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 ….
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
