Growth in neoclassical theory is brought about by increases in the quantity of factors of production and in the efficiency of their allocation. In a simple world of two factors, labour and capital, it is often presumed that low-income countries have abundant labour but less capital. This situation arises owing to shortage of domestic savings in these countries, which places constraint on capital formation and hence growth. Even where domestic inputs in addition to labour, are readily available and hence no problem of input supply, increased production may be limited by scarcity of imported inputs upon which production processes in low-income countries are based. International capital flows (ICFs) readily become an important means of helping developing countries to overcome their capital shortage problems. One of the components of international capital flows is foreign private investment (FPI).
Other components are official flows from bilateral sources (e.g. developed and OPEC countries) and multilateral sources (such as the World Bank and its two affiliates, the international development Association (IDA), and the International Finance Corporation (IFC), on concessional and non-concessional terms Commercial bank loans including export credits).
Economic theory suggests that capital will move from countries where it is abundant to countries where it is scarce. This pattern of movement will be informed by the returns on new investment opportunities, which are considered higher where capital is limited. The resultant capital relocation will boost investment in the recipient country and, as summers (2000) suggests, bring enormous social benefits. Underlying this theory is the premise that returns to capital decrease as more machinery is installed and new structures are built, although, in practice, this is not always, or even generally true.
With the advent of the third millennium, the pace of globalization has continued to accelerate. In the areas of international trade and finance, has been pushed by many factors including accelerated privatization and economic liberalization in almost every country in the world.
One important economic consequence of globalization for developing countries has been the massive and unprecedented inflows of foreign private capital during the final decades of the 20th century. Indeed during the last decade of the last century, private capital flows wrested primacy place from public flows, seizing the pre-eminent position as the source of foreign investment and development finance for developing countries. According to Weitz and Lijane (2002) “While official flows totaled $56 billion in 1990, compared to $44 billion in private flows, by 1996, public flows had declined to $41 billion and private flows grew to $244 billion”.
UNCTAD figures show that in 1997, FDI inflows amounted to US$400 billion and in 1998, reached an unprecedented level of US$440 billion (Mallampally and sauvant, 1999). Although FDI have become more widely dispersed among recipient countries in recent years, the distribution is still skewed with Asia receiving the lion’s share of FDI flows going to developing countries and Africa receiving very little.
Another perspective on the skewness of the distribution is obtained when it is realized that in 1995, 81% percent of global FDI flows to developing countries went to 12 countries while 89% of all portfolio flows went to almost the same dozen countries (Weitz and Lijane, 1998).
Clearly, therefore the challenge to attract more inflows for investment in development projects has become acute in Sub-Saharan Africa, where only a small proportion of new inflows have gone. Note, the needs of developing countries particularly those in Sub-Saharan Africa have sharply increased in recent years due to the accelerating process of globalization. According to Weitz and Lijane (2001), “Opening up a country requires investment for connecting the necessary infrastructure – roads, telecommunication, power plants, and financial system.”
Given the low incomes and low savings in many African countries, the investment-savings gap has widened and there is little hope of closing it without the active involvement of the private sector – both domestic and foreign. Thus, increasingly, in order to finance the investment gap, it is becoming imperative to attract foreign investment.
There is an emerging consensus that a conducive macroeconomic policy environment is not only a desideration but is in fact a sine qua non for attracting substantial amounts of foreign investment inflow in a liberalizing and globalizing world economy. Nigeria needs a massive inflow of foreign investment in order to transform its economy, upgrade dilapidated infrastructure and plug on to the electronic age of computers and the Internet. An absolute prerequisite for success is the design and implementation of policies and measures that would make the policy environment investment friendly. In creating a friendly environment of foreign investors, the public sector has a major role to play via its expenditure power.
1.1 STATEMENT OF RESEARCH PROBLEM
Direct foreign investment has been said to be a necessary and positive instrument to accelerate the rate of economic growth in countries suffering from acute shortage of capital. But if direct foreign investment is to be undertaken in the context of an efficient and well executed plan for economic development, its effect or impact can be overwhelming. With regards to these issues, this research will seek to provide answers to the following questions:
- What are the determinants of foreign investment in Nigeria?
- What are the impacts of foreign investment on economic growth in Nigeria?
- How can direct foreign investment be increased in a developing country like Nigeria?
- What are the possible solutions to the limiting factors against direct foreign investment in Nigeria?
- What is the relationship between foreign investment and the size of the public sector?
1.2 OBJECTIVES OF THE STUDY
Stemming from The above statement of problems, the broad objective of this study is to empirically investigate the impact of foreign direct investment on the Nigerian economy. Other specific objectives include:
- To evaluates the determinant of foreign investment in Nigeria.
- To examine the impact of foreign investment on Nigeria economic growth rate.
- To examine the impact of public expenditure growth on foreign investment in Nigeria.
- To make appropriate policy recommendations based on the empirical findings.
1.3 SIGNIFICANCE OF STUDY
It has been established that economies in the world are driven by policies. The government, been the centre of policy formulation is therefore saddled with the responsibility of formulating policies that will produce positive impact on the economy. The foreign investment of a nation, been one of the government’s key responsibility has thus been recognized as a major driving force of the economy particularly in the area of globalization. It therefore becomes imperative that the government formulate suitable policies to attract foreign investment. The findings from this study will be useful in this direction.
1.4 HYPOTHESIS OF THE STUDY
To carry out this study, the following hypothesis would direct the thrust of the research;
H0: Nigeria’s direct foreign investment inflow has no significant impact on the economic growth in the Nigeria economy.
H1: Direct foreign investment inflow has a significant impact on the economic growth in the Nigeria economy
H0: That public expenditure growth has no significant impact on the Nigerian economy.
H1: That public expenditure growth has a significant impact on the Nigeria economy
H0: The size of public sector has no relationship with the flow of foreign investment in Nigeria.
H1: The size of public sector has relationship with the flow of foreign investment in Nigeria
1.5 SCOPE LIMITATION OF THE STUDY
In this process, a special effort is made to analyze the nexus between policy environment and foreign investment inflow in Nigeria, and explain the pattern of foreign investment flows since 1984. The study will basically cover a period of 1982-2009.
1.6 LIMITATION OF THE STUDY
This study is limited to the determinants of foreign investment in Nigeria. A major constraint of the study is the short time needed to complete this study and problem of consistent and accurate data.