FOREIGN DIRECT INVESTMENT,GROSS CAPITAL FORMATION AND ECONOMIC DEVELOPMENT IN NIGERIA AN EMPIRICAL ANALYSIS
CHAPTER ONE
INTRODUCTION
- Background to the study
 Increased globalization has captured the attention of not only entrepreneurs and business people but also government officials who are searching for international business advantages in an ever-changing world. The active pursuit of FDI for the first time in Nigeria’s history is a signal that the rules of the game have changed under globalization. The message is clear: Markets are moving toward international competition, and to prosper, nations need to tap into the resources and opportunities available beyond their borders. To this end, they need not only to attract FDI to their shores but also to engage in outward investment in foreign markets.
Foreign Direct Investment (FDI) acquired an important role in the international economy after the SecondWorld War. Theoretical studies on FDI have led to a better understanding of the economic mechanism andthe behavior of economic agents, both at micro and macro level allowing the opening of new areas of studyin economic theory. To understand foreign direct investment we must first understand the basic motivations that cause a firm to invest abroad rather than export or outsource production to national firms.
Gross fixed capital formation According to Wikipedia, the free Encyclopedia is a macroeconomic concept used in official national accounts. Statistically it measures the value of acquisitions of new or existing fixed assets by the business sector, governments and “pure” households (excluding their unincorporated enterprises) less disposals of fixed assets. GFCF is a component of the expenditure on gross domestic product (GDP), and thus shows something about how much of the new value added in the economy is invested rather than consumed. The relationship of foreign direct investment to gross fixed capital formation cannot be overemphasized since they both involved capital accumulation for investment purpose. Their impact on economic development is overwhelming and shows a positive relationship.
According to Official statistics from UNCTAD there has been an increase in FDI inflows globally. Between the years 1980 and 2014, FDI inflows were recorded to be about US$ 52 million, US$ 243 million, US$ 1.2 million, US$ 1.3 million and US$ 1.35 in years 1980, 1990, 2000, 2010 and 2014, respectively. Freckleton et al. (2012) noted that due to the increase in FDI flows, scholars over the years have been motivated to investigate its determinants and impact on the economy. In South Africa, where poverty, unemployment and the urgent need to add to existing infrastructure and develop new crucial infrastructures to meet the ever increasing population and economic growth remain a challenge, the role of FDI seems to be imperative. However, the question remains whether FDI inflow can play such a role in South Africa or how relevant FDI inflow is in South Africa economic stability. In line with the above, the aim of the study is first to examine if a long-run relationship exists between FDI inflow and employment and between FDI inflow and capital formation. Secondly, it aims to explore causality relationship between employment and capital formation in relation to FDI inflow.
Nowadays the issue of foreign direct investments is being paid more attention, both at national and international level. There are many theoretical papers that examine foreign direct investments (FDI)’s issues, and main research on the motivations underlying FDI were developed by J. Dunning, S. Hymer or R.Vernon. Economists believe that FDI is an important element of economic development in all countries, especially in the developing ones.
The conclusion reached after several empirical studies on the relationship between FDI and economic development is that the effects of FDI are complex. From a macro perspective, they are often regarded as generators of employment, high productivity, competiveness, and technology spillovers. Especially for the less developed countries, FDI means higher exports, access to international markets and international currencies, being an important source of financing, substituting bank loans.
Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. World Bank (1996) conceptualized Foreign Direct Investment (FDI) as investment that is made to acquire a lasting management interest (usually 10% of voting stock) in an enterprise and operating in a country other than that of the investors.
Foreign direct investment represents a veritable source of foreign exchange and technological transfer, especially to a developing economy like Nigeria. It can be analyzed in terms of inflow of new equity capital (change in foreign share capital), re- invested earning (unremitted profit), trade and supplier’s credit, net inflow of borrowing and other obligations from the parent company or its affiliates (Nwankwo et al, 2013). Olopoenia (1985) observed that foreign investment could be seen as an additional factor of production and as a supplement to the national savings effort of the capital importing country. This is meant to relax both the foreign exchange and savings constraint on the rate of growth of output in the recipient country.
Agada and Okpe (2012) saw FDI as an attempt by individuals, groups, companies and government of a nation to move resources of productive purpose across its country to another country with the anticipation of earning some surplus. Otepola (2012), asserted that FDI has emerged as the most important source of external resource flows to developing countries over
FDI often contains a package of assets including equity capital, technology, management and marketing skill, etc. (Hymer 1976). However, FDI can occur even without the movement of funds from one country to another. For instances, MNEs, in many cases, exchange proprietary knowledge (technology, skills, etc.) or physical capital (machinery, equipment’s, etc.) against equity claims on a host country firm, or FDI may occur through the reinvested earnings of existing affiliates of foreign firms.
 Foreign Direct Investment (FDI) is an investment made to acquire a lasting management interest in a business enterprise operating in a country other than that of the investor (World Bank, 1996). According to Thirwall (1994), FDI refers to investment by multinational corporations (MNCs) with headquarters in developed countries. This investment involves not only a transfer of funds but also a whole package of physical, techniques of production, managerial and marketing expertise, products, advertising and business practices for the maximization of global profits. FDI comprises not only merger and acquisition and new investment, but also reinvested earnings and loans and similar capital transfer between parent companies and their affiliates.
 The rapid growth of interest in foreign direct investment (FDI), stand from the perceived opportunities derivable from utilizing this form of foreign capital injection into the economy, to augment domestic savings and further promote economic development in most developing economies (Aremu 2005). According to Alfaro, (2006) Policymakers believe that FDI produces positive effects on host economies. Some of these benefits are in the form of externalities and the adoption of foreign technology.
FOREIGN DIRECT INVESTMENT,GROSS CAPITAL FORMATION AND ECONOMIC DEVELOPMENT IN NIGERIA AN EMPIRICAL ANALYSIS
