THE IMPACT OF FOREIGN DIRECT INVESTMENT ON SECTORAL PERFORMANCE IN THE NIGERIA ECONOMY USING MARITIME SECTOR AS A CASE OF STUDY

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No of Pages: 69

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ABSTRACT

The study seeks to empirically analyze the impact of Foreign Direct Investment on sectoral performance in the Nigeria economy, using maritime sector as a case of study. The data for the research study was extracted from CBN statistically bulletin volume 25, 2018 edition. The methodology is ordinary least square were foreign direct investment was regressed on Foreign Direct Investment, Interest rate, Exchange rate, on Nominal Gross Domestic Product. Some econometrics tests were conducted such as the unit Root, Contegration, Vector Error Mechanism and Granger Causality test.  The unit root result shows that none of the variables were stationary at level, but at first differencing them all became stationary. The contegration result shows that there is long-run relationship among the variables. The Vector Error Mechanism model shows that maritime sectoral performance had an impact on Nigerian economy. It is on this note that the researcher recommends amongst others that: The government should initiate policies that will promote the long- run growth of the maritime sector and the economy at large, There is need for government to be formulating investment policies that will be favorable to local investors in order to complement the inflow of investment from abroad as high interest rate will hinder the growth of investment, A stable political environment was found to be fundamental in attracting foreign investment to an economy, It should also set machinery in motion to improve the quality of the labour force through improved educational system, and qualitative and continuous manpower training.

 

 

TABLE OF CONTENTS

TITLE PAGE   i

APPROVAL PAGE   ii

DEDICATION   iii

ACKNOWLEDGEMENT   iv

TABLE OF CONTENTS  v

LIST OF TABLES  viii

ABSTRACT   ix

 

CHAPTER ONE   1

INTRODUCTION   1

1.1       Background of the Study  1

1.2       Statement of the Problem   6

1.3       Research Questions  9

1.4       Objectives of the Study  10

1.5       Hypotheses of the Study  10

1.6       Significance of the Study  11

1.7       Scope and Limitation of the Study  11

 

CHAPTER TWO   13

LITERATURE REVIEW    13

2.1       Conceptual Review   13

2.1.1    Impact of Foreign Direct Investment 14

2.1.2    Economic Growth and FDI  17

2.1.3    FDI and Nigeria maritime Sector 24

2.1.4    Determinants of Foreign Direct Investment 26

2.2       Theoretical Framework  28

2.2.1    Neo-classical perspective  29

2.2.2    Dependency Theory  37

2.2.3    Acceleration Theories of Investment 42

2.2.4    Endogenous growth models theory  43

2.2.5    Analysis of FDI inflow into Nigeria by Sectors  45

2.2.6    Impact of maritime sector to the Nigeria economy  46

2.3       Empirical Review   48

2.4       Gap in Literature  51

 

CHAPTER THREE   53

RESEARCH METHODOLOGY   53

3.1. Research Design  53

3.2       Model Specification  54

3.3       Estimation Procedure  55

3.3.1    Unit Root Test 55

3.3.2    Co-integration test 56

3.3.3    Vector Error Correction Mechanisms (ECM) 58

3.3.4    Granger-Causality Test                                                                                    59

3.4       Data Discussion  60

3.5       Data Sources  61

 

CHAPTER FOUR   63

PRESENTATION AND ANALYSIS OF RESULTS  63

4.1.      Unit Root Test 63

4.2       Co-integration Test 64

4.3       Vector Error Correction Mechanism (ECM) 66

4.4     Tests for Hypotheses                                                                                        67

4.4       Implication of the Study  68

 

 

CHAPTER FIVE   70

SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION   70

5.1       Summary of Findings  70

5.2       Recommendations  71

5.3       Conclusion  72

References  75

 

 

LIST OF TABLES

Table 4.1: Augmented Dickey Fuller Unit Root Test

Table 4.2: Johansen cointegration test for the series;  FDI, EXC, RGDP & OPEN

 

  

 

 

 

CHAPTER ONE

INTRODUCTION

            1.1              Background to the Study

Foreign direct investment is one of the most dynamic international resource flows to developing countries. It is important because it is a package of tangible and intangible assets, and firms deploying them are being regarded as very important players in the global economy. Foreign direct investment serves as an engine for economic growth most especially to developing countries like Nigeria. Holger and Greenaway, (2004) noted that these is a considerable evidence that Foreign direct investment can effect growth and development by complementing domestic investment and by facilitating trade and transfer of knowledge and technology. Foreign direct investment is attached with great importance especially in the growth of an economy. And because of this, Nigeria tries to attract greater volume of this important potential resource. Ajayi, (2000) notes that Africa, like many other developing regions of the world, needs a substantial inflows of external resources in order to fill the savings and foreign exchange gaps and leaping itself to sustainable growth levels in order to eliminates its pervasive poverty. And because of this, developing countries regard foreign direct investment as an engine of economic growth as it provides much needed capital for investment, increases competition in the host country industries, and aids local firms to become more productive by adopting more efficient technology or by investing in human and /or physical capital. Foreign direct investment inflows into developing countries have grown rapidly over the years, and this is because the developing countries see foreign direct investment as an important element in their strategy for economic development.

Ayanwale, (2007) FDI is not only important for developing countries, it is equally important for developed countries and because of its great importance in an economy, countries comes up with some promotional measures like mergers and acquisitions through privatization to lure FDI into their  economy. Kyaw, (2003) submits that mergers and acquisitions including private-to-private transactions as well as acquisitions through privatization which increased significantly in developing countries because an increasingly important vehicle for FDI. UNCTAD (2008) reported that the increase in FDI inflows largely reflected relatively high economic growth and strong corporate performance in many parts of the world. Promoting and attracting FDI has therefore become a major component of development strategies for developing countries. In the case of Nigeria, the role of FDI as a source of capital has become increasingly important not only because of the belief that it can help to bridge the savings- investment gap but also because it can assist in the attainment of millennium Development goal targets. FDI contributes to growth in substantially manner because it is more stable than other forms of capital flow. Other benefits of FDI in an economy include, employment, facilitating access to foreign market and generating both technological and efficiency spill over to local firms. Abimbola, (2010) points out that the benefits of FDI vary with respect to the level of openness and quality of human capital in developing countries. The economy of Nigeria is a middle income, mixed economy marked with well-developed financial, legal, communications, transport and entertainment sectors. It is ranked 31st in the world in terms of GDP (PPP) as of 2009 Wikipedia, (2011). From 2003 to 2007, Nigeria attempted to implement an economic reforms program called the National Economic Empowerment Developing Strategy (NEEDS). The purpose of the NEEDS was to raise the country’s standard of living through a variety of reforms, including macroeconomic stability, deregulation, liberation, privatisation, transparency and accountability. Oil continues to dominate the public finance and foreign exchange resources in Nigeria.

Amadi (2002) opined that with oil as the main sources of foreign exchange, a one product monoculture economy must be continuously deficient in investment capital. FDI also compete with domestic firms. Markusen and Venables(1999), in their analysis of the effect of foreign firms on the developing of domestic firms in the industrial sector, discovered that foreign companies compete with domestic producers while creating additional demand for domestically produced intermediate goods through linkages with local suppliers.

A sector in today business environment needs a lot of tools to be able to administer effectively in the day to day running of the business. Management by objectives is one of such tools. It is a way of getting improved results in managerial method whereby the superior and the subordinate managers in an organization identifies major areas of responsibility, and set some standards for performance and the measurement of results against those standards (Derek 2005).

The result tends to increase performance levels in the sector, but the results are more apparent when it is tied to goal setting (Locke and Bryan, 2009 and Conlon, 2010) and the sector values (Braunstein, Klein, and Pachla, 2013). Knowledge of results also improves satisfaction (Cook, 2008 and Hackman & Lawler, 2011) although this relationship seems to be moderated by the economic growth of sector.

Sector performance is an organization’s ability to implement its plans using the smallest possible expenditure of resources. It is an important factor in the firm’s organizational effectiveness, this being the ease and degree of success with which the organization is able to accomplish its aims.

Maritime transport which is also called waterborne transport, is one of the modes of transportation of goods and/or persons, others being air, road, rail, pipeline, ropeways transport. Maritime transport is essential to the proper operation of any country’s economy and a vital part of a nation’s transport infrastructure. A minister of Transport in the Federal Republic of Nigeria was once quoted to have said that transport is to the Nigerian economy what the artery is to the blood circulation system of the body. Without maritime transport, Nigeria would have been landlocked and its economy will not move forward but remain stagnant in different areas and as such maritime transport is of significant importance to and greatly influences the development and growth of the Nigerian economy in several ways. It is a key section of the Nigerian economy. The aim of this paper is to examine the impact of Foreign Direct Investment on sectoral performance in the Nigeria economy: A study of the maritime sector.

 

1.2  Statement of Problem

Nigeria’s economic development was anchored basically on agricultural and primary exports before independence. But a purposeful effort was made to alter the structure of the economy by increasing investment in 1960. Incentive measures were thus directly aimed at attracting foreigners, their capital, technology and skills

The centrality of FDI as the prime mover in the growth process of the Nigeria economy has often been emphasized by the traditional Neo-classical theory of the determinants of the growth process. Hence, foreign direct investment encourages the flow of technology and skills and fills the gap between domestically available supplies of savings, foreign exchange and government revenue. Asiedu (2003), cited in Egbo (2011) asserted that foreign direct investment in Nigeria is mediocre compared with the resource base and potential need of the country. In addition to this assertion, the empirical link between FDI and Nigeria’s economic growth is yet unclear despite numerous studies that have examined the influence of FDI on Nigeria’s economic growth. However the extent to which FDI contributes to growth depends on the economic and social conditions or in short the quality of the environment of the recipient country (Akinlo, 2004). The quality of environment relates to the safe of savings in the country, the degree of openness and the level of technological development.

Nigeria is one of the countries with great demand for goods and services and has attracted some FDI over the years, but the most pertinent question that usually comes to mind is whether FDI actually contributes to economic growth in Nigeria. Equally, there have been a good number of studies on FDI and Economic growth in Nigeria but the existing empirical evidence on their long-run relationship has been inconclusive in relation to the periods under review, the motivation for this work therefore arose from the fact that for Nigeria in particular, the issue of economic growth is a very important one. Therefore, the extent to which economic growth has been achieved in Nigeria as a result of various sectoral performance measures put in place by successive administrations to attract foreign direct investment is an economic issue that requires investment. Hence, the main thrust of this study shall be to evaluate of maritime sectoral performance on its impact of foreign direct investment on Nigeria economic growth.

 

1.3   Research Questions

The study was guided by the following research questions:

1.      To what extent does foreign direct investment contribute to the performance of maritime sector in Nigeria?

2.      Is there any significant long-run relationship between foreign direct investment and the performance of maritime sector towards Nigeria economic growth?

3.      Is there any significant causal relationship between foreign direct investment and economic growth?

 

1.4        Objectives of the Study

The main objective of the study is to ascertain the extent at which foreign direct investment inflow influences Nigeria’s economic growth. However, the following specific objectives would also be achieved to;

1.       Empirically investigate the contributions of foreign direct investment on the performance of maritime sector.

2.      Establish whether there is a significant long-run relationship between foreign direct investment and performance of the maritime sector towards Nigeria economic growth.

3.      Determine the nature of causal relationship between foreign direct investment and economic growth.

 

1.5       Research Hypotheses

The following null hypotheses were tested in the course of the research work:

1.      H0: Foreign Direct Investment does not have a significant impact on the performance of maritime sector in Nigeria economy.

2.      H0: There is no long-run relationship between Foreign Direct Investment and the performance of maritime sector toward Nigeria economic growth.

3.      H0: There is no significant causal relationship between foreign direct investment and economic growth in Nigeria.

 

1.6       Significance of the Study

Findings of the study will make meaningful contribution to the general knowledge and understanding of the nature of FDI and its impact on Nigeria’s economy. It would help economists, leaders and other members of the government to understand the importance or otherwise of foreign direct investment which in turn would help in policy formulation.

Lastly, it would stimulate further research in the area of foreign direct investment and would provide policy recommendations to policy makers on ways to attract more foreign direct investment into the country.

 

1.7       Scope and Limitations of the Study

The study aims to address the issue on the impact of foreign direct investment on the Nigeria economy. The areas to be covered include the concept of foreign direct investment; its impact and determinants with special regards to the Nigeria economy. The empirical investigation shall be restricted to performance of maritime sector in Nigeria.

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