ost developing nations was skeptical about the virtues of free trade and investment. In he 1970s and 1980s, bank loans were the primary form of private capital flows to Nigeria econ omy. Within this period, the country imposed trade restrictions and capital controls as p rt of the policy of import substitution industrialization strategy aimed at protecting dome stic industries and conserving scarce Journal of Integrative Humanism – Ghana March, 2 014 ISSN: 2026-6286 75 foreign exchange reserves. It was soon discovered ba sed on substantial evidence that this inward-looking development strategy discouraged trad e s well as Foreign Direct Investment (FDI) and had negative implications on economic gro wth and living condition in the country, Rodrik (1998). The disappointing economic performan ce of Nigerian economy coupled with the globalization of activities in the world economy ; force her to look outward for development strategies. All was required to enable Ni geria meet the minimum growth rate required to meet the United Nations Millennium develo pment goals. Globalization of developing countries is seen by many as the key eco nomic trend of recent time. In a globalizing world economy, a growing number of countr ies have received significant capital flows, mainly in form of foreign direct investment. A distinctive feature of the world economy in recent times has been the growth of forei gn d rect investment, or investment by multinational firms in foreign countries in order t o control asset and manage production activities in those countries. Nigeria is not an exc eption. As a result, the cross-border mergers and acquisition, particularly majority-ownership tra ns ctions surged worldwide during 1990s. Thus, mergers and acquisitions through priva tization, which increased significantly in Nigeria has helped Nigeria economy to grow tremendousl y. A recent study by Gastanga, Nugent, and Pashamova (2007) supported the notion th at countries with relatively liberalized capital accounts that is open economies attract mor e foreign direct investment flows from countries that are more closed. In spite of these enormous benefit, host c untries stand to gain from FDI the flow of foreign capital in form of foreign private capital to developing countries and Nigeria especially over the years have been marginalized. Ac cording to UNCTAD (2001) Nigeria share in FDI flow has steadily declined in recent ti mes. Factors contributing to this lag in FDI flows to Nigeria relative to other countries of t he world according to UNCTAD include; high level of corruption, poor governance, inadequa te infrastructure among others. Morisset (2001) also submit that since 1980, the flow of inve stment have increased dramatically the world over. Total world outflows of capital in that ye ar grew at an average rate of almost 30%, more than three times the rate of world exports at that time, with further growth experienced in the 1990s. Despite all these, Nigeria and other developing countries still lag behind in attracting benefits of foreign direct inv estment. The volume of FDI attracted by Nigeria has not reflected in her development strateg y. Based on this, UN and World Bank initiated a pro-SSA awareness to correct old impressi on which holds that Nigeria and SSA – Sub-Saharan African countries are risky investment l ocation. This also covers important issues like transparency of macroeconomic policies, macroeconomic stability policy on exchange rate and price stability, robust instituti ons and political stability. The Nigerian government and leaders are not relentin g. The following are being implemented to attract more FDI into the country. T hese include; constitutional amendment to bring sound and stable political system. Privati zation of public enterprises, deregularization of down stream oil sector, introdu cing a more relax tax system, creation of the Nigerian Investment Promotion Commission (NIPC), granting of license to Global System for Mobil Communication (GSM), and recent con stitution of Economic Summit. All these and others have helped in giving FDI a human face. Though the country has witness a tremendous improvem ent in economic growth for the past 3 years, we are yet to relate it to increas e in FDI inflows. Also we are not convinced that the strategies embarked upon by government hav e attracted more FDI to the country than before. This is what has warranted this study: T he determinant of foreign direct investment and their impacts on Nigerian economy. Th e next section deals with the review of Journal of Integrative Humanism – Ghana March, 2 014 ISSN: 2026-6286 76 literature, followed by research methodology. We the n round up our study with conclusion, summary and recommendation. Literature Review The contribution of FDI to economic growth has been debated quite extensively in the literature. The traditional argument is that an inf low of FDI improves economic growth by increasing the capital stock, whereas recent literat ure point to the role of FDI as a channel of international technology transfer. There is growing evidence that FDI enhance technological change through technological diffusion, for example , because multinational firms are concentrated in industries with a high ratio of R & D relative to sales and large share of technical and professional workers (Morisset 2000). Multinational corporations are probably among the most technologically advanced firms in th e world. Moreover, FDI not only contributes to imports of more efficient foreign te chnologies, but also generate technological spill-overs for local firms. In this approach, tech nological change plays a pivotal role in economic growth and FDI by multinational corporation s is one of the major channels in providing developing countries LDC’s with access to a dvanced technologies. The knowledge spillovers may take place via imitation, competitio n, linkages and or training, Kinoshita (1998) and Sjoholm (1999). Although, in practice it is rather difficult to distinguish between these four channels. In the 1970s, however, attention was focused on the “ why” question; why firm chose to get up production facilities in foreign lo cation rather than exporting, Caves (1982; 1996). But recently there has been a reviewed intere st on the locational aspect of FDI, which complements the competitive ownership factors of fir m and their modes of market entry, Dunning (1998). This approach take into consideratio n “the relationship between trade and FDI and the economic structure and dynamic comparat ive advantage of regions and countries”, Dunning (2002). Moreover, foreign direct investment can boast domestic investment. For instance, a recent empirical work in dicates a strong link between the volume of foreign direct investment and domestic investmen t, Bosworth and Collins (1999), and Mody and Murshid (2001) find out that a dollar of f reign direct investment results in an almost one-dollar increase in investment. According to Cleeve (2005), the choice of location of FDI should depend on the motivation for undertak ing the investment activity. To attract FDI and Multi-national Enterprise (MNE) activities, different types of incentives are needed to attract the different modes of FDI which are; Natu r l resources seeking, market-seeking, efficiency seeking and strategic asset seeking FDI (see Dunning 1998, Caves 1982 and 1996). Athakorala and Menon (1995) show that foreign direct investment to Malaysia facilitated technology transfer and improved the sk ills of the labour force. For example, for a country with a high level of human capital, such as Korea, increasing the openness measure by the average gap between closed and open economies can raise growth by as much as a quarter of a present a year, World Bank (2002). Fur thermore, FDI can help boast host country exports. Multinational enterprises may help developing host countries process and export locally produced raw materials, using their m arketing skills, superior technology, and general know-how. They facilitate the export of loca l production through their distribution network and they often account for a significant sha re of host country export (Fontagne, 1997). In the early 1970s, Africa attracted a hi