FOREIGN DIRECT INVESTMENT AND MANUFACTURING INDUSTRY IN NIGERIA, PERFORMANCE, PROBLEMS AND PROSPECTS

ABSTRACT

This study shows the performance of foreign direct investment on the manufacturing sector of the Nigeria economy. The study adopts a time series approach to the development of three different models namely; Manufacturing Value Added Model, Foreign direct investment, Interest rate and Gross fixed capital formation, from the year 1981 to 2015.The required data were collected from the central bank of Nigeria (CBN) 2015 statistical bulletin.  The econometric model of multiple regression analysis was used to test the relationship between the dependent and independent variable, the short and the long run impacts of the foreign direct investment inflow on Nigeria’s manufacturing sector was analyzed using OLS estimation technique. All variables were tested to confirm the absence or presence of unit roots problems using ADF (Augmented Dickey-Fuller) test for the period in consideration. The study therefore concludes that foreign direct investment and interest rate data had positive and insignificant relationship with manufacturing sector in Nigeria whereas gross domestic investment had positive and significant relationship with the dependent variables.

CHAPTER ONE

1.0                                           INTRODUCTION

1.1     Background of the Study

One of the major objectives of every economy is to achieve a high economic growth that will lead to rapid economic development through poverty reduction, creation of employment opportunities and entire promotion of the welfare of the citizen.

Virtually, almost all development theories believe that this economic growth can be achieved through the accumulation of physical and human capital among other things. Hence, the accumulation of capital can come in the form of foreign direct investment (FDI) and domestic investment which are the central issues on which this research work revolves.

The Nigerian economy has been on the highest recipient of the capital income from the nest of the world (CBN statistical Bulletin, 2010). The reasons behind these are undoubtedly the large market size of the economy, the level of its trade openness among other reasons. But recent events in the country show that such benefit might not be sustained given the present socio-political rivals form the sect of some anti-social group popularly known as the “Boko Haram” in the country which highly detrimental to the economic health of the nation as well as the entire growth of the economic.

This leads to a snail movement of the development process and eventually a complete over hauling of the entire system, lack of industrialization, capital flight and absence of technology transfer. For instance the level of Nigeria’s share of foreign Direct Investment (FDI) in flows to Africa, fell from 35.3% in 2005 and stood at 14.1% in 2010 (CBN statistical Bulletin 2010). Hence, the macroeconomic environment of the country is no longer conducive for investors to thrive and no one will like to invest in a place where he will suffer capital loss no matter how promising and profitable it appears. In addition to what has been said so far, attempts will be made in the literature to unravel the cause of this volatility and unstable flow of foreign direct investment to Nigeria and the consequences of such volatility of overall of overall economic progress in the country; among issues investigated is the effect of global economic policy shocks and uncertainty. Theoretically, uncertainty may adversely affect Foreign Direct Investment.

Chenery and Strout 1966 posited that Foreign Direct Investment is expected to transfer technology, as well as increase managerial and marketing skills to domestic industries in order to enhance their productivity and economic growth to the wider economy of the host nation. It is evident that in recent times, foreign direct investment (FDI) has become the most important source of external resource flows to developing countries and plays an extraordinary role in globalization.

Thirwall (1985) refers to foreign direct investment as investment by multinational companies with headquarters in developed countries. This investment involves not only a transfer of funds and reinvestment of profits but also a whole package of physical capital, techniques of production, managerial and marketing expertise, products advertising and business practices for the maximization of global profits.

The major players in Foreign Direct Investment are the multinational corporations (MNCs). 90% of the top hundred MNCs are from the United States, Japan and the European Union (UNCTED 2002). Given the predominance of MNCs, a conventional definition of FDI is a form of international that involves significant equity state and effective management decision power in or ownership control of foreign companies (De Mello, 1997).

1.2     Statement of the Problem

In line with the economy’s weak technological and industrial base, industrial activities were organized to depend largely on imported inputs and Nigeria has employed a number of strategies aimed at attracting Foreign Direct Investment and to enhance the performance of the manufacturing sector, in order to increase economic growth and development. Some of the policy measures adopted to improve the situation such as stabilization measure of 1982, as well as the restrictive monetary policy and stringent measure of 1984, however, failed. This lead to the introduction of the structural adjustment program (SAP) in 1986 whose main aim is to reduce the high dependency of the economy on crude petroleum a major foreign exchange earner by promoting non-oil exports particularly manufacturing goods. Although these went a long way in attracting Foreign Direct Investment flows into the economy, as the country becomes the second largest recipient of Foreign Direct Investment flows among low income countries (CBN statistical Bulletin 2010). But the Nigeria manufacturing sector’s performance has declined steadily, meaning that improving the Nigeria manufacturing sector does not depend largely on attracting FDI flows and raising the level of saving as many literatures suggest (Fabayo, 2003; Nnanna, et al, 2004), but is depends mainly on the accumulation and efficient utilization of Human Capital Skill.

It is worthy to note here that insufficient or complete lack of human capital skills widens the technological gap between the domestic firms and foreign firms. Without the accumulation of knowledge through sound and qualitative education there is no foundation on which implant technology and the manufacturing sector can grow or even survive. This supports the findings of Borenztein, 1998; and UNCTAD, 1999 that the positive effect of FDI inflow on manufacturing sector’s growth is dependent on the presence of skills that facilitate the absorption of new knowledge. Other studies have also observed an insignificant or adverse effect of FDI inflow on low-income countries and a more favourable effect on middle-income countries as a result of difference in the level of human capital development or skills.  To further strengthen our proposition that skill acquisition should precede foreign direct investment inflow, the report from ODI (1997) noted that Nigeria was the second largest recipient of foreign direct investment among low-income countries following China and India being behind Nigeria. But when we look at the development in these countries in comparison to Nigeria, we are far behind. Take for instance, in 2005, China had experienced spectacular economic growth, quadrupling its GDP to not only become the second largest economy in the world but has also become the manufacturing Centre of the world, producing more than 35 percent of the world output. India is closely following China as one of the largest economies of the world (CBN Statistical Bulletin 2010). The critical economic success factor in both China and India’s economic explosion has been the development of human capital skills through sound and qualitative education for the manufacturing sectors.

Also, the CBN Report 2003 buttressed the point that technology is the greatest obstacle constraining productivity in Nigeria’s manufacturing sector as development in technology and innovation are the primary forces of industrialization today. We cannot acquire technology without sound and qualitative education. The lack of engineers and technical staff is reported to be setting back potential foreign investment, especially in manufacturing sectors in Nigeria. Thus, given the relative increase in foreign direct investment inflow into Nigeria in 1990s in general and the diversification of foreign direct investment into the manufacturing sector in particular, what is the likely impact of foreign direct investment inflow on Nigeria’s manufacturing sector? This constitutes one of the focuses of this work.

In particular, the issue of how beneficial foreign direct investment is for developing countries forms the kernel of empirical controversy (De Mello, 1997, Akinlo, 2004; Oladipo and Vasquez-Galan, 2009). Indeed, few issues have generated more controversy in the post-war history of North-South relations than those connected with the role of foreign direct investment in the industrialization of developing countries. The focus on foreign direct investment is not without reasons. First, unlike loans, foreign direct investment can bring development capital without repayment commitments. Second, foreign direct investment is far more than mere capital: it is a uniquely potent bundle of capital, contacts, managerial and technological knowledge with potential spillover benefits for host country firms. Third, unlike other forms of capital flows, Foreign Direct Investment has proven to be resilient during crises. In the midst of his controversy arises the need for country specific assessment of the role of foreign direct investment in national industrialization efforts, with particular emphasis on the manufacturing sub-sector. This is the motivation behind this study.

1.3     Research Question

Based on the objective of the study the following research questions are necessary or the formulation of hypothesis.

1. Does the foreign direct investment have a significant impact on the development of the Nigeria economy?
2. What is the nature and magnitude of the foreign direct investmenton economic growth in Nigeria?
3. Are there enough incentives by the governed to encourage the flow of foreign direct investment?

1.4     Research Objectives

The broad objective of the study is to examine the effect of foreign investments on the performance of manufacturing sub-sector in Nigeria. The specific objectives are;

1. To find out whether or not foreign direct investment has a significant impact on the growth of the Nigerian economy.
2. To determine the nature and magnitude of the impact of foreign direct investment on economic growth in Nigeria.

• To ascertain the adequacy of the level of fiscal incentives given to foreign investors by the Nigerian government.

1.5     Significance of the Study

It is hoped that this study will act as a reference point for policy debate in the idea of Foreign Direct Investment in our economy.

On the whole it is envisaged that the research findings will be of the following specific significance.

1. It will serve as guide to economic policy makers and planners in future decisions concerning foreign direct investment.
2. It is equally hoped that findings and recommendation of this study will be of immense benefit not only to the government but also to other researchers and students for future research undertakings.

1.6     Statement of Hypothesis

In order to find answers to the questions raised in the research questions, the following hypothesis are necessary and would be tested and it will either be accepted or rejected based on the research findings.

1. H_O: There is no significant relationship between manufacturing                  sector performance and foreign direct investment.
2. H_O: There is no negative effect on manufacturing sector                              performance and foreign direct investment.

1.7     Plan of Work

Sequel to the background of the study, previous studies will be examined to find out the nexus between foreign direct investment and manufacturing sector performance. Section 3 will examined the theoretical frame work and the model specification, while section four presents the results of the analysis carried, section five concludes the study.

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