THE IMPACT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC DEVELOPMENT IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       BACKGROUND OF THE STUDY

Investment according to Bierman et al (1975) is the commitment of funds in any real property financial assets with the primary objective of obtaining an income over time. It is a commitment of resources made in anticipation of realizing benefits that are anticipated to accrue to the investor over a reasonable long period in the future. By its very nature, an investment decision is essentially an irreversible commitment and it cannot be altered without some costs or loss.

Another feature is that the commitment is made in the anticipation of obtaining generally uncertain future benefits that are subject to significant element of risks and uncertainties.  Yet another characteristic is that the effect of decision extends beyond the current account period, at times, it stretches into the distant future.

Van Horne (1968) observes that investment adds to the firm’s capital stock and thereby broaden the base on which benefits (profit) will be earned. Thus, the investment decisions influence the total amount of assets held by the firm, the composition of these assets and the business risk complexion of the firm.

Investment could be real physical assets or financial assets transactions. The former involves the acquisition of producer goods or equipment that will assist in the production of future consumable goods. On the other hand, financial transactions comprise loans of money and similar transactions. Investment involves additions to real or financial assets.

There is a basic difference between gross, replacement and net investment. Gross or total investment represents the outlay necessary for maintaining the present level and efficiency of capital items. Examples are provisions for wear and tear of existing assets or replacement or purchase of additional securities to maintain the market value of a firm.

Okafor (1983), asserts that net investment is the difference between gross and replacement of investment.

Nwadikom (1985), observes that foreign investment is a type of investment whether in real or financial assets across the national boundaries of the investor, with the principal objectives of maximizing the objective function of the investor. Foreign Investment may be undertaking by individuals, firms and the governments. Fundamentally, foreign investments fall into two broad distinctive categories portfolio and direct investment.

Direct investment implies an investment in a foreign country where the investor retains control over the investment. It typically takes the form of a foreign firm floating a subsidiary firm or taking over control of an existing firm in the country in question.

Direct investments have always attracted a great deal of attention and have given rise to heated controversies, some economists saw it as a natural consequences of maturing capitalism.

Chikelezie (1988: 8) observes that in recent years, direct investment have attracted renewed interest in both developed and developing nations.

Foreign direct investment is perceived as a way of filling gaps between the domestically available supplies of savings (domestic investors), Foreign exchange, government revenues, skills and planned level of these resources necessary to achieve economic development.

Todaro (1977) noted that few developments have of played a critical role in the extra – ordinary growth of international trade and capital flow during the past two decades as the rise of the multinational corporations (MNCs). These huge business firms with their far reaching network of subsidiaries in dozens of world countries all match to the drum of centralized global output maximization and decisions of parent companies located in North America, Europe and Japan. However, they present unique opportunities and a host of critical problems for these many less developed nations in which they conduct their business. Direct foreign investment involves much more than the simple transfer of capital or the establishment of a local factory in the third world nations. MNCs carry with them technologies of production, tastes, and styles of living, managerial services, diverse business practices, including cooperative arrangement, market restriction, advertising and the phenomenon of pricing. Unlike certain types of foreign aids, the purpose of the MNCs activities is fair from charitable. In many instances, they have little to do with the development aspirations of the countries in which they operate.

Few areas in the economics of development arouse so much controversy and are subject to such varying degree of interpretations, as the questions of the benefits and costs of private foreign investment in the economies of the third-world nations.

The controversy about the role and impact of foreign private investment in developing economies often has its underlying fundamental disagreement about the nature, style and character of a desirable development process.

The real debate ultimately lies on different ideological and value judgment about the nature and meaning of economic development and the principal sources from which it springs.

The advocates of foreign private investment tend to be free market, private enterprises and laissez-fare doctrinalists, who firmly believe in the efficiency of the free market mechanism, where this is defined as a hand-off policy by the host government. The actual operations of MNCs tend to be monopolistic and oligopolistic in nature and practice. Price settings are achieved more through international bargaining and collusion than as natural outgrowth of free market supply and demand.

Those who argue against the activities of MNCs, are often motivated more by a sense of the importance of natural control over domestic economic activities and minimization of dominance/ dependence relationship between powerful MNCs and third-world governments.

They see giant corporations not as need agents of economic change but more as vehicle of anti – development.

MNCs, they argue, reinforce dualistic economic structures and propagate domestic inequalities with wrong products and inappropriate technologies. Some opponents therefore call for outright confiscation (without compensation) of foreign owned enterprises. Others advocate a more stringent regulation of foreign investment.

On the other hand, a strengthening of the relative bargaining powers of host country government through their coordinated activities while reducing the overall magnitude and growth of private foreign investments in the third world, may make the investment better suited to the real long-run development needs and priorities of poor nations. The net social benefit of this trade – off between quantity and relevance is likely to have a positive impact on national development.

1.2         STATEMENT OF THE PROBLEM

Developing countries in their attempt to attract innovative technology seek foreign resources. The inadequate of these external resources is frequently a critical constraint on economic development of such countries. External resources in the form of foreign capital inflow may facilitate increased domestic savings.

In her attempt to attempt to attract direct foreign investment, Nigeria is facing a number of problems:

a)            Problems of declined  level of foreign investments in recent times as a result of some stringent operating economic polices and an unfavorable political climate existing in the country.

b)           The problems of formulating suitable policy and incentive package that will help stimulate foreign participation in domestic economic activities.

c)            The problem of lack of adequate infrastructures in the country, forces the investors to supplement government efforts by providing the infrastructure at additional costs.

d)           The problems of making the sectors of the economy potentially viable to attract direct foreign investment.

1.3       OBJECTIVES OF THE STUDY

This research paper has a number of objectives:

i.              To ascertain the nature and volume of inflow of foreign direct investment in Nigeria.

ii.            To identify various policies and incentive packages operating in the economy such as the exchange control act of 1962, the Nigerian enterprises promotion decree of 1972, 1977, 1989 and 1993, the Structural Adjustment Programme (SAP) and other current fiscal policies, and to find out whether they have served their due purpose.

iii.           To evaluate these policies in terms of performance and to identify the impacts or changes made by these policies on the Nigerian economy, particularly towards the attraction of direct foreign investment.

iv.           To examine other factors which affect the inflow of direct foreign investment in Nigeria

v.            To draw a reasonable conclusion and other recommendation based on information gathered for the research.

1.4       RESEARCH QUESTIONS

The critical appraisal seeks to give answers to the following questions:

a)            What is the volume of direct foreign investment into the Nigerian economy

b)            What is the change in the gross domestic products   from the impact of direct foreign investment,

c)            Assess the performance of the incentive policies on economic development of Nigeria.

1.5         RESEARCH HYPOTHESIS

For carrying out this research, the following hypotheses were formulated;

i.              There is a relationship between the inflow of direct foreign investment and economic development of Nigeria.

ii.            There is a correlation between gross domestic products and inflow of direct foreign investment.

1.6         SIGNIFICANCE OF THE STUDY

This research work will extensively examine direct foreign investment and the economic development of Nigeria. It will try to establish the trends of inflow into the country, so that we shall flow the trend of the flow and be able to identify when there is an increase or a decrease in the level of capital flow.

Suggestions and recommendations made in this research paper will assist policy makers in formulating new strategies, maintaining or modifying the existing policies with a view of attracting foreign investors into the country.

Furthermore, it will also serve as a useful research material to those interested in further research into the area of the study.

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