THE DETERMINANT OF FOREIGN DIRECT INVESTMENT IN NIGERIA. A RESEARCH PROJECT MATERIAL ON BANKING AND FINANCE
ABSTRACT
The research investigates the determinants of foreign direct investment (FDI) in Nigeria over the period for 1980-2007. Cochrane Ocutt method of regression was utilized in the study. The findings indicate that exchange rate (economic factor) and political instability are the crucial determinants of FDI in Nigeria.
Domestic market size (represented by GDP), openness to trade and inflation are insignificant determinants of FDI.
The regression model however, showed a significant fit with f-value of 36. 521 and adjusted R2 of 0.93 at 0.05 confidence level. It was also observed in the result that the behaviour of GDP and inflation to FDI is contrary to theoretical and empirical expectation of positive and negative relationship respectively.
The findings suggest that policy measures, primarily directed at efficient exchange rate management and minimal political risk, would promote FDI flow in the country.
CHAPTER ONE
BACKGROUND OF STUDY
1.1 INTRODUCTION
Growth in neoclassical theory is brought about by increase in the quantity of factors of production in the efficiency of their allocation. In a simple world of two variables, labour and capital, it is often presumed that low income countries have abundant labour but lees capital. This situation of domestic savings in these countries places constraints on capital formation and hence growth. Even where domestic input in addition to labour are readily available and no problem of input supply, increased production may be influenced by scarcity of imported inputs upon which the production processes in low income countries are based.
International capital flows (ICF) readily becomes an important source or means of enhancing developing countries to overcome their capital flow in foreign private investment (FPI) other components are:
a. 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 Assistance (IDA) and the International Finance Corporation (IFC) on concessional and non-concessional terms.
b. Commercial loans including exports credit: Economic theory suggests that capital will move from countries where it is abundant to countries where it is scares. This pattern of movement will be informed by the returns of new investment opportunities which are considered higher in cases where capital is limited.
The result capital relocation will boost investment in the recipient countries and bring about enormous social benefits. With the advent of the third millennium era, globalization has continued to accelerate. In the areas of international trade and finance, many factors including accelerated privatization and economic liberalizations have also pushed globalization in almost every nation in the world. One important economic consequence of globalization for developing countries has been massive and unprecedented inflows of foreign capital during the final decade of the 20th century.
However, Private Capital Inflows (PCI) wrested primacy place from public flows, seizing the pre-eminent finance for developing countries. According to Weitz and Lijane (1998), while official flows totaled $56billion in 1990, compared to $44billion in private flow by 1996, public flows had declined to $41billion and private flows grew to 244billion.
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