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THE IMPACT OF FOREIGN DIRECT INVESTMENT (FDI) ON AGRICULTURAL AND MANUFACTURING OUTPUT


 

ABSTRACT

In this project, an attempt is made to examine the impact   of Foreign Direct investment on both the manufacturing and agricultural sector. The study reveal that foreign direct investment inflow has been bias in favour of the extractive (oil) industry. Annual time series data spanning the years (1981-2012) utilize. The methodology of cointegration and error correction model is utilize. The study employs two models. One model regressed agricultural GDP on FDI and other regressors, while  the other model  regressed manufacturing GDP on FDI and other regressors belief to be determinant of manufacturing GDP. The study  conducted preliminary test for stationarity, and proceeded to conduct the cointegration test. The augmented Dickey fuller was  utilized in examining the statistical properties of the variables. All the variables are non-stationary at levels except import expenditure on food. Thus, all other variables are homogeneous of order one, while import expenditure on food is  homogeneous  of order zero. Both the trace statistics and maximum Eigen  value show that there are at least  one cointegrating vectors, hence the  variables  in both models are cointegrated and a long  – run meaningful relationship exist among. The parsimonious  error  correction model regresses changes of the dependent variables on first difference of the regressors. The models show that FDI has been biased in favour of the extractive oil industry, hence has made negative impact on both manufacturing and agricultural GDP. FDI inflows into the agricultural sector has been particularly low because of he long gestation period and low technology of the sector. Furthermore, the study finds out that oil export negatively impact on agricultural GDP and manufacturing  ala dutch disease. Public capital expenditure negatively impact on manufacturing GDP, showing that the lopsidedness  of budgetary allocation in favour of recurrent   is responsible for infrastructural gap that has constrain manufacturing GDP. Manufacturing capacity utilization negatively impact on manufacturing GDP. Capacity  utilization in manufacturing sector consistently  fall below fifty percent. Several factors are responsible for the capacity under realization of the manufacturing sectors. They include shortage of skillful manpower, shortage of raw materials and shortage of power supply. Public  expenditure on agriculture  does not positively impact  on agricultural GDP. This study proffered  recommendations that will transform both the agricultural and manufacturing GDP. Recommendation that will help  attract more FDI into the manufacturing and agricultural sector is proffered.

 

 

CHAPTER ONE

INTRODUCTION

  • Background to the Study

The most spectacular manifestation of globalization which has occurred since 1990, is the increase flow of FDI, particularly to developing countries (Iyoha & Adamu, 2013; Todaro, 1997).  In the last two decades, FDI flows have grown geometrically all over the world with longtime projection showing a moderate but steady rise reaching $1.8 trillion dollar in 2013 and $1.9 trillion dollar in 2014 against $1.5 trillion in 2011, barring any macroeconomic shocks (United Nation Conference on trade & development, 2005).  However, flows to developed countries increased by 21% during the period (1999 – 2003). In developing countries, FDI flows within the same period increased by 11% to stand at $684 billion by the year 2003 (UNCTAD,2005). FDI to developing countries increased by 25% during the period (1997-2005) and stood at $92 billion by the year 2003 (UNCTAD, 2005).

Nigeria’s receipt of FDI has grown overtimes (Nwakwo, 2006) with the lion share going to the extractive and service industry (Obadan, 2012).  It is worthy of note that the Agricultural sector which is the mainstay of the Nigeria economy, employing over 70% of the Nigeria’s population has received a minuscule proportion of total FDI flows into the country.  It is alleged that over 60% of total FDI flow into Nigeria has gone into the extractive (oil) industry.

The IMF manual (1997) has defined FDI as investment made to acquire a lasting interest in an enterprise (whether incorporated or unincorporated) operating in an economy other than that of the investor (Obadan, 2012).  As further classified by OECD (1983), a direct investment enterprise refers to a situation in which a single foreign investor controls less than 10% or more of the ordinary share or voting power of an incorporated or unincorporated enterprise with a view to having an effective voice in the management of the organization.

Theoretically, the FDI can be measured as flow and a stock concept.  Either of the two, aggregate FDI includes all financial transfer aimed at financing of new investments plus retained earnings of affiliates, internal loans and financial of cross-border mergers and acquisitions.  The FDI flows can be observed from the perspective of the host economy, which records them as inward FDI along with other liabilities in the balance of payment, or from the perspective the home economy, which records them as inward FDI a category of assets.  Hence, FDI can take many forms such as direct acquisition of a foreign firm, construction of facilities or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property.

The importance of foreign direct investment has attracted great controversy concerning its impact on the economic well being of citizens of the receiving countries.  Proponents of FDI’s have positioned that FDI has the ability to resolve the three major development challenges confronting developing countries.  These challenges are: The resource gap constraint, managerial skill gap and the foreign exchange constraint (Chenery & Strout, 1986; Cable & Persaud; 1984).  The benefits of FDI not withstanding, antagonists have argued that FDI can create dependency syndrome, distort domestic polices and occasion huge resource transfer in the long-run in the form of repatriation of dividends and profits (DOS Santos, 1970; Hymer, 1972).

Re-iteratively, FDI flows into Nigeria has been biased in favour of extractive industry to the disfavour of manufacturing and agriculture.  The outcome of the negligence of the two key sectors is undiversified nature of the economy and paradox of poverty and unemployment in the presence of a robust economic growth performance.  In view of the Lopsidedness of FDI flows to the extractive industry, this present study will empirically investigate the impact of aggregate FDI’s receipt on both the manufacturing and Agricultural sector, with the intent of purveying recommendations that will help increase the flow of FDI to both manufacturing and Agricultural sector.

  • Statement of Research Problem

Though, global FDI flows have been biased in favour of the fastest growing developing countries, particularly the newly industrialized countries (Iyoha & Adamu, 2013).  Todaro (1997) remarked that over ninety percent of global FDI has gone to countries of East Asia.  Notwithstanding the anemic share of Nigeria’s receipt of world FDI, the country’s receipt has grown overtimes, from an anemic N584.9 million by the year 1981, FDI inflow into Nigeria increased to N128331.8 million by the year 1997.  Between 1990 and 2003, FDI’s receipt grew by 1,571.6% (CBN, 2012).  Between 2000 and 2012, FDI’s receipt grew at an annual average of 15.3%. By the year 2012, Nigeria’s FDI’s receipt stood at N471068.88 million.

The flow of FDI into Nigeria’s economy has been biased in favour of the extractive industry.  It is alleged that well over 60% of FDI inflow into Nigeria has gone to the extractive industry.  The proportion of total FDI that went into the mining and quarrying sector was an anemic 5.8% in the year 1991, but this quickly rose to 51.7% in the year 1995.  However, it dropped to 38.2% in the year 2001 (Obadan, 2012).  A large part of FDI into mining and quarrying sector went into oil exploration and exploitation (Nwankwo, 2006; Obadan, 2012; UNCTAD, 2005).

Agricultural and manufacturing sectors have received an anemic share of FDI inflow into Nigeria. For instance, throughout the period (1991-2012), Agricultural’s share of FDI did not exceed 4% (CBN, 2012).  Obadan (2012) remarked that the inability of the agricultural sector to attract FDI is due to the long gestation period, low technology of the sector and the low rate of return . Nwankwo (2006) positioned that the biased nature of FDI in favour of the extractive industry is responsible for the undiversified nature of the Nigeria’s economy.  FDI inflows in Nigeria has not generated so much employment opportunities and make meaningful dent on poverty because its benefits are restricted to few sectors.

In Nigeria, for sometime the economic growth has been robust averaging 6% per annum fro the past one decade (National Bureau of statistics, NBS, 2012).  Paradoxically, poverty, social indicators and unemployment rate has shown that the growth has not been translated to development. In Nigeria, the poverty rate was 54% in the year 2004 but skyrocketed to 65% in the year2006, and further risen so that current statistics but the poverty rate at above 70% (Odubunmi & Abayomi, 2014).  The endemic poverty has manifested in many dimensions ranging from poor access to sanitation, safe-drinking water etc. The life expectancy rate for Nigeria is 52 years while maternal mortality rate is 630 per 100,000, infant mortality rate is 74 per 1,000 live births.  One area where the high poverty rate has manifested is the high rate of unemployment which for the entrée nation is 23.39% while youth unemployment rate stood at 33.38% (NBS,2012). Nigeria’s growth has been biased coming only from the oil sector.  It is therefore not surprising that the robust growth has not been able to generate employment opportunities and make meaningful dent on poverty.  The oil sector that contributes close to 40% to the country’s GDP employ less than 20% of the work force, hence many Nigerians are not benefiting from the fruit of the growth (Odubunmi & Abayemi, 2014).

In view of the increasing FDI inflows into Nigeria and the robust economic growth, this study attempts to examine the impact of aggregate FDI on both manufacturing and Agricultural output.  Studies relating to FDI have focused on FDI growth nexus (Borenztein et al; 1998; Glass & Saggi, 1999; Dees, 1998; Blomstrom et al; 1994), FDI-human capital development (Borenztein et al; 1998; Bala Subramanyan et al; 1996), FDI and domestic investments (Borenztein et al; 1998; Driffield,2001) and Determinants of FDI (Nwankwo, 2006; Wafure & Nurudeen, 2010; Serven & Salimano, 1992; Anyanwu, 1998; Odozi, 1995 etc).  There are only handful of studies that have examined the impact of FDI on manufacturing and Agricultural output.  While Opaluwa, Ameh, Alabi & Abdul (2012) examine the impact of foreign direct investment.  Furthermore, Ogbanye, Okwu and Saror (2010) and Udoh (2012) examine the impact of FDI on Agricultural output growth.

In the light of the foregoing, this study will attempt to examine the impact of FDI on both Agricultural and manufacturing sector. This study therefore is more comprehensive and exhaustive than previous studies.  To the best of our knowledge, no study has examined the impact of FDI on both manufacturing and agricultural sector.  The choice of agriculture and manufacturing sector is because the two sectors when transformed has the potential to meaningfully dent poverty and generate employment opportunities which are the two intractable challenges confronting the Nigerian economy.

  • Objectives of the Study

The objectives of the study can be itemized below:

  • To examine the trend of FDI Overtimes
  • To examine the impact of FDI on manufacturing output in Nigeria
  • To examine the impact of FDI on Agricultural output in Nigeria
    • Hypotheses to be Studied

The hypotheses that are central to this study are given in their null form.

  • Ho1: The impact of FDI on manufacturing output in  Nigeria is not significantly different from zero
  • HO2: The impact of FDI on Agricultural output in Nigeria is not significantly different from Zero.
    • Scope of the Study

The scope of the study is confine to a sectoral empirical impact of FDI on the output of the manufacturing and Agricultural sub-sector.  Due to the significance importance of the study, there was need for it to cover quite large number of years which includes year of major industrial and agricultural reforms and policy such as structural adjustment programme of 1986.  Thus, the scope of the study spans 1981­-2012, giving rise to about 32 observations, which will give sufficient degree of freedoms for us to study the phenomenon.  The data for this study are mainly foreign direct investment, manufacturing output, Agricultural output etc. These data being secondary will be obtained from Central Bank of Nigeria Statistical bulletin, National Bureau of statistics and everyother published articles.

Structure of the Study

The structure of this study is organized into chapters; this is done with the purpose of expediting easy understanding and allowing for coherence in the work. It will span through five chapters as follows: chapter one contain introduction to the study, the rational behind the study, the problem statement, and the objectives of the study, hypothesis of the study, the scope of the study, significance of the study as well as limitation of the study.  While chapter two review relevant literature. Chapter presents the methodology adopted for analyzing the data used in the research while chapter four present the empirical result of data analyses and chapter five consist of summary, conclusion and policy recommendations.

Author: SPROJECT NG