Assessing The Impact Of Foreign Direct Investment Economics Essay

The impact of FDI flow in todays economic system and globally has been seen as an indispensable factor that facilitates growing in most underdeveloped state and besides, developed states have seen the influence of FDI in the universe today. There are assorted transitions through which FDI can impact growing and development of a state. This includes the impact of FDI on Trade, economic passages and GDP as it seems of import in general and for the instance of Nigeria.

1.Foreign Direct Investment Impact on Trade

The Nigerian trade industry particularly the service sector is one of the most recognized that has expanded greatly because of the parts of FDI to that sector. Under general premise of laizzez faire, there is a belief that states that engage in free trade will decidedly profit from it thereby taking to welfare betterments of those states. Contemporary theoretical surveies have shown that international trade and investing complements each other instead than replacing one for the other if trade between two economic systems is based on their absolute advantage ( Aizeman and Noy, 2005 ; Ayodele, 2007 ) . However, if the trade between the two states is established on their absolute advantage, trade and investing may be substituted for each other and concern houses would decide to provide goods and services through exports or Foreign Direct Investment ( FDI ) . Then the grade of complementarity between trade and investing will stay an empirical inquiry.

Numerous cross-country surveies found support for the hypothesis of a negative relationship between FDI and export. In contrast, other surveies indicated that FDI really has a positive consequence on export public presentation of host states. This is based on the available empirical surveies of the function of FDI on export public presentation of host states ( Cabral, 1995 ; Blake and Pain, 1994 ) .The United Nations Conference on Trade and Development, UNCTAD ( 2007 ) studies that FDI flow to Africa has increased from $ 9.68 million in 2000 to $ 1.3 trillion in 2006. The UNCTAD World Investment Report shows FDI influx to West Africa has besides increased from $ 33060 in 2000 to $ 110394.5 which is about ternary the figure. It was realized that the influx was dominated by Nigeria, who received 70 % of the sub regional sum and 11 % of Africa ‘s entire. Out of this entire inflow Nigeria, oil sector entirely received 90 % . However, World Investment Report ( WIR ) , of the UN Conference on Trade and Development ( UNCTAD ) , revealed that FDI flows to Nigeria fell to $ 6.1 billion ( N933.3 billion ) in 2010, demoing a diminution of 29 per cent from the $ 8.65bn ( N1.33 trillion ) realized in 2009 financial twelvemonth. Besides, statistics obtained from the 2010 one-year study by Central Bank of Nigeria ( CBN ) indicates that the entire foreign capital influx into the Nigerian economic system in 2010 was $ 5.99 billion. Records show that that FDI represents, 78.1 per centum bead from $ 3.31 billion in 2009. Analysts ascribed the diminution in FDI, to the increasing rate of insecurity in the state every bit good as infrastructural impairment.

The public presentation of the Nigeria trade sector has been comparatively been impressive in recent clip as we see from the figure below which shows the entire trade since 1990 and it has been an upward tendency since the past decennary apart from twelvemonth 2009 which fell drastically as earlier mentioned.

Figure: 3.1 Entire Trade in Nigeria

Beginning: UNCTAD 2012

However, the export sector has been impressive but the import sector is turning faster than the export sector, but still attempt have been made to better the export merchandises in the state, and much more attempt still hold to be put in topographic point for betterment. Aggregate end product growing step by the Gross Domestic Product ( GDP ) , harmonizing to the Central Bank of Nigeria ( CBN ) 2007 economic study for 3rd one-fourth of 2007, was estimated at 6.05 % compared with 5.73 % in the 2nd one-fourth. This has vastly contributed to the positive growing of the economic system.

2. Impact on Economic Passage

Another frequently neglected impact of FDI is the impact on economic passage of Nigeria. Neoclassical have said the market is a better manner to form economic system. Nigeria has been a capitalist economic system which is controlled by the market and less intervention from the province. Thereby leting FDI influx to hold positive effects on the economic system ( Zhang, 2001 and Ali and Guo, 2005 ) . Apart from the big influx of FDI into the oil and gas industry in old old ages which happens to be the copiousness of resource that Nigeria is endowed with. The alteration and variegation of the ownership of concerns besides change the influx of FDI. After the denationalization of the telecommunication sector, the influx of direct investing has been high as the service industry has experienced big investing influx boulder clay this present twelvemonth. Furthermore, with the FDI inflow the outgrowth of a market oriented establishments had been developed. Many Particular Purpose Enterprises ( SPEs ) were joint ventures with Foreign-Invested Enterprises ( FIE ) and could therefore benefit from assorted direction systems, incentive strategies or hazard direction. And domestic every bit good as international fight has been improved by FDI by interrupting oligopolistic constructions or province monopolies. The passage of the Nigeria economic system has been enormous as a consequence of the big influx of FDI into the state. Fascinated by the high rates of return, investors from all over the universe have now placed their involvement on The Federal Republic of Nigeria. As Africa ‘s most thickly settled state, Nigeria besides boasts the continent ‘s 2nd largest oil militias and has a really promising growing mentality. Nigeria is going a instead worthy receiver of foreign capital and by 2015 will be having anyplace from $ 10- $ 12 billion per twelvemonth ( Ethna Portnoy 2014 ) .

However, it is necessary to cognize that the present state of affairs ( insecurity ) in the state in recent old ages has nevertheless affected the rate of FDI but FDI is still comparatively safe. A Nigeria is secure for FDI notwithstanding recent bombardments in some parts of the state. This is because investings are outgo on physical assets, which are non for immediate ingestion but for the production of consumer and capital goods and services. Business houses make investings which are administered by the desire to maximise net income in the long-run. FDI is seen as a major inducement to economic growing in developing states due to its ability to cover with major obstructions that may originate. However, the consequence of the FDI influx in the economic system has been of great benefit to some extent.

3. Impact of FDI on GDP

Harmonizing to standard neoclassical theories the most recognizable impact of FDI is on GDP growing. Although it is hard to state whether the addition in FDI is what increases economic growing or it is the rate of increased growing that stimulates more FDI. Nevertheless, FDI is supposed to lend to growing rate either indirectly or straight in different ways which includes:

Tax grosss, net incomes from foreign endeavors and duties increase the authorities ‘s income.

FDI has enhanced capital formation and formed a critical portion of capital accretion. This consequence is estimated to run from 4 per centum points of growing in states that have high FDI influxs to negligible sums frailty versa ( Tseng and Zebregs, 2002 ) .

Inward FDI augmented the entire factor productiveness of the host state as new inputs and thoughts increase the productiveness parametric quantity of the production map. Harmonizing to Whalley and Xin ( 2006 ) Foreign-Invested Enterprises have a labour productiveness that is approximately 9 times higher than the 1 in domestic endeavors.

Foreign investings have created tonss of spill-overs for local concerns due to the acceptance of advanced engineering and know-how from western investors. As for the spillovers, the transportation of advanced engineering represents one of the chief grounds why

developing states favor FDI from industrial advanced states.

So it ‘s no surprise that in recent old ages more undertakings in the high engineering sector were promoted. The growing of the Nigerian economic system has been important in recent old ages. However, Foreign Direct Investment ( FDI ) inflows to Nigeria dropped well between 2009 and 2010 by $ 3.7bn from $ 6bn in 2009 to $ 2.3bn in 2010 ( UNCTAD, 1999, A 2006, A 2007 ) . This tremendous autumn of 60.4 per centum shows the demand for Nigerian authorities to get down to thoroughly and courageously turn to the challenges to foreign investing and other concern involvements in the state. In respective of economic reforms by the authorities, no important betterment was made. The insecurity in the state is a likely major factor responsible for the crisp diminution and has reflected the societal, economic legal and cultural environment of the state which raises several inquiries and anxiousness from prospective foreign investors.

The “ Boko Haram ” revolution since 2010 in Nigeria is having attending from the authoritiess. Amnesty and post-amnesty plans brought to the Niger Delta is worthy of note because it has brought composure to the part which has led to betterment of the macroeconomic environments in the oil sector. Government committedness and other ongoing reform in the fiscal sector to undertake the challenge of unequal power supply are other beginnings of reassurance. There seemed to be some renewed assurance in puting in the state. Although the one-year GDP growing rate has fallen and stands at 7.8 % in 2010 to 6.6 % in 2011, as we see from the figure below the upward motion since 2005 and the bead in 2011.

Figure 3.2: Annual GDP growing rate

Beginning: World Development Indicators.

From the treatment of the impact of FDI above, we now want to prove statistically the rate upon which FDI has influenced growing in the Nigerian economic system and if there are positive effects of FDI on economic growing in Nigeria.

3.2 Analytic Model

This subdivision explains the methodological analysis which had been used to analyze the effects of FDI on economic growing and trade. This is of import because the function of FDI as a servant of growing and development is now good recognized and mostly appreciated.

3.2.1 Data Source and Method of Construction

We therefore concentrate our attending on econometrics techniques that are used to analyse the relationship between FDI and economic growing. The econometrics technique that we employ trade with the appraisal of the multiple arrested development equation. However, some clip series entirely presents some jobs which will be consistently solved. Many economic theoretical accounts entail co-integration relationship. The principle behind it is that many economic theories imply that a additive combination of certain non-stationary variables must be made stationary and the Unit root trial ( Augmented Dickey-Fuller trial ) are used to analyze the stationarity of the clip series. We will besides use the farmer attack to prove whether FDI causes economic growing to see how much of current economic growing is explained by glued economic growing and so to see whether adding lagged values of FDI can better the account and eventually the Error Correction Model provides a relation of short or long term kineticss between the co-integrated variables. In chapter one, subdivision 1.7, a brief treatment has been given to where the information ‘s were retrieved from and we will now give a short description of the relevancy of each of the variables.

Dependent variable:

Economic growing: the annual growing rate of GDP per capita is used as a placeholder for economic growing ( e.g. Borensztein et al. , 1998 ) . This computation of the one-year growing rate of GDP enables comparings between accession states of different sizes every bit good as analysing the development of GDP over clip. Since FDI is regarded as an of import determiner for economic growing, particularly for those states that lack fiscal or competitory capablenesss, it is expected that FDI has a positive important influence on GDP growing.

Independent variables:

1 ) Infrastructure Development: Good substructure facilitates production, reduces runing costs and thereby promotes FDI ( Wheeler and Mody, 1992 ) . Infrastructure increases the productiveness of investing and thereby enhances economic growing. Other steps used in the literature include electric power transmittal and distribution losingss and gross fixed capital formation. Given the handiness of information we used electricity production as a placeholder for this variable. The variable is measured in electricity production per kW. With this step we expect a positive direct relationship between this step and economic growing.

2 ) Openness of the Host Economy to Trade: The entire trade ( imports and exports ) is used to capture this variable. In the growing accounting literature exports have been considered as an explanatory variable. FDI influxs are expected to ensue in improved fight of host states exports. As exports and investing addition, they will hold a multiplier consequence on GDP. Increased exports and investings may besides bring forth foreign exchange that can be used to import capital goods. Further, if the extra investing embodies impersonal labour intensive techniques, employment will lift. We expect a positive direct relationship between this variable and economic growing.

3 ) Government size: This is measured as the general authorities outgo. It is expected to bear a positive direct relationship to economic growing. This is because a higher degree of authorities outgo should interpret into proviso of more societal capital that should promote production and growing.

4 ) Human capital: The importance of instruction to economic growing is proxied by the ratio of secondary and third establishment registration in the population. Barro and Lee ( 1994 ) and Akinlo ( 2004 ) included this variable in their growing equation and consequences showed a direct relationship. Borensztein et Al. ( 1998 ) , nevertheless, found a conditional relationship, which was indirect below some threshold and positive thereafter. Bende-Nabende and Ford ( 1998 ) found an indirect relationship between human capital and growing in Taiwan. We expect a direct positive relationship between the two variables.

Other variables: We included the rising prices rate as a step of overall economic stableness of the state. We expect an indirect relation between rising prices and economic growing, the undermentioned arrested development theoretical account is specified to mensurate the effects of FDI on economic growing:

3.3 Model Specification

In this portion of the thesis, a complete theoretical account is set up to through empirical observation look into the relationship between FDI and GDP growing.

3.3.1 The complete growing equation theoretical account

The specification of the theoretical account is:

G = I?0 + I?1FDI + I?2XM +I?3GS + I?4INFL +I?5INFRA + I?6HUMCAP + U

G = GDP growing,

FDI = influx of foreign direct investing influxs, represented as FDI

Export/Import = the amount of entire export and import ( merchandise openness ) , represented as XM

Government size = authorities ingestion as a ratio of GDP represented as GS

Inflation = rate of rising prices represented as INFL

Infrastructure development= measured as ( per capita electricity ingestion ) represented as


Human capital= ( portion of secondary school and university registration in the population ) represented as HUMCAP

U = error term.

Our methodological analysis will assist us in gauging our empirical theoretical account and produced empirical analysis.

3.3.2 How does FDI impact growing?

The cardinal of import inquiry this survey seeks to reply is whether there is great influence of the variable Foreign Direct Investment ( FDI ) on economic growing that is if there is a important positive consequence of FDI on growing and how precisely it affects growing rate in the economic system of Nigeria. However other variables as stated above will explicate farther the effects on economic growing. The following chapter will demo us the consequences.

3.4 Model Estimation and Technique

The ordinary least squares equation technique is the appraisal process chosen for this survey. It will be used for gauging the equation specified. As a justification for this method, Maddala ( 1977 ) identified that ordinary lest squares is more robust against specification mistakes that many of coincident equation methods and besides that anticipations from equation estimated by ordinary least squares frequently compare favorably with those obtained from equations estimated by the coincident equation method. Among other grounds is the simpleness of its computational process in concurrence with optimum belongingss of the estimations obtained and these belongingss are one-dimensionality, indifferent and minimal discrepancy among a category of indifferent calculators. The package Eviews 7.1 will be used for analysis and consequence end products and reading will be discussed in the following chapter.