FOREIGN CAPITAL FLOW AND MACROECONOMIC STABILITY IN NIGERIA

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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).

 

 

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