THE CONTRIBUTIONS OF FOREIGN DIRECT INVESTMENT ON FINANCIAL GROWTH IN NIGERIA

Abstract

Foreign Direct Investment (FDI) stimulates financial sector growth through the presence of foreign participation in investment in the nation. This study explores the relationship between foreign direct investment and financial sector growth, providing empirical evidence from Nigeria. Annual time-series data were gathered on foreign direct investment, capital formulation, Gross Domestic Product, local financial market from 1980-2009. The empirical model was analyzed using the econometric techniques of ordinary least square method, unit root test, co-integration test, and Error correction Mechanism,. The findings suggest that the inflow of FDI has a positive impact on the Financial Sector in the short run but fail to translate to real long financial sector growth that could promote speedy economic growth due to the fact that the bulk of foreign direct investment has been channeled to other sectors of the economy namely the Oil and Gas Sector. The study recommends that government should encourage and formulate policies that will increase the volume and magnitude of Foreign Direct Investment into the Financial Sector as well as implement policies that attract foreign participation in domestic economy and create good and conducive investment climate that assures that foreign businesses thrive, among others.

TABLE OF CONTENTS

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Title page                                                                                   i

Certification                                                                                ii

Dedication                                                                                         iii

Acknowledgements                                                                              iv        

List of Tables/ figures                                                                              viii

Abstract                                                                                                 ix

CHAPTER ONE- INTRODUCTION

Background to the Study

Statement of the Problem

Objectives of the Study

Research Questions

Hypothesis for the Study

Significance of the Study

Brief Methodology

Plan of the Study

CHAPTER TWO- LITERATURE REVIEW AND THEORETICAL FRAMEWORK

2.1      Introduction

2.2      Empirical review

2.3      Financial Liberalization and Economic Growth

2.4      Theories of Foreign Direct Investment and Financial Sector Development

2.5      The Nigerian Financial Sector

CHAPTER THREE- ANALYTICAL FRAME WORK AND RESEARCH METHODOLOGY

3.1      Introduction

3.2      Theoretical Framework

3.3      Methodology

3.4      Re- statement of Hypothesis

3.5      Model Specification

3.6      Model Estimation Techniques

3.7      Unit Root Test

3.8      CoIntegration Analysis

3.9      Source of Data

CHAPTER FOUR- EMPIRICAL RESULT AND DISCUSSION

4.1      Description of Statistics

4.2      Unit Root Test

4.3      Co integration Test

4.4      Long run Static Regression Analysis

4.5      Error Correction Model

4.6      Coefficient of determination

4.7      Short Run Model’s Goodness of Fit

4.8      Stability Test

CHAPTER FIVE- SUMMARY, RECOMMENDATIONS AND CONCLUSION

SUGGESTION FOR FURTHER STUDY

 5.1      Summary

5.2      Recommendations

5.3      Conclusion

5.4      Suggestion for further studies

References

Appendix

List of Tables

4.1      Summary of Statistics

4.2      Unit Root at a level

4.3       Unit Root at First Difference

4.4      Johansen Co integration

4.5       Static Regression Error Correction Model Estimate

List of figure

4.1          Growth of Foreign Direct Investment and GDP finance in Nigeria

4.2                  Square Test of Model Stability

CHAPTER ONE

INTRODUCTION

1.1       Introduction

Foreign direct investment has been referred to as a source of foreign finance urgently, needed for development by the Third World. Indeed, Kojima (1978) as cited in Oke (2012) has indicated that instead of conflicting with international trade, foreign direct investment complements it.

Foreign Direct Investment (FDI) usually consists of external resources, including technological, managerial and marketing expertise, in addition to capital. These may generate considerable impact on Nigerian real sector in general and production capabilities in particular, since they are directly linked to productive investment (Oke (2012), Foreign Direct Investment also facilitates transfer of technology and managerial and marketing skills, which are indispensable in the quest for viable solution to the problems of industrial inputs and diversification as well as expansion of export. This implies that, the ability of Nigeria to sustain growth and development as well as meet her external obligations, millennium development goals (MDG) and to realize her dream of joining the league of highly industrialize nation by the year 2020 depends on adequate inflow of foreign investment resources.

However, the country has been experiencing difficulties in her effort to meet these goals. According to the researcher referred earlier, little or nothing is available for new investments at the current level of foreign exchange earnings and high external debt servicing obligation, As a result, traditional model of economies assumes that average and marginal consumption propensities are high, that savings are low and that the formation of new productive capital is restricted given the low level of per capital real income characterizing underdeveloped economies,

It  may be noted that  high population growth, import dependency, misguided deregulation/re-regulation, lack of incentives for investment in terms of infrastructure globalization and political instability including mono-cultural economy are some reasons identified in literature for the slow economic growth in Nigeria. In light of the above scenario, it is discovered that there exists a gap between the domestically available supply of savings, foreign exchange, government revenue and skills and the planned level of the resources necessary to achieve development targets (Todaro, 1977).

However, this gap necessitates the need for external resources to augment domestic resources in the country. These external resources could be in the form of foreign aids or grants, short-term credit, state loans and private investments. Although, effort have been made to investigate real sector of various economies of the world, but there exist no concrete evidence from literature that brings out the salient problems, findings, conclusion and recommendation with respect to financial sector FDI. In literature, research is scarce on the contributions of FDI to Nigerian economy. It is for this purpose that this study is aimed at filling this literature gap.

Most arguably, it is expected “a priori” that the impact of FDI is noticeable and felt on Services and Financial sectors, there is still need to carry out a quantitative analysis of FDI and financial sector variables in Nigeria to back it up. This is because of the obvious reasons that can be attributed to Nigeria economy like inadequate power supply, weak infrastructural facilities, inconsistent and unstable government policies, inefficient capital market, Bank robbery and abuse, environmental risk; such as the Niger Delta Militant activities, to mention just a few. It is against this backdrop that the study seeks to assess the impact of Foreign Direct Investment on financial growth in Nigeria.

1.2       Statement of the Problem

Foreign Direct Investment (FDI) stimulates financial sector growth through the presence of foreign participation in investment in the nation.  It appears that Nigeria financial sector is yet to explore the potential of foreign direct investment. However, the ability of Nigeria to sustain growth and development as well as meet her external obligations, millennium development goals (MDG) and to realize her dream of joining the league of highly industrialize nation by the year 2020 depends on adequate inflow of foreign investment resources.

Unfortunately, the country has been experiencing difficulties in her effort to meet these goals. At the current level of foreign exchange earnings and high external debt servicing obligation, little or nothing is available for new investments. This study seeks to explore the relationship between foreign direct investment and financial sector growth, providing empirical evidence from 1980-2009.

1.3       The Research Objectives

The purpose of this study is to assess the contributions of foreign direct investment on financial sector growth in Nigeria from 1980- 2009.

However, it will:

1.      Assess the contribution of foreign direct investment to the financial sector growth in Nigeria.

2.      Examine the casual relationship between foreign direct investment and financial sector growth in Nigeria.  

1.4       Research Questions

1.      To what extent has foreign direct investment contributed to the country’s financial sector growth?

2.      Is there a significant casual relationship between foreign direct investment and growth of financial sector in Nigeria?

1.5       The Research Hypothesis

The null hypothesis stated for the study is:

1.      There is no significant causal relationship between foreign direct investment and financial sector growth in Nigeria.

1.6       Significance of the study

The purpose of any research study is to make positive contributions. This study is not a different one. This study has identified the impact of Direct Foreign Investment on the growth of financial sector. It will help to document the contributions of foreign direct investment on financial sector of Nigeria. The study is relevant in the true sense that it will make an attempt to provide concrete evidence the relationship between foreign direct investment and financial growth since literature that brings out the salient problems, findings, conclusion and recommendation with respect to financial sector FDI is scarce. It will them add literature to the existing field.

1.7       Brief Methodology

The study utilized secondary data sourced from the Central Bank of Nigeria (CBN) and African Development Indicator (ADI). The time series data covers the period 1980 through 2009. The study adopted and modified the model used by Ojo (2012) which provides evidence for the relationship between foreign Direct Investment and Labour Financial market. It employed the technique of Simple Regressions Analysis of Ordinary Least Square (OLS) and Cointegration analysis of Error Correction Model (ECM) using E- view package.

1.8       Plan of Study

The study was divided into five chapters. Chapter one covers the introduction, statement of the problem, objectives of the study and research questions among others. The review of related and relevant study to provide proper support to the study was conducted in Chapter two, while Chapter three discuses the theoretical framework and the methodology for the study. Chapter four presents the empirical result and discussion of major findings of this study and in Chapter five, a summary, conclusion and recommendations were made on the basis of the findings of the study.