Fostering Economic Growth

Introduction

Economies around the world are always in pursuit of economic growth through various approaches using both domestic and foreign investments. In the foreign realm, Foreign Direct Investment has been one of the most pursued approaches to economic development. Multiple scholars have subsequently established that there is a positive correlation between economic growth and foreign investment. Foreign Direct Investment (FDI) is mainly an element of local development forged through foreign players. Every developing country in the world, including Nigeria, aims at enhancing its economy, but majorly faces the challenge of low capital to finance the critical investments that would foster economic growth. Such parameters have rendered these countries deficient of investable capital since domestic investment is mainly lower as compared to the required investment that can lead to higher rates of economic development (Flora and Agrawal 2017, p. 269). In the long run, the deficiency has led to a broader gap between the actual domestic investments and the needed investment to fuel economic growth. For students who get stressed with their economics dissertations, think of seeking expert guidance to enhance their understanding and academic performance. If you need assistance, consider exploring options for economics dissertation help to ensure your academic success.

At the moment, Nigeria is hugely blessed with more natural and human resources. Sources from the country’s interior department state that the country has about 61 minerals, and each mineral have the capability of sustaining the economy (Siddique, Ansar, Naeem, and Yaqoob 2017, p. 117). Despite the availability of these resources, they have remained untapped, except in the case of crude oil, which has been exploited in a discriminatory manner and is hugely dependent on by the country. The existence of natural resources versus the presence of poverty among citizens has been branded as a “Resource curse,” which appears to be affected by the country. In respect to this situation, Mahmoodi and Mahmoodi (2016, p. 939), Wu and Xie (2018), Alvarado, Iniguez, and Ponce (2017, p. 176) and Matthew and Johnson (2014, p. 33) advised that developing states like Nigeria can disrupt the vicious cycle of scarcity and attain the needed economic development if it seeks foreign funds to supports domestic savings and investments.

So far, developing economies such as Nigeria have taken macroeconomic reforms that would make sure that the investor environment is friendly. Since the introduction of FDI in the Nigerian economy the company has realised an increased aggregate productivity, low unemployment rates, increased export rates, and increased transfer of technology. As compared to the rate of FDI in other developing countries with high Gross Domestic Product (GDP) like Singapore, and Indonesia, Nigeria’s FDI inflow is relatively low, which is an indicator that an increased inflow would probably lead to better results. There is hope for an increased inflow of FDI due to the attractive oil industry in the country, this is supported by various advisory policies from the International Monetary Fund (IMF), the World Bank and the donor community. Based on this discussion, the study can make a hypothesis that an analysis on the FDI and economic growth in Nigeria would yield a positive result.

Research Objectives

In response to the common perception of a positive correlation between FDI and economic growth, this study will majorly aim at empirically re-examining how Nigeria as a developing state with endowed resources has successfully attracted FDI over the years and what are the effects of these activities on the country’s economy. Therefore, the study seeks to

1. Asses the effects of FDI in the Nigeria Economy in a period of 15 years

2. Determine the relationship between FDI and economic growth

Research Questions

The following question will guide the study in unveiling the relationship between FDI and economic growth about Nigeria

1. Does FDI have a positive economic effect on the Nigerian economy?

Literature Review

The correlation between FDI and economic growth has attracted various scholars around the world. It should be noted that the relationship between FDI and economic growth has been investigated using data from one country or a cluster of states. Even so, there has never been a consensus on what aspects of the economy are directed affected by FDI. Regarding a single country examination, a study by Saidi, Mbarek, and Amamri (2018, p. 239) inspected the effects of FDI on the economic growth of South Korea between 1980 to 2009. The author revealed that there was a positive correlation between Korea’s economic growth and FDI. Facets of the economy that were majorly affected by the presence of FDI include human capital and employed, which subsequently improved over time, which enhanced the economy more. The same observations were also made in Pakistan, which had experienced a positive long-term inflow of foreign capital and subsequent economic growth. However, other studies have also given divergent results on the effects of FDI on the economy. For example, a survey by Ovat and Amba (2018) institute that there were no positive effects of FDI on the economic growth of Poland between 1993 to 1997. At the same time, the researchers recommended that the presence of FDI had limited the economic growth of Bulgaria and Romania majorly because these states were subjected to various trade imbalances, monopolies, and reverse transfer of human labour and technology.

In reference to studies on clusters of country, a research conducted by Flora and Agrawal, (2017, p. 269) on 23 Asian countries between 2000 to 2016 found a positive correlation between FDI and economic growth. Ali and Mingque (2018, p. 109) also assessed the role of FDI on the economic growth of developing states and revealed that FDI was an efficient intermediary that could foster technological development and economic growth. Besides, the research also revealed that FDI had more potential of improving the economy if the relevant country has a high human capital. A survey by Sothan (2017) showed a high correlation and significant causation between FDI and economic development for Arabian countries using OLS regression. The study revealed that the local economic and political environment with policies that intended to attract FDI were significant factors in determining the inflow of FDI. Ahmad, Draz, and Yang (2018) argued that FDI was among the critical elements of economic development in 20 countries that belonged to the Organisation for Economic Cooperation and Development. The empirical findings from the study also revealed that these states had some sort of development in their respective financial markets, which hugely affects the relationship between FDI and economic growth. A study by Zekarias (2016, p. 151) revealed a two-way link between FDI and economic growth and found that in the long-run, both economic development and FDI moved in the same direction, or instead, they were co-integrated. Besides, their empirical results showed that there was a bidirectional causality between these two variables for states that had higher levels of economic transparency and openness. However, there was a unidirectional causality between a country’s GDP to FDI in cases of closed economies.

Abu and Achegbulu (2011) conducted an assessment on the effects of FDI on the economic growth of Nigeria using a linear regression model, and the Granger causality test and revealed that FDI had a positive impact on the growth of Nigeria’s economy between 1986 to 2006. The study also found a causal relationship between GDP and FDI. The survey by Abu and Achegbulu (2011) takes a different perspective in analysing FDI and economic growth in Nigeria as it captures the essence of domestic capital investment as Gross Fixed Capital Formation in attracting FDI to the host state. Domestic investment is a fundamental issue in attracting FDI, which contributes positively to the growth of any economy.

The literature reviewed stipulates that there are underlying factors that act as a capacity for FDI to enhance economic growth. These underlying measures can be quantified in terms of human capital, development of financial markets, and reduced trade barriers, among other facets. In the case of Nigeria (which is a primary receiver of FDI in Africa), the country has relatively developed financial markets and institutions, an educated workforce, a liberalised economy, and relatively high economic growth. Such an environment allows for a stricter test of the role of FDI within the methodology section, majorly because it makes it more likely that FDI would exert a positive impact on the economy in case such a relationship is found.

In contrast to the mentioned positive relationships between FDI and the growth in the economy for cross-country data, a negative correlation between FDI and economic growth has not been justified. Thus, there is a need for more studies that would find conclusive results on why FDI can lead to economic development despite a widespread perception that FDI has a positive correlation with economic growth.

Methodology

The study is majorly founded an inductive approach to gain the necessary insights from the data collected and establish a conclusion based on the data trends. So far, it has been proved by past studies that FDI has a positive correlation with economic growth in Nigeria. However, there are cases where FDI has shown not to affect or led to adverse effects in the economy. Therefore, the study will not assume that in this case, FDI will also lead to positive results, as stated by other studies, and it is for this reason that the study will use the inductive approach. The study will be informed by secondary data from various academic and professional sources such as peer-reviewed literatures, World Bank database and the Central Bank of Nigeria Statistical Bulletin. The study will use a linear regression method to estimate the relationship between selected data variables.

Model

The variables that would be used in the research involve Gross Domestic Product (GDP), Exchange rates, Gross Fixed Capital Formation, and Foreign Direct Investment. In this case, GDP will be treated as a dependent variable, while the FDI, Gross Fixed Capital Formation, and the Exchange rate will be used as an independent variable. The data to be used will range from 2004-2019 (the last fifteen years). The study will use the Johansen co-integration approach to check the relationship between the stipulated variables.

The study assesses cross border facets of FDI and its effects on the economic development controlling for other facets of development. The dependent variable in this case is economic growth which would be defined as the as the GDP per capita growth. FDI in this case is the explanatory variable of interest. These are the fundamental variables generally used in the literature. Various databases aforementioned would be used to source the necessary data on FDI and ensure that the research covers the widest possible scope of FDI. Lastly, it would be essential to make use of commonly utilized variables such as inflation, gross fixed capital formation, trade openness and human capital.

Limitations of the Study

Since the study is majorly based on secondary sources, this means that the data would be historic data and not real-time data. In most case, real-time help in depicting the current economic situation, which can be used to infer real-time decisions and plans. This does not mean that historic data is weak in informing policy, but it implies that given the two, real-time data by the previous researchers. Such biases are challenging to unveil especially if the author used primary data sources.

References

Abu M. and Achegbulu J. O, 2011. An Investigation of the impact of Foreign Direct Investment on Economic Growth in Nigeria. International Business and Management, Vol. 3(1): pp 232 – 238.

Ahmad, F., Draz, M.U., and Yang, S.C., 2018. Causality nexus of exports, FDI, and economic growth of the ASEAN5 economies: evidence from panel data analysis. The Journal of International Trade & Economic Development, 27(6), pp.685-700.

Ali, N., and Mingque, Y., 2018. Does foreign direct investment lead to economic growth? Evidence from Asian developing countries. International Journal of Economics and Finance, 10(3), pp.109-119.

Alvarado, R., Iniguez, M., and Ponce, P., 2017. Foreign direct investment and economic growth in Latin America. Economic Analysis and Policy, 56, pp.176-187.

Flora, P., and Agrawal, G., 2017. FDI and economic growth nexus for the largest FDI recipients in Asian emerging economies: a panel co-integration analysis. In International Business Strategy (pp. 261-275). Palgrave Macmillan, London.

Mahmoodi, M., and Mahmoodi, E., 2016. Foreign direct investment, exports, and economic growth: evidence from two panels of developing countries. Economic research-Ekonomska istraživanja, 29(1), pp.938-949.

Matthew, O.H., and Johnson, ATAN, 2014. An Investigation of the Impact of Foreign Direct Investment on Economic Growth in Nigeria: A Rigorous Approach. Journal of Poverty, Investment and Development, 3, pp.33-41.

Ovat, O.O. and Amba, A., 2018. Foreign direct investment and economic growth in developing countries: How has Nigeria fared. IOSR Journal of Economics and Finance, 9(5), pp.55-63.

Saidi, K., Mbarek, M.B., and Amamri, M., 2018. Causal dynamics between energy consumption, ICT, FDI, and economic growth: A case study of 13 MENA countries. Journal of the Knowledge Economy, 9(1), pp.228-238.

Siddique, H.M.A., Ansar, R., Naeem, MM, and Yaqoob, S., 2017. Impact of FDI on economic growth: Evidence from Pakistan. Bulletin of Business and Economics, 6(3), pp.111-116.

Sothan, S., 2017. Causality between foreign direct investment and economic growth for Cambodia. Cogent Economics & Finance, 5(1), p.1277860.

Wu, L., and Xie, H., 2018. The Impact of Different FDI Entry Modes on Economic Growth in Asia. International Journal of Trade, Economics, and Finance, 9(2).

Zekarias, S.M., 2016. The impact of foreign direct investment (FDI) on economic growth in Eastern Africa: Evidence from panel data analysis. Applied Economics and Finance, 3(1), pp.145-160.

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