FOREIGN CAPITAL FLOW AND MACROECONOMIC STABILITY IN NIGERIA
CHAPTER ONE INTRODUCTION
1.1 BACKGROUND OF THE STUDY
Foreign Direct Investment (FDI) which is an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor, has long been a subject of great interest in the field of international development. In an era of volatile flows of global capital, the stability of FDI and its emergence as an important source of foreign capital for developing economies has once again renewed interest in its linkages with sustainable economic growth. FDI inflows contributed to a strengthening of the balance of payments in several African countries. In 2006, foreign reserves in the region as a whole grew by 30%, and by even more in some major oil-exporting countries such as Nigeria and the Libyan Arab Jamahiriya (World Investment Report, 2007). Indeed, for developing countries taken as a group, net inflows of FDI have increased almost five fold from an average of 0.44% of GNP in the period 1970-74 to 2.18% of GNP in the period 1993-97 (World Bank, 1999). FDI now forms a significant component of domestic investment activity in developing countries accounting for more than 8% of Gross Domestic Investment (GDI) in the mid-1990s up from 2% of GDI in the early 1970s. Finally, FDI is now the pre-eminent source of capital flows into developing countries accounting for about 36% of total capital flows in the mid-1990s up from approximately 18% of flows in the 1970-74 period (World Bank, 1999). Average annual inflows of Foreign Direct Investment (FDI) into Africa doubled in the 1980s compared with the 1970s. It also increased significantly in the 1990s and in the period 2000–2003. Comparisons with global flows and those of other regions may be more useful, however. In the mid 1970s, Africa’s share of global FDI was about 6%, a level that fell to the current 2–3%. Among developing countries, Africa’s share of FDI in 1976 was about 28%; it is now less than 9% (United Nations Conference on Trade and Development – UNCTAD, 2005). Also in comparison with all other developing regions, Africa has remained aid dependent, with FDI lagging behind Official Development Assistance (ODA). Between 1970 and 2003, FDI accounted for just one-fifth of all capital flows to Africa. It is well known that FDI is one of the most dynamic international resource flows to developing countries. FDI is particularly important because it is a package of tangible and intangible assets and because firms deploying them are important players in the global economy. There is considerable evidence that FDI can affect growth and development by complementing domestic investment and by facilitating trade and transfer of knowledge and technology (Holger and Greenaway, 2004). The importance of FDI is envisioned in the New Partnership for Africa’s Development (NEPAD), as it is perceived to be a key resource for the translation of NEPAD’s vision of growth and development into reality. This is because Africa, like many other developing regions of the world, needs a substantial inflow of external resources in order to fill the saving and foreign exchange gaps and leapfrog itself to sustainable growth levels in order to eliminate its current pervasive poverty (Ajayi, 1999, 2000, 2003).
The literature on the FDI–growth relationship is vast for both developed and developing countries. The basis for most of the empirical work focuses on neoclassical and endogenous growth models. It is often claimed that FDI is an important source of capital, that it complements domestic investment, creates new jobs opportunities and is in most cases, related to the enhancement of technology transfer, which of course boosts economic growth. While the positive FDI–growth linkage is not unambiguously accepted, macroeconomic studies nevertheless support a positive role for FDI especially in particular environments. Existing literature identifies three main channels through which FDI can bring about economic growth. The first is through the release it affords from the binding constraint on domestic savings. In this case, Foreign Direct Investment augments domestic savings in the process of capital accumulation. Second, FDI is the main conduit through which technology transfer takes place. The transfer of technology and technological spillover lead to an increase in factor productivity and efficiency in the utilization of resources, which leads to growth. Third, FDI leads to increases in exports as a result of increased capacity and competitiveness in domestic production. Empirical analysis of the positive relationship is often said to depend on another factor, called “absorptive capacity”, which includes the level of human capital development, type of trade regimes and the degree of openness (Borensztein et al., 1995, 1998).
One of the most salient features of today’s globalization drive is conscious encouragement of cross-border investments, especially by trans-national corporations and firms (TNCs). Many countries and continents (especially developing) now see attracting FDI as an important element in their strategy for economic development. This is most probably because FDI is seen as an amalgamation of capital, technology, marketing and management. Sub-Saharan Africa as a region now has to depend very much on FDI for so many reasons, some of which are amplified by (Asiedu, 2001). The preference for FDI stems from its acknowledged advantages (Sjoholm, 1999 and Obwona, 2001, 2004). The effort by several African countries to improve their business climate stems from the desire to attract FDI. In fact, one of the pillars on which the New Partnership for Africa’s Development (NEPAD) was launched was to increase available capital to US$64 billion through a combination of reforms, resource mobilization and a conducive environment for FDI (Funke and Nsouli, 2003). Unfortunately, the efforts of most countries in Africa to attract FDI have been futile. This is in spite of the perceived and obvious need for FDI in the continent. The development is disturbing, sending very little hope of economic development and growth for these countries. Further, the pattern of the FDI that does exist is often skewed towards extractive industries, meaning that the differential rate of FDI inflow into sub-Saharan African countries has been adduced to be due to natural resources, although the size of the local market may also be a consideration (Morriset, 2000 and Asiedu, 2001).
Include Source Nigeria is turning out to be one of the most attractive countries in terms of foreign investment inflows. Foreign Direct Investment increased from less than US$ 1billion in 1990 to US$ 1.2billion in 2000, US$1.9 billion in 2004, US$ 2.3billion in 2005 and US$ 4.5 billion in 2006. As percentage of GDP, Foreign Direct Investment has increased substantially in recent years. The same pattern is witnessed in portfolio investment, which grew from US$0.2 billion in 2003 to US$
2.9 billion in 2005 and US$ 0.92 billion in 2006. This is attributable to the economic reforms and the resulting of macroeconomic stability, which have instilled great credibility in the Nigerian economy. Home remittances are also becoming an increasingly important catalyst to growth in Nigeria. In 2004, Nigeria received an estimated US$ 2.26 billion in home remittances; this has continued to increase remarkably with a recorded figure of over US$7 billion in 2006 (Bello,
2006). Nigeria’s economy has experienced strong growth in recent years. Real GDP growth averaged 7.8 percent from 2004 to 2007, and growth of 6.4 percent in 2007 exceeded the low-income sub-Saharan (LI-SSA) median (4.0 percent), the LI median (6.0 percent), and the rate in Indonesia (6.3 percent), although it was lower than the rate in Kenya (7.0 percent) (see Figure 1.1). Oil accounts for nearly 40 percent of GDP, but from 2001 to 2006—except in 2003—real growth in other sectors outpaced growth in the oil sector (IMF, 2008) Sectors that have experienced particularly strong growth include telecommunications, which has been liberalized and privatized over the past decade, and wholesale and retail trade. Agriculture has also shown some growth, although it remains far from fulfilling its potential (Economist Intelligent Unit, 2008).
Nigeria’s per capita GDP is high relative to GDP in other LI-SSA countries. In purchasing power parity dollars, GDP per capita grew from $1,597.90 in 2003 to
$2,034.60 in 2007—an average annual growth rate of 5.6 percent. It is now far higher than the LI-SSA’s median per capita GDP ($1,018.00) and Kenya’s ($1,359.00) but still much lower than Indonesia’s ($3,234.00). In 2007 Nigeria had an estimated gross domestic product (GDP) of US$166.8 billion according to the official exchange rate and US$292.7 billion according to Purchasing Power Parity (PPP). GDP rose by 6.4 percent in real terms over the previous year. GDP per capita was about US$1,200 using the official exchange rate and US$2,000 using the PPP method. About 60 percent of the population lives on less than US$1 per day. In 2007 the GDP was composed of the following sectors: agriculture, 17.6 percent; industry, 53.1 percent; and services, 29.3 percent. In 2006 Nigeria received a net inflow of US$5.4 billion of Foreign Direct Investment (FDI), much of which came from the United States. FDI constituted 74.8 percent of gross fixed capital formation, reflecting low levels of domestic investment. Most FDI is directed toward the energy sector. Between 2008 and 2020, Nigeria hopes to attract US$600 billion of FDI to finance its Vision 2020 policy to transform the country’s economy into one of the world’s 20 largest, see figure 1.1 below (Library of Congress, 2008).