Foreign Direct Investment. A Panacea to National Economic Development in Nigeria?

Doktorarbeit / Dissertation , 2016 , 100 Seiten

BWL - Investition und Finanzierung

The study examined foreign direct investment (FDI): a panacea to national economic development. The objectives set for the study are; to determine the causes of the Nigerian economic downturn, to ascertain the effects of foreign direct investment, to suggest measures that would be taken to accelerate the economic development of Nigeria. Primary and secondary data were used; the population of the study was 1200 from which the sample sizes of 400 were determined using Taro Yamani’s formula. The research instruments used were questionnaire and oral interview. The reliability of the research instruments was tested using Pearson Product moment correlation coefficient; the result gave a reliability index of 0.98 indicating a high degree of consistency. Chi-square and ANOVA approach were the statistical tools used. The findings from the study reveals that, decline in oil prices and revenue, increase government expenditure and decline in market indices are the challenges posed by economic downturn in Nigeria; consumption-based economy, poor savings, high credit culture and huge financial outflow are the causes of the economic crises in Nigeria; reduction in direct foreign investment and overseas development assistance are the effects of economic crisis to Nigeria and finally, diversification of the economy, robust regulatory policies and professional supervision to aid foreign direct investment in Nigeria. Based on the findings, the researcher made the following recommendation: Nigeria should adopt tough policy measures as effective strategies towards a comprehensive strengthening of the economy, government should ensure that policy recommendations are implemented in order to reposition the Nigerian economy against the impact of future economic downturn, government should create enabling environment to attract foreign investors in order to boost economic activities in the country. Finally, government needs to sincerely focus on developing/strengthening the economy and provide alternative sources of revenue on a sustained basis.

Table of Contents

Dedication

Acknowledgements

ABSTRACT

LIST OF TABLES

CHAPTER ONE: INTRODUCTION
1.1 BACKGROUND TO THE STUDY
1.2 THE STATEMENT OF THE PROBLEM
1.3 THE OBJECTIVES OF THE STUDY
1.4 RESEARCH QUESTIONS
1.5 RESEARCH HYPOTHESES
1.6 JUSTIFICATION OF THE STUDY
1.7 SCOPE AND LIMITATIONS OF THE STUDY

CHAPTER TWO: LITERATURE REVIEW
2.1 THEORETICAL FRAMEWORK
2.2 THEORIES OF FDI AND TRANSNATIONAL PRODUCTION
2.3 THEORIES OF ECONOMIC GROWTH AND FDI
2.4 FOREIGN DIRECT INVESTMENT AND SUSTAINABLE DEVELOPMENT
2.5 THE PROS AND CONS OF FDI IN ECONOMIC DEVELOPMENT
2.5.1 STIMULATION OF NATIONAL ECONOMY
2.5.1 THE STABILITY EFFECT OF FDI
2.5.2 SOCIAL DEVELOPMENT EFFECTS OF FDI
2.5.3 INFRASTRUCTURAL DEVELOPMENT AND TECHNOLOGY TRANSFER
2.5.4 THE EFFECT OF FDI ON BUSINESSES
2.6 DETERMINANTS OF FOREIGN DIRECT INVESTMENT
2.7 TRANSPARENCY AND ECONOMIC POLICY DEVELOPMENT
2.7.1 BRIBERY AND CORRUPTION
2.7.2 NON-TRANSPARENCY IN PROPERTY RIGHTS AND PROTECTION
2.7.3 THE LEVEL OF BUREAUCRATIC INEFFICIENCY
2.7.4 WEAK RULE OF LAW
2.7.5 POOR CONDUCTION OF ECONOMIC POLICIES
2.8 TRANSPARENCY AND FOREIGN DIRECT INVESTMENT

CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY
3.1 SCOPE OF THE STUDY AND SOURCES OF DATA
3.2 METHOD OF DATA ANALYSIS
3.2.1 TEST OF HYPOTHESES
3.2.2 THE ANALYSIS OF VARIANCE (ANOVA) APPROACH
3.2.3 THE COEFFICIENT OF DETERMINATION APPROACH
3.3 SPECIFICATION OF MODELS
3.4 ASSUMPTIONS OF THE LINEAR STOCHASTIC REGRESSION MODEL

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF DATA
4.1 INTRODUCTION
4.2 PRESENTATION OF DATA
4.3 HYPOTHESES TESTING
4.3.1 HYPOTHESIS 1
4.3.2 THE ANOVA APPROACH
4.3.3 THE COEFFICIENT OF DETERMINATION APPROCH
4.3.4 THE T-TEST
4.3.5 HYPOTHESIS 2
4.3.6 THE ANOVA APPROACH
4.3.7 THE COEFFICIENT OF DETERMINATION APPROACH, R2
4.3.8 THE T-TEST
4.4 DISCUSSION OF RESULTS
4.4.1 HYPOTHESIS 1
4.4.2 HYPOTHESIS 2

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 SUMMARY
5.2 CONCLUSION

BIBLIOGRAPHY

Dedication

To God Almighty who made it possible that this academic sojourn came to a successful end, and all who believe that it is never too late to achieve a goal especially in an academic world. I dedicate this project to the loving memory of my Late father Doc. Ezekiel Chidi Nwauba though he is no more, but his words still lives in me.

Acknowledgements

I wish to express my indebtedness to all those, whose contributions were prominent in the realization of this work.

I am particularly grateful to my indefatigable supervisor, Prof. Walter Idada, for his painstaking suggestions, corrections, limitless guidance, encouragement and numerous pieces of advice which led to the completion of this work.

I lack words to express my sincere gratitude and appreciation to the Head, Department of Public Administration Dr. Nosa Godwin and the Dean of Management Science Prof. O.O.Iyoha who at one time or the other, not only encouraged but also made useful suggestions. Deserving sincere appreciation are ICONS of the literary world and lecturers of my department for devoting their time to read and offer useful corrections and suggestions that greatly enhanced the quality of this work.

I also wish to appreciate the contributions of Dr. Taiwo Ajayi of Courage University, Republic of Benin and these intellectuals; Prof.O.J. Imahe, Prof. F.O. Ikpotokin, Prof. Sam.O.Uniamikogbo, Prof. Esibe Justice, Prof. B.Aigbokhan, Prof. A.S. Adagbonyi, Prof. Atapia.O.Atapia, Dr.P.A.Ihionkhan, Dr.J.I.Ikharehon, Dr.L.Okosodo, Mr.P.A.Akhator, Mrs.J.Itoya and Mr.P.O.Igudia. I am grateful for their inspirations.

To the numerous authors and publishers whose works were indispensable to the scope and quality of this work, I say a big thank you. I also wish to appreciate Miss Blessing Ujunwa, who patiently sat with me for long hours, days and weeks to type this work. This acknowledgement will not be complete without appreciating the invaluable support and love I received from my beloved wife Mrs. Nwauba, Stepheny Ozioma and our children; Elisha, Elijah and Princess. May God richly reward and bless all of them.

ABSTRACT

The study examined foreign direct investment (FDI): a panacea to national economic development . The objectives set for the study are; to determine the causes of the Nigerian economic downturn, to ascertain the effects of foreign direct investment, to suggest measures that would be taken to accelerate the economic development of Nigeria. Primary and secondary data were used; the population of the study was 1200 from which the sample sizes of 400 were determined using Taro Yamani ’ s formula. The research instruments used were questionnaire and oral interview. The reliability of the research instruments was tested using Pearson Product moment correlation coefficient; the result gave a reliability index of 0.98 indicating a high degree of consistency. Chi-square and ANOVA approach were the statistical tools used. The findings from the study reveals that, decline in oil prices and revenue, increase government expenditure and decline in market indices are the challenges posed by economic downturn in Nigeria; consumption-based economy, poor savings, high credit culture and huge financial outflow are the causes of the economic crises in Nigeria; reduction in direct foreign investment and overseas development assistance are the effects of economic crisis to Nigeria and finally, diversification of the economy, robust regulatory policies and professional supervision to aid foreign direct investment in Nigeria. Based on the findings, the researcher made the following recommendation: Nigeria should adopt tough policy measures as effective strategies towards a comprehensive strengthening of the economy, government should ensure that policy recommendations are implemented in order to reposition the Nigerian economy against the impact of future economic downturn, government should create enabling environment to attract foreign investors in order to boost economic activities in the country. Finally, government needs to sincerely focus on developing/strengthening the economy and provide alternative sources of revenue on a sustained basis.

LIST OF TABLES

Table 2.1: Private Capital Flows to Developing Countries, 1990 – 1998

Table 2.2: Regional trends and prospects for FDI

Table 4.1: Regression Result/Output for hypothesis 1

Table 4.2: Residual Statistics for Hypothesis 1

Table 4.3: DFI against GDP

Table 4.4: Residuals Statistics

TABLE 4.5 Descriptive Statistics

CHAPTER ONE: INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Evidence supports the fact that no single definition of Foreign Direct Investment (FDI) can be taken to be adequate since definitions are actually given and often vary according to the context or even the intention of the individuals attempting such a definition. However, scholars seem to have come to terms with the fact that Foreign Direct Investment (FDI) is a corporate governance mechanism. By this is meant that FDI is not only a transfer of ownership from domestic to foreign residents, but also is that mechanism through which foreign investors can exercise management and control rights over host country firms.

The global trend is that there should be a free flow of capital across national boundaries, especially to allow for capital to seek out the highest rate of return. These external flows either come in form of official or private flows. It is an official flow when it originates from such sources as foreign governments, international agencies or even multinational organizations. Private capital flows basically follow the paths of private individuals, banks, companies or institutions. It is therefore, instructive to note that three fundamental distinctions can be made from the external flows vis-à-vis the official development finance (ODF), export credits and foreign private flows.

Even the Official Development Finance (ODF) still has two major strands – the official development assistance (ODA) and other official flows. The ODA consists of official grant elements from agencies of government or multinational institutions meant to support economic development.

Export credits, on the other hand are fashioned to fund specific purchase of goods or contract agreements. These are no doubt, taken as commercial credits by virtue of the fact that they involve transfer of goods between an exporter and a willing importer which payment is postponed to a later date in future. Hence, this entitles the exporter to a commercial claim on the importer until such a time that the importer is able to settle such claim, say up to a ten year period.

Obviously, export credits are transacted through direct contact between the exporter and the importer or through official government institutions and agencies or through commercial banks. These three channels define CCCP the three basic forms of export credit otherwise referred to as the suppliers’ credits respectively. Besides the official export credits, others constitute the private credit as well as present veritable channels for private capital flows.

Essentially, foreign private flows comprise international bank loans and bond issues, private export credit, foreign direct investments and portfolio investments. Perhaps, the striking difference worthy of note, between the portfolio investors and direct investors is that while the former does not exercise management control over the companies in which the securities/assets were acquired, the later exercises such management control rights.

Invariably, portfolio investors are only entitled to dividends and/or capital gains. As noted by Klein (1994), it is however, discernible that FDI and ODA are the non-debt elements of capital flows with the FDI creating equity position on behalf of the investors.

Foreign Direct Investment plays crucial roles in the economic development of countries. It enhances risk reduction from the side of investors by providing an opportunity for the diversification of their lending and investment. Through FDI, the global integration of capital markets leads to the attainment of best practices in corporate governance, accounting rules and legal traditions. Moreso, the global mobility of capital limits the ability of governments that desire to pursue bad policies, since governments that desire to attract foreign inflow of capital must be seen to uphold international standards. Again, FDI carries with it the technology transfer, especially in the area of new varieties of capital inputs that are hitherto not associated with the domestic economy. Also, FDI contributes to both human development and revenue base through corporate tax remittances to the host country (Odozi, 1998, IMF 1977)

Akin to this, Foreign Direct Investment contribution to revenue base, Akujiobi (2005) has noted that incomes in Nigeria are at very low ebb; thus, leading to the problem of low savings, low investment and low productivity. Hence, for this vicious cycle to be broken, and according to the Machinsen and Shaw Development thesis, as cited by Okigbo (1981), there is therefore a strong need to increase a country’s capital resources. With this, domestic savings will be augmented which will ultimately propel new investments.

In the light of the foregoing, there is therefore the need to probe into the extent foreign direct investment has affected the Nigerian economy.

1.2 THE STATEMENT OF THE PROBLEM

Economic development generally entails improvement in the various aspects of the life of the entire citizenry. For instance, there is economic improvement when a greater number of useful jobs are created for the employable persons, higher real income is recorded, better health conditions, better housing, high level of education exist in the economy. However, adequate economic investment can hardly be achieved without commensurate investment in both human and material resources (Kraus, 1961; Fryer, 1965, Clairmonte, 1960 and Seibel and Marx, 1987)

Commentaries are highly rife on private investments. For instance, there are the works of Kuh (1963) on capital stock growth; Grunfields study of corporate investments (1960); Eisher’s Permanent Income Theory for Investment (1967); Torgensen and Siebert’s Theory of Capital Accumulation (1968); Andersen’s Corporate Finance and Fixed Investment (1967); Meyer and Glauber’s Accelerator-residual fund model (1967); Resek’s study of Investment (1966); Evan’s Study of Investment (1967) as well as Torgenson’s Econometric Study of Investments (1971).

Further studies have equally been done in recent times in the area of private spending investment. While such studies as Kumar and Pradhan (2002) see foreign direct investment as the most important source of external resource flows to developing countries in addition to contributing a significant part of capital formation to domestic economies, others in Nigeria like Udo and Obiora (2006), Sule (1991), Uchendu (1993) and Akinfesi (1981) all concentrated on the determinants of foreign direct investment inflows to the Nigerian economy.

The obvious shortcoming of most of these studies however, lies in their inability to determine the extent the Nigerian economy has been able to attract foreign direct investment. Even in such situations where some efforts seemed to have been made to address these deficiencies, such studies were again notably silent on the extent the FDI has been able to contribute to the economic growth of the country. Besides, it is equally pertinent, if not imperative, to determine the sectoral contributions of FDI to the economy in general. Such a study, it stands to reason, will encourage policy formulations and improve the nation’s economy through increased capital formation to augment shortfalls in domestic savings.

The problem of insufficient domestic savings and investible funds, therefore justify the need for foreign direct investment in the country to boost Nigeria’s economic development. Even with more foreign direct investments, the problem again is in trying to investigate the effect of FDI on the economy. The present study is therefore an attempt to fill this yawning gap.

The study hence is an empirical determination of the impact of

1.3 THE OBJECTIVES OF THE STUDY

The main focus of the research study is to investigate empirically, the effects of Foreign Direct Investment on Nigeria’s economic development. The specific objectives include the following:

(i) To determine the nature of relationship between the foreign direct investment as a whole on the economy.
(ii) To determine the effect of each of the explanatory variables namely, Mining and Quarrying, Manufacturing and Processing, Agriculture and Forestry, Transport and Communication, Building and Construction, Trading and Business Services, and Miscellaneous on the Gross Domestic Product of Nigeria.
(iii) To establish the degree of relationship between the aforementioned explanatory variables above and the industrial development of Nigeria.
(iv) To ascertain the effect of the explanatory variables on the industrial development of Nigeria.
(v) To determine if there are policy constraints to the nation’s ability to attract Foreign Direct Investment.
(vi) Finally, to make policy recommendations on how to improve the economy through direct foreign investment.

1.4 RESEARCH QUESTIONS

Having stated the objectives above, we consider the following research questions relevant for the study.

(i) What is the nature of relationship between the foreign direct investment and the Nigerian economy?
(ii) To what extent does the foreign direct investment exert influence on the Nigerian economy?
(iii) How has each of the explanatory variables affected Gross Domestic Product?
(iv) What is the nature of relationship between the explanatory variables both as a whole and individually, and Nigeria’s industrial development?
(v) To what extent does each of the explanatory variables affect industrial development?
(vi) What policy measures are necessary in the nation’s bid to encourage economic growth through direct foreign investment?

1.5 RESEARCH HYPOTHESES

The following hypotheses are formulated for testing:

Ho1: Foreign Direct Investment has no significant effect on Gross Domestic Product

Ho2: There is no significant relationship between Foreign Direct Investment and industrial development.

1.6 JUSTIFICATION OF THE STUDY

The study examines in details the impact of Foreign Direct Investment on the economy in general. Hence, the study probes into the nature of relationships between the Foreign Direct Investment and the Gross Domestic Product on the one hand, and between FDI and industrial development on the other hand. The study will therefore inform policy decisions and aid policy makers in their effort to fashion out dynamic policy measures to influence the attraction of Foreign Direct Investment for economic development.

The study will also elicit interest and debate on how to encourage economic growth through Foreign Direct Investment. Hence, the study will serve as a reference material for future and further work in the area of Foreign Direct Investment annexes.

1.7 SCOPE AND LIMITATIONS OF THE STUDY

This study covers the period, 1983 to 2003. It also centers on the Nigerian experience since it will not be easy to cover some more countries beside Nigeria within the period the study is expected to be completed. However, since economies are often remarkably similar, our hope is that the result of the present study can be applied to a good number of countries. In the way of limitations, in a study of this nature, a lot of problems are bound to appear and may range from inadequate information, time constraints to financial constraints of the researcher, etc

1. INADEQUATE INFORMATION.

This type of series research work would have been better if done for all the years. However, because of data availability, it has been confined to a defined period of time, 1983-2003.

2. TIME.

This research work being a requirement for the award of the Doctor of Philosophy (Ph.D) degree equally has a time interval allocated to it by the university authority. Consequently, extreme pressure must be exerted on the researcher in order to complete the work within the stipulated time.

3. FINANCE

Finance is also a major constraint, especially with respect to data generation. Enormous expenses are therefore involved in visiting the Internet, traveling to various locations of the Central Bank of Nigeria in Owerri, Lagos, Abuja and Port Harcourt in order to obtain the most up-to-date data. Hence this partly informed the use of a defined period of study. All the same, the study made the best use of available resources.

CHAPTER TWO: LITERATURE REVIEW

2.1 THEORETICAL FRAMEWORK

It has been widely acclaimed that Foreign Direct Investment (FDI) represents the most important source of external resource flow to developing countries. Also, foreign direct investment constitutes a significant part of capital formation in these developing countries, even though their share in global distribution of FDI has continued to dwindle over the years (Kumar and Pradim, 2002).

However, what is in doubt presently is the nature of the relationship between foreign direct investment and the less developed countries, (LDCs). By this is meant the effect of FDI on the economies of developing countries like Nigeria.

Emerging facts from recent studies, do suggest that this relationship can be best described as a “mixed bag”. Hence, Resnick (1999) concludes thus,….while controversy on the role of FDI in LDCs is still alive and well, there is an emerging body of knowledge evidence that suggests that it does more good than harm. Good outcomes, their degree and their quality rely on the role of the state, the mediator between powerful MNCs and citizens.

In support of this view by Resnick (Kumar and Pradham, (2002)) have observed that the externalities of FDI on a host economy is in fact a “double edged sword of opportunity and exploitation by MNCs”, whose positive externalities are vertical linkages and knowledge spillovers for domestic enterprises. As such, foreign entrants may generate demand for intermediate goods and with possible crowd-in domestic investment to deliver such demand. This equally has the tendency to diffuse new skills and knowledge brought in the host country.

The knowledge spillovers that accompany such FDI is grouped into two broad categories vis-à-vis the intra-industry spillovers and inter-industry spillovers. It is an intra-industry spillover when such spillovers are absorbed by competitors of foreign entrants prompted to respond to new imported processes or product technology introduced by technology importing firms by upgrading their technology. This effect at times speeds up the diffusion of new technologies.

Besides, this is the type of spillover that could result from the increased competition from foreign entry that forces local firms to become more responsive and efficient in the use of existing technologies or even to explore new ones. Thus, the mechanism for communicating such spillovers becomes the reverse engineering by competitors, increased rivalry via research and development

(R &D) and product development with mobility of employees trained in new technologies by foreign firms.

In the case of vertical inter-firm linkages, the vendors and customers of foreign firms may benefit from the knowledge brought in the course of their dealings with it. The multi-national enterprises (MNEs) may demand higher specifications, retooling and technology updates from their component vendors, thus forcing them to embrace new technologies, Markusen and Venables (1997), and Agosin and Mayer (2000) have observed.

On the other hand however, the most immediate externality of an MNE entry on domestic enterprises into the industry of the entrant is negative just as foreign entry erodes their market share. In addition, a foreign entry could have adverse effect on the domestic economy through its effect on investment in the industry, in the form of its entry raising the conduct of businesses.

The argument here is that the MNE affiliates with their overwhelming and dowry intangible assets like internationally known brand names, captive access to technology, technical, managerial and organizational skills, have a penchant to pursue non-price modes of rivalry in order to maximize the revenue productivity of their assets, (Kumar, 1990, 1991). In conclusion, therefore, MNEs with their entry could crowd-out domestic investment in the domestic economy, beside erosion of the market share of local firms.

2.2 THEORIES OF FDI AND TRANSNATIONAL PRODUCTION

Several theories have been put forward to try to explain the effect of FDI on economies and why firms engage in transnational production. Most of these theories operate under the assumption of the existence of perfect markets for both factors and goods. Hence, the theories assert that FDI ought not to exist since the markets are perfect, without any form of risk.

However, with the risk exposure surrounding international investments, the implication, then is that there must be distinct compensatory advantages inherent in locating in a particular host country. Vernon (1996) in an attempt to address this issue, propounded the product cycle model, which sought to explain why a firm desires and hence turns to multinational at a certain stage in its growth.

In fact, three stages are discernible from Vernon’s explanation. The first stage describes the early stage of the firm where the intention is to produce for its domestic economy; the reason being mainly attributable to the need to serve the market that has the need for such product. Also, at this stage, there is the need for a continuous feedback from the consumers and also to communicate with the suppliers of the firm.

The second stage, however, arises owing to the fact that different countries are at different stages of economic development, with new markets being ready to receive new products that must have been made popular through the demonstration effect of richer countries. Thus, it becomes necessary, at this stage, to export such products to their newly found markets abroad.

The last stage of this comes as a result of the firm discovering a comparative advantage in producing such a product in another country. Hence, the MNC is created and a possible reversal of exportation back to the country that originally invented the product may be noticed.

The above product cycle hypothesis presents a useful tool in explaining the following. First, it demonstrates why there is concentration of innovations in developed countries. Second, it offers an integrated theory of international trade and FDI. Third, it provides an explanation for the rapid growth in exports of manufactured goods by the newly industrialized countries. Finally, it serves as a useful point of departure for the study of the cause of international investment.

In spite of the afore-mentioned merits of this hypothesis, it is however, notably silent on resolving the question of why MNCs prefer the use of FDI to licensing their technology to local firms in the host countries. These explanations are captured in the theory of the firm, as found in the works of Hymer (1976), and Dunning (1977, 1988).

Hymer (1976) has attributed this MNCs preference to use FDI, to the need to enjoy a number of advantages which accrues to them namely, patience to new technologies, team-specific management skills, plant economies of scale, special marketing skills, possession of brand name, etc. Hymer (1976), contends further that for a firm to invest abroad, the potential gains from these advantages must outweigh the disadvantages of establishing and operating in a foreign country, such as communication problems, ignorance of institutions, customs and tastes.

On the other hand, and in accordance with Dunning’s (1977, 1988) view, three conditions must be met for a firm to undertake foreign direct investment (FDI). These conditions we summed up under his eclectic theory of FDI, otherwise referred to as the OLI framework, which is equally an attempt to integrate other explanations of FDI as cited under the foregoing above. Here, OLI stands for Ownership advantages, Location advantages and International advantages. These three taken together determine whether a firm, industry or country will be a source or a host of FDI or will not qualify for either. The ownership advantage described here is anything that gives the firm enough valuable market power to outweigh the disadvantages of doing business abroad, as mentioned under the product-cycle hypothesis of Hymer, (1976).

It may present itself in the form of a product or production process that other firms do not have access to, such as a patent, trade secret or blueprint (Udo and Obiora, 2006). Such advantage could still result from the possession of intangible assets like a trademark or reputation for quality products.

It is again, necessary that the foreign market offers location advantage such that it is more profitable to produce abroad than to produce at home and then export to the foreign market. Obviously, location-specific advantages could come in the form of access to local and regional markets, availability of comparatively cheap factors of production, competitive transportation and communication costs, the opportunity to circumvent import restrictions, and attractive investment incentives (Chery, 2001)

The final condition is that the firm must enjoy such international advantages as may result from electing to exploit its assets abroad by opening or acquiring a subsidiary instead of opting to sell or license these rights to exploit those assets to a foreign firm. The main shortcoming of this theory is its inability to explain the phenomenon surrounding the conditions besides mentioning them. However, it has further pushed forward the frontiers of knowledge in the area of production theory.

2.3 THEORIES OF ECONOMIC GROWTH AND FDI

The standard neoclassical theories postulate that economic growth and Development can only be achieved through effective use of the factors of production, say, land, labour, capital, and entrepreneurship. With the under-utilization of these factors of production in the developing nations, it therefore stands to reason that the marginal productivity of capital ought to be higher in the developing countries. Thus, the resulting assumption is that interdependence between the developed and the developing countries ordinarily should benefit the developing countries.

The reason being that the developing countries stand to attract more capital flow with higher returns for investment than the developed nations, and through this process, a positive transformation is attained for the developing economies. And this continues till the gap between the two economies is closed up. However, the observation is that in reality rather than the gap being closed up, it gets even widened. Also, the capital flows to the developing economies have continued to be abysmally low and down.

In conclusion, efforts to explain this seeming paradox, Arghiri (1972) propounded his theory of “Unequal Exchange.” According to Arghiri (1972), for a good explanation of this anomaly, Ricardo’s law of comparative advantage must be dropped to allow for its integration with international capital and commodity flow, especially with a view to rejecting the assumption of the international immobility of factors.

According to Arghiri, profits should be high with low wages being experienced in developing economies. More so, with profits being reinvested, there should be development, the ultimate result being the narrowing of the perceived gap between developed and developing economies. He noted that this is not the case owing mainly to one major factor. He therefore reasoned that since foreigners face low profits in their home countries, they are invariably willing to accept much lower rates of profit than local investors in the host economies. Thus, this becomes the driving motive for the eventual invasion of local markets as they strive to push down the prices with the aim of siphoning profits back to their countries. This then explains the reason why in advanced countries, foreign investment leads to higher profits, higher prices and growth while it spells doom for the economies of developing nations.

The conclusion of this view is that unequal exchange is predicted on the basis of the dominant position enjoyed by the advanced industrial economies and the resultant dependence of the developing countries on the rich nations.

The bottom line is that various governments of the developing economies need to develop a good policy framework that will ensure that the negative effects of foreign direct investment (FDI) do not outweigh the positive impacts. In line with this school of thought, theorists have evolved several channels through which foreign direct investment (FDI) can positively affect economic growth (Markusen, 1995; Lenniad and Asefa, 2001; Barro and Sala –I-Martin, 1995; and Borensztein, et al, 1998). Though technology licensing may allow countries to acquire innovations and expatriates may transmit knowledge and skill, it can be argued that FDI has the greatest potential as an effective means of transferring technical skills because it tends to package and integrate elements from all the mechanisms (Udo and Obiora, 2006)

2.4 FOREIGN DIRECT INVESTMENT AND SUSTAINABLE DEVELOPMENT

With the recent drop in Overseas Development Assistance (ODA), the attention of low income countries has shifted to alternative sources of capital to finance national development (ECOSOC, 2000). Evidently, foreign direct investment (FDI) presents the largest source of foreign private capital reaching developing countries. This is presented in Figure 2.1 below

FIG. 2.1: Private Capital Flows to Developing Countries, 1990 – 1998

Abbildung in dieser Leseprobe nicht enthalten

Source: Adapted from ESCOSOC (2000): Foreign Direct Investment: A lead Driver for sustainable development?

From Fig. 2.1, it is interesting to note that the world’s flow of foreign direct investment has grown phenomenally for the period 1990 – 1998. The total inflows witnessed an over 370% growth from US $174 billion in 1992 to US $644 billion in 1998. Despite this global growth, UNCTAD (1999) has observed the reverse for the developing countries. For instance, total inflows to developing nations, for the 1997 – 1998 nose-dived. In terms of regional growth, the Asian economy is experiencing the fastest growth in Foreign Direct Investment, accompanied also by the greatest volatility while the whole of Africa is located at the bottom with the least performance in FDI growth. (World Bank, 1999). Table 2.1 is self explanatory for a clearer picture on this regional growth distribution.

TABLE 2.2: Regional trends and prospects for FDI as clearly diagrammatically outlined in page 40.

Abbildung in dieser Leseprobe nicht enthalten

(Source: World Bank, UNCTAD, ICC)

The general consensus is that FDI inflow is a “double edged sword”, all depending on policy measures for its application. Hence, Gardiner (2002), succinctly stated that:

For all its potential, there is far greater awareness of the complex nature of FDI and the possible negative impacts of rapid and large growth for least developed countries. A crucial question is how FDI might be better applied to support more sustainable forms of development, particularly in those countries with burgeoning debts and widening income disparity to the rest of the world.

The above statement by Gardiner (2002) therefore underscores the need for an in-depth study of the workings of FDI, its pros and cons, as well as the possible roles to be played by institutions so as to fully exploit the positive sides of FDI in economies.

2.5 THE PROS AND CONS OF FDI IN ECONOMIC DEVELOPMENT

As the world’s attention continues to be shifted from other sources of Capital flow to FDI, it becomes pertinent to understudy the impact of FDI on economies. The assumption in various quarters is that such capital flow from FDI will lead to better benefits to economies if applied appropriately. The proper application of FDI, therefore, will depend, to a great extent, on the form it takes; the type of FDI, sector, scale, duration, business location and secondary effects, etc.

Perhaps, it needs to be observed that attention is being shifted from merely ensuring the availability of FDI to its better application for sustainable objectives. Hence, there is a catalogue of positive and negative aspects of FDI as a source of development for developing economies. These include the following:

2.5.1 STIMULATION OF NATIONAL ECONOMY

FDI contributes to Gross Domestic Product (GDP), Gross Fixed Capital Formation (GFCF) and balance of payment. Empirical studies support the fact that a positive relationship exists between higher GDP and FDI inflows (OECD, 1999). In spite of this resounding revelation, some regions of the world have witnessed an inverse relationship between the GDP and FDI inflow, for example in Central Europe. Also, FDI contributes to debt servicing repayments, stimulates exports and produces foreign exchange revenue. Evidently, subsidiaries of multinational corporations (MNCs), that contribute a significant proportion of FDI, are estimated to produce about a third of total global exports. However, what is presently in doubt is if increases in FDI naturally translate into domestic gains (UNCTAD, 1999).

This is especially when one considers some of the negative sides of FDI like corporate strategies helping MNCs to enjoy protective tariffs and indulge in transfer pricing in order to reduce the level of corporate tax received by host governments. Other possible ways of the negative impact include MNCs importation of intermediate goods, management fees, royalties, profit repatriation, capital flight and interest repayments on loans, which weigh against the gains of domestic economies.

2.5.1 THE STABILITY EFFECT OF FDI

Since currency devaluation means a drop in the relative cost of production for MNCs, FDI inflows therefore are expected to be less affected by changes in national exchange rates than other private sources, say, portfolio investments or loans. By the same token, FDI can stimulate product diversification through investments into new businesses, thus reducing market reliance on a limited number of sectors/products (UNCTAD, 1999). On the other hand, stability cannot be guaranteed when in situations where there is a global fall in international flows of trade and investment.

The obvious reason being that new inflows of FDI are affected by such global trends is the difficulty for a foreign company to divest or reverse from foreign affiliates as compared to portfolio investments. Equally, regional stability is a “mixed bag”; while FDI growth continued in some Asian countries (Korea and Thailand) during the 1996/97 crisis, it fell in others, for example in Indonesia. Also, with the Latin American financial crisis in the 80’s, many of the Latin American economies witnessed a sharp fall in FDI (UNCTAD, 1999).

2.5.2 SOCIAL DEVELOPMENT EFFECTS OF FDI

Increases in FDI flows that result in new businesses will go a long way in creating more employment opportunities, raise wages as well as help to cushion the effects of declining market sectors. On the other hand, within local economies, small scale and rural businesses of FDI host countries may be denied access to bank credits/loans since they lack the capacity to attract foreign investment, etc. Hence, they may be forced out of business or resort to informal sources of financing.

[...]

• Veranstaltung: Public Administration
• Autor: Prince Eze Chidi Nwauba (Autor:in)
• Erscheinungsjahr: 2016
• Seiten: 100
• Katalognummer: V910107
• ISBN (eBook): 9783346229816
• ISBN (Buch): 9783346229823
• Sprache: Englisch
• Schlagworte: foreign, direct, investment, panacea, national, economic, development, nigeria