ABSTRACT
This study employed an economic method to analyze the impact of foreign direct investment to the growth of manufacturing output in Nigeria using annual time series data of the choice variables from 1981 to 2015. The data used were secondary data obtained from central bank of Nigeria. The findings revealed that manufacturing foreign direct investment (MFDI), previous years manufacturing output (PMGDP) were positively and statistically significant in explaining the variation in the manufacturing output, while interest rate (INT) is positively and statistically-insignificant in explaining manufacturing output. The co-integration result revealed that there is no long run relationship between foreign direct investment in the manufacturing sector and manufacturing out in Nigeria. The result further revealed that FDI and previous manufacturing output significantly influenced the current output of the manufacturing sector. Policy implication is that the economy should channel more foreign direct investment inflow towards manufacturing sector, as this will lead to higher growth of the aggregate output. It was recommended that there should be more attention towards attracting FDI into manufacturing sector which can be done through fiscal incentives such as tax holidays, tax reliefs and other policies that would ensure a stable macroeconomic environment. Secondly, lowering interest rate to see if it will boost the manufacturing output since from economic theory it has been argued that low interest rate increases investment and output.
CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The decline in the performance of the manufacturing sub-sector has been attributed to low investment due to low savings in the domestic economy. Other factors include; poor inflows of foreign investment as a result of poor enabling environment, deficient infrastructural facilities, weak raw material base, poor business ethics, debts, poor technological base, and high cost of energy. However, foreign direct investment (FDI) provides much needed resources to developing countries such as capital, technology, managerial skills, entrepreneurial ability, brands, and access to markets. These are essential for developing countries to industrialize, develop, and create jobs for the mass unemployed in their countries. Foreign direct investment recipients benefit from acquiring technologies and from getting involved in international production and trade networks. As a result, most developing countries recognize the potential value of FDI and have liberalized their investment regimes and engaged in investment promotion activities to attract various countries.
The current state of the Nigerian economy as a mono-product economy (oil based economy) gives rise to the need to diversify. An increase in investment requires the mobilization of both domestic and international finance. Given the unpredictability of capital availability, volatility of world oil market, the low share of the country in world trade, high volatility of short term capital flow and the low savings rate of the country, the deserved increase in investment has to be achieved through an increase in foreign direct investment flows, at least in the short run (De Gregorio, 2003). This makes it a priority for her manufacturing sector to accommodate FDI as a medium of increasing investment in the sector. The demand for foreign direct investment (FDI) in the manufacturing sector is as a result of its ability to function as a tool of economic development. It is therefore evident that Foreign Direct Investment is one of the requirements necessary for achieving greater manufacturing output level in developing economies. Nigeria as one of the economies with great demand for goods and services has attracted some FDI over the years.
Over the years, Nigerian government made policies that accommodated FDI in the hope that it will significantly contribute the development of sectors like manufacturing sector, in order to encourage economic development. They often provide subsidies and special incentives believing that the total benefits will outweigh the total costs of attracting FDI. Potential benefits are that foreign firms can raise the level of capital formation, promote exports, and generate foreign exchange and also they provide the much needed market for domestic suppliers and support industries and, in the process, transfer technology, increase industrial linkages and stimulate industry as a whole, while providing direct and indirect employment (Fadayo, 2003).
Hence, Meaningful, long-lasting economic growth and development is almost entirely contingent upon securing substantial amounts of foreign direct investment. FDI is crucial for the Nigerian manufacturing sector, as it permits the transfer of technology and facilitates improvements in productivity. Ultimately, this can help alleviate Nigeria’s widespread poverty by increasing per capital income and elevating overall standards of living. FDI projects could generate greater employment and increase the productivity of the manufacturing industry.
1.2 Statement of Problem
In the modern world today, manufacturing sector is regarded as the basis for determining a nation’s economic efficiency. The manufacturing sector of any economy worldwide is reputed to be the engine of growth and a catalyst for sustainable transformation and national development. This is based on its ability to creating wealth, generating employment, contribute to the country’s Gross Domestic Product as well as alleviating poverty among the citizenry. (Amakom, 2012). For economic development and efficiency to be attained, there must be a sufficient capital which would serve as the back bone of such an economy. As a result of the low savings and low domestic capital formation of most developing countries such as Nigeria, the required capital has to be sourced from abroad in form of FDI, etc.
Prior to the oil boom of the 1970’s, manufacturing contributed approximately 10% to Nigeria’s economic output. After the discovery of crude oil in Nigeria, the nation shifted from its leading development of industrial production base through agriculture and manufacturing and placed heavy weight on crude oil production (Englama, 2010). Thereafter, increased revenues from oil caused the sector’s relative Gross Domestic Product (GDP) share to decline; growth persisted albeit at a slower rate. The recession caused by the fall in oil prices triggers policy attention to turn back to the manufacturing sector, such as the Structural Adjustment Programme (SAP) of 1986 which was initiated to stimulate domestic production, privatisation and commercialisation policies. (Chete and Adenikinju, 2002).
The manufacturing sector of Nigeria is still in an infant stage, compared to other sectors in the country and to other similar African countries like Ghana, Kenya, and Botswana (Teriba et al 1981; Iarossi et al. 2009). In terms of share of Gross Domestic Product (GDP), the manufacturing sector contributes a relatively small amount. As at 1980, the manufacturing sector was at its peak of about 11% of GDP. This declining trend has been the case till date, as minor increases in manufacturing shares over the years has been largely unsustainable. At its record lowest share of value 2.4% of GDP in 2008, while Crude Petroleum and Agriculture contributed about 37% and 33% respectively (CBN, 2009). The Nigerian manufacturing sector contribution to GDP decline from 4.21% in 2009 to 4.1% in 2010 GDP, (MAN, 2010), while the production output declined from N183.8 billion in the first half of 2009 to N165.7 billion in the same period of 2010. (Sherif 2012)
Furthermore, the available statistics shows that FDI does not necessarily flow in the same direction with manufacturing output. The manufacturing output of 4,527,450,000,000 which amounted to7.19% of the total economic output for the year 2011, increased to N5,588,820,000,000 in 2012 reaching its highest output at 8,685,430,000,000 in 2014 which represent t 7.79% and 9.75% of the total economic output for the respective years. On the contrary, FDI recorded the highest inflow of $8,841,114,000 which commensurate 2.15% of the GDP in 2011. The inflow declined to $7,069,934,000 and $4,655,849,000 amounting to 1.53% and 0.82% of the GDP for 2012 and 2014 respectively.
The standing belief that FDI generates positive productivity effects for host countries, is considered evasive in the case of the manufacturing sector. In spite of the enormous strategies put in place to attract the inflow of FDI into the country, the expected surge has not been realized. Given the relative amount of FDI inflow into Nigeria from 1980 to 2015, the growth of manufacturing output has not being in relative proportion to FDI inflow. The relationship between FDI and Manufacturing Output is ambiguous. Numerous studies have identified foreign direct investment, as key to economic growth, while this study is set to identify the impact of FDI on a specific area of the economy i.e. manufacturing sector. It is in view of the above development and against this background therefore, that this study seeks to find plausible answer to the question; “does FDI have any significant impact on manufacturing output in Nigeria?”
1.3. Research Objectives
The broad objective of the study is to examine the impact of foreign investments on the manufacturing sector in Nigeria.
The Specific objective is to:
- Determine the effect of FDI on the manufacturing output in Nigeria.
- Determine the long run relationship between FDI and Manufacturing output.
1.4 Research Hypothesis
The following hypothesis will be tested on this study;
Hi = FDI has no significant effect on the Manufacturing output.
Hii = There is no long runrelationship between FDI and manufacturing output
1.5 Significance of the Study
The findings of this research will be relevant to the Nigerian society, in the sense that, it will enable policy makers to be guided in the right direction towards maximizing both FDI inflows.It will also help the government to take better decision on whether to encourage or discourage FDI inflow. This study will also contribute to the literature review for further research.
1.6 Scope and Limitation of Study
This research work focuses on FDI inflow and the manufacturing output in Nigeria within the period of 1981-2015. This research work was limited by the following factors; time, finance and availability of data.
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