ABSTRACT
This
study investigated the causal relationship between foreign investment inflows
disaggregated into foreign direct investment and foreign portfolio investment
inflows and macroeconomic performance in Nigeria. Most emerging economies
around the world strive to attract foreign investment inflows because of the
gap between the domestic savings and investment especially into the real
sectors of theireconomies. This ismost probably because, foreign investment
inflows are seen as an amalgamation of capital, technology, marketing and
management of resources which are useful in harnessing host country resources. Since
globalization, the flow of foreign investments into emerging economies has
increased and the debate on the effect of these foreign investment inflows on
macro economic performance has also intensified. Nigeria is one of the largest
beneficiaries of foreign direct investment (FDI) and foreign portfolio
investment (FPI) in sub-Saharan Africa. Yet their impact on macroeconomic
performance has not been fully ascertained. It is, therefore, against the
foregoing that this study sought to examine the effect of total foreign
investment inflows on gross domestic product, exchange rate, inflation rate and
interest rate in Nigeria. The study adopted the
ex-post facto research design. Annual time series data for 26 years for the
period, 1987 – 2012 were sourced from the Central Bank of Nigeria (CBN)
statistical bulletin. Four hypotheses were formulated and tested using the
ordinary least square (OLS) regression method. The results revealed that total
foreign investment inflows had positive and significant effect on gross
domestic product in Nigeria;foreign direct investment had negative impact on
exchange rate while foreign portfolio investment had positive impact on
exchange rate. Again, total foreign investment inflows have positive and
insignificant impact on inflation whereas foreign direct investment had
positive impact on interest rate and foreign portfolio investment had a
negative impact on interest rate. The study recommends, among others, that
incentives such as tax holidays should be used to direct foreign investment
inflows towards non-oil real sectors of the economy in order to boost export. This
will obviously lead to strongerexchange rate, lower inflation, and encourage
competitive interest rate which will encourage savings and sustainable economic
growth.
TABLE OF CONTENTS
Title Page … … … … … … … … … i
Declaration … … … … … … … … … ii
Approval Page … … … … … … … … iii
Dedication … … … … … … … … … iv
Acknowledgments … … … … … … … … v
Abstract … … … … … … … … … vi
Table of Contents … … … … … … … … vii
List of Tables …       …       …       …       …       …       …       …       …       xii
CHAPTER ONE: INTRODUCTION
- Background Of The Study … … … … … … 1
1.2      Statement of the Problem …       …       …       …       …      …       3
1.3 Objectives of the Study … … … … … … 5
1.4 Research Questions … … … … … … … 5
1.5      Research Hypotheses         …       …       …       …       …       6
1.6 Scope of the Research … … … … … … 6
1.7. Significance of the Study … … … … … … 6
1.8.     Operational Definition of Terms …   …       …       …       …       7
References … … … … … … … … 9
CHAPTER TWO:REVIEW OF RELATED LITERATURE
2.1 Theoretical Review … … … … … … … 12
2.1.1  Overview of Foreign Investment …          …       …       …       12
2.1.2 Theories of Investment … … … … … … 16
2.1.2.1 Foreign Direct Investment as a Capital Movement … … … 18
2.1.2.2 Eclectic Theory. …       …       …       …       …       …       …       18
2.1.2.3 The Internalization Theory … … … … … … 19
2.1.2.4 Production Cycle Theory … … … … … … 19
2.1.3 Types of Foreign Direct Investment … … … … … 20
2.1.3.1 Horizontal FDI (Market Seeking) … … … … … 20
2.1.3.2 Vertical FDI (Resource-Seeking) … … … … … 22
2.1.3.3           Export Platform FDI (Efficiency Seeking) …    …      …       22
2.1.4   International Trade and Foreign Direct Investment … …    23
2.1.5 Causes of Capital Flows to Developing Countries … … … 26
2.1.5.1   Portfolio Flows …           …       …              …    …       …       26
2.1.5.2 Foreign Direct Investment Flows. … … … … … 27
2.1.6 Institutional Conditions for Attracting FDI … … … 29
2.1.7 Features of FDI and FPI … … … … … … … 29
2.1.8      FDI and Multinational Corporations …        …       …       …       34
2.1.8.1 Regulatory Pressure Effect … … … … … … 34
2.1.8.2   Demonstration Effect: …          …       …       …       …       35
2.1.8.3 Professionalization Effect … … … … … … 36
2.1.9 Foreign Portfolio Investors … … … … … … 38
2.1.9.1   Pension Funds  …          …        …       …       …       …       38
2.1.9.2   Insurance Companies. …    …       …       …       …       …       39
2.1.9.3 Mutual Funds. … … … … … … … 40
2.1.9.4 Hedge Funds … … … … … … … … 40
2.1.10 International Diversification of Portfolios … … … … 42
2.2 Empirical Review … … … … … … … 43
2.2.1 (FDI), (FPI), and Economic Growth … … … … … 43
2.2.2  The Relationship Between(FDI), (FPI) and Exchange Rate      46
2.2.2.1  The Role of Exchange Rate Regime      …       …       …       …       48
2.2.2.2  Exchange rate Uncertainty and Investment …       …       50
2.2.3 FDI, FPI and Inflation … … … … … … … 51
2.2.3.1 Inflation and Nigeria … … … … … … 55
2.2.4 FDI, FPI Interest Rate … … … … … … 55
2.2.4.1 Analysis of Interest Rate in Nigeria … . … … … 58
 2.2.5     Foreign Investment and Financial Reforms in Nigeria …       59
2.2.6 Macroeconomic Performance … … … … … 62
2.2.7 Determinants of Foreign Investment … … … … 64
2.2.7.1           Determinants of FDI ….  …       …       …       …       …       64
2.2.7.1           Determinants of FPI         …       …       …       …       …       66
2.2.8 Foreign Portfolio Investment and Domestic Stock… … … 68
2.2.9 Foreign Direct Investment and Domestic Investment    …     70
2.2.10 FDI and Export … … … … … … … 73
2.2.11 FDI and Corruption            …     …       …       …       …      …       76
2.3     Summary of Review of Related Literature …          …       …       79
           References …          …       …       …       …    …       …       …       81
CHAPTER THREE: RESEARCH METHODOLOGY
3.1       Research Design …          …         …       …       …       …       …       99
3.2 Nature and Source of Data: … … … … … … 99
3.3       Specification of Models …              …       …       …       …       99
3.3.1 Introduction … … … … … … … … 99
3.3.2 Hypothesis and Model Specifications … … … … 101
3.4      Description of Variables …       …       …       …       …       …       104
3.5      Data Analysis Techniques:       …       …       …       …       …       105
References   …       …       …       …           …       …       …       …       107
CHAPTER FOUR: DATA ANALYSIS
4.1 Introduction …. … … … … … … …. 108
4.2      Data Presentation and Interpretation    …       …       …       108
4.3 Test of Research Hypotheses … … … … 116
4.3.1 Test of Hypothesis One … … … … … … 116
4.3.2 Test of Hypothesis Two … … … … … … 119
4.3.3 Test of Hypothesis Three … … … … … … 122
4.3.4 Test of Hypothesis Four … … … … … … 124
4.4 Correlation Result … … … … … … … 129
-4.5    Implication of Result        …       …       …       …       …       …       135
4.5.1 Objective One … … … … … … … 135
4.5.2 Objective Two … … … … … … … 136
4.5.3 Objective Three … … … … … … … 137
4.5.4 Objective Four … … … … … … … 137
References … … … … … … … … 139
CHAPTER FIVE: SUMMARY OF FINDINS, CONCLUSIONS & RECOMMENDATIONS
5.1 Summary of Findings … … … … … … 140
5.2 Conclusion …. … … … … … … … 141
5.3 Recommendations … … … … … … … 142
5.4      Contributions to Knowledge      …..     …       …       …       …       144
5.5      Recommendation for Further Studies      …       …       …       144
Bibliography … … … … … … … … 145
Appendix … … … … … … … … 165
LIST OF TABLES
Table 2.1 Comparism of FDI and FPI … … … … … 15
Table 2.2 Macroeconomic Performance in Nigeria (1970 – 2009) … 63
Table 4.1 Data on FDI, FPI and GDP …. …. … …. … 108
Table 4.2 Data on FDI, FPI and Exchange Rate ….        ….      ….      110
Table 4.3 Data on FDI, FPI and Inflation Rate ……       ….      ….      111
Table 4.4 Data FDI, FPI and Interest Rate … …. …. …. …. 112
Table 4.5 Data on Control Variables … … …. …. …. …. 113
Table 4.6 OLS Regression Result-FDI, FPI and GDP …. …. …. 117
Table 4.7 OLS Regression Result-FDI, FPI and Exchange Rate         ….      120
Table 4.8 OLS Regression Result-FDI, FPI and Inflation Rate …. Â
Table 4.9 OLS Regression Result-FDI, FPI and Interest Rate   ….  126
Table 4.10 Correlation
Matrix of all the Variables …. …. …. …. 129
CHAPTER ONE
INTRODUCTION
- BACKGROUND TO THE STUDY
Globalization is the process through which economies, societies and cultures relate through trade, transportation and communication. Economic theory clearly points to the tremendous potential advantages of cross-border capital flows.Neoclassical economists support the view that capital flow is beneficial because they create new resources for capital accumulation and stimulate growth in developing economies with capital shortages. Various types of these flows are welcomed to bridge the gap between domestic saving and investment that accelerate growth. Capital flow play significant role in economics. Finance is the life blood of any enterprise. With sufficient finance, an entrepreneur can get other factors of production such as labor, machinery/technology, management as well as raw materials and be involved in any other business activity (Okafor and Arowshegbe, 2011). According to Fuch-Schtindekn and Herbert (2001), foreign investments usually have absolute impact on domestic investment, and the productivity of investment, technology overflow, and household financial development. Fitzgerald (1998) theoretically argues that higher capital inflows lower interest rates, which help increase investment and economic growth. On the empirical side, using data from seventeen emerging economics, Bekaert and Harvey (1998) find a positive relationship between equity capital flows and key macroeconomic indicators, including growth and inflation. Evidence from Latin America and far Eastern economies shows that capital inflows tend to appreciate real exchange rates, lower interest rates, and increase consumption, investment and economic growth (Antzolatus 1996; Calvo 1994; Carbo and Hernandez 1994; Fernandez-Arias and Montiel 1995, Khan and Reinhart 1995).
In contrast, the financial crisis that came up in Asia, Russia and Latin America have created doubts about the benefits of capital inflows and emphasized the necessity of capital controls. Agosin (1994) argues that capital inflows are used to finance imports and domestic consumption. Rodrik (1998) contends that capital flows have no significant impact on economic performance once the impact of other variable, such as education level, the initial level of income, the quality of government institutions, and regional dummies, are controlled for.
Foreign investment comes in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). The former entails a controlling authority over the concerned enterprise; at times it means setting up of new projects. Portfolio investment by contrast is essentially a financial transaction – purchase of stocks, bonds and currencies as assets. Many developing economies have over the years depended heavily on the attraction of financial resources from outside in different ways. Official and private capital flows including FDI and FPI as a way of accelerating their economic growth (Odozi, 1988; Ekpo, 1997; Uremadu, 2008). Some nations exhibited a choice for FDI since they regard it as an avenue for overcoming the slow trend in official and private portfolio capital flow (Uremadu, 2008). The need to draw foreign capital in non-debt constituting way is one of the reasons, why emerging economies wish to encourage private capital flows. Thus, there has been a dramatic increase in the magnitude of capital flows from countries in the North to emerging economies across the South where the need is high. According to Siamwalla (1999) the relative low yields in industrial countries together with impressive economic growth and attractive returns in developing, countries motivated investors to relocate their funds to direct investments. He assumes that the growth in international foreign investment inflow is an aftermath of good mixture of macroeconomic variables as well as the drift towards trade globalization, international financial linkages and expansion of production bases overseas. He further states that macroeconomic variables are indicators or main signposts indicating the current trends in the economy. Some main macroeconomic variables identified by Keynes (1930), that study foreign inflows into an economy are gross domestic product (GDP), exchange rate, interest rate, inflation rate and money supply.
Nigeria as an import dependent economy needs foreign investment to enhance her investment needs. That is why since the emergence of democratic governance in May 1999, she has embarked on some concrete means to encourage cross-border investors into her domestic economy. Some of these means are: the repeal of laws that are adverse to foreign investment increase, promulgation of investment laws, introduction of policies with favorable atmosphere like ease of businesses, fast export and import processing methods, fight against advanced fee frauds, instituting economic and financial crimes commission. These definite measures seem to have been making positive impact on Nigeria’s foreign capital inflows (Uremadu, 2011).
Nigeria has also been a mono-cultural economy and relies heavily on crude oil as the major means of foreign exchange. Oil is vulnerable to the inconsistencies of production and prices at the international market. So returns from it may be subject to serious inconsistencies. This usually results in mono-cultural economies being deficient in investment capital.Poor economic management is another feature in Nigeria economy and which often leads to trade imbalances, persistent fiscal deficit, insufficient domestic savings, low high inflationary pressure, poor infrastructural facilities, unemployment, low output and excess dependence on imports (Okafor, 2012).
A close survey of the Nigeria economy indicates that Nigeria has recorded trade imbalances in most fiscal years, indicating that total payments surpassed total receipts in relation to total imports and total exports (Amadi, 2002). Overall balance of payments became worse in 1999, 2002 and 2008 mostly because of increased outflow from capital accounts (CBN, 2009). Most of the capital outflow must be attributed to increased importation, declining exports mainly non-oil subsector and particularly due to external debt servicing required in meeting up with resource gaps. Essien and Onvioduokit (1999) and Ariyo (1999) described debt servicing and reserve creation as fluctuating variables that create dependence on foreign capital in Nigeria.Therefore, increase in foreign investment has stimulated debates about its influence on the macroeconomic performance of an emerging market like Nigeria.
