IMPACT OF FOREIGN DIRECT INVESTMENT ON STOCK MARKET GROWTH

Abstract

This study examined the role played by foreign direct investment and business environment on economic growth. The sample contained 39 Sub-Saharan African countries divided into two groups, 21 low incomes and 18 middle incomes from 1992 to 2012. The findings of pooled mean group estimator (PMG) revealed that the impact of foreign direct investment on economic growth was negative and statistically significant in low income and middle income countries. This result implies that more foreign direct investment harms economic growth in Sub-Saharan Africa. In addition, the business environment appeared to have different impact on economic growth with respect to the income level

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The impact of foreign direct investment (FDI) on economic growth is a well-investigated issue by many economists over around the world especially in the developed countries, while it is less-studied especially in African countries. Foreign direct investment plays an important role in the performance of the economy as a whole. The FDI is expected to have spillover effects among all sectors in the economy of the host country, such as increasing the export of goods and services, importing advance technology, adopting new advanced production processes, decreasing the rate of unemployment by the job creation and increasing the fund and finance for the local investors. These spillover effects could be much higher in a particular business environment such as improved infrastructure stock, high level of human capital and developed financial sector .

The foreign direct investment inflows in Africa is the lowest comparing to other regions, even it increased in recent decades but still lower in the world [3]. Attracting more FDI flows to come-in the region needs more improvement in the business environment such as human capital and infrastructure to gain more advantages from the FDI spillover effects [4,5]. Business environment in African countries is inadequate, since the infrastructure stock and human capital are too low comparing to other regions (See doing business report 2013). Recent reports show that only 27% of African population has access to internet, 22% of African population is telephone subscribers, transportation cost in Africa is the highest in the world and access to electricity in Africa is the lowest in the world Jerry (2007).

It is most important thing to understand the nature of the impact of FDI and business environment on economic growth. The recent studies are less-focused in African countries, for example Enong (2012) studied the relationships of interest in different regions, while the studies in Africa are quite rare. So it is very important to fill the gap in addressing this issue in Africa to help policy-makers to develop and introduce effective polices to grow the economy of the region. From this end, the aim of this study is to examine the relationships between foreign direct investment, business environment and economic growth.

Nigeria is one of the economies with great demand for goods and services and has attracted some FDI over the years. The amount of FDI inflow into Nigeria was estimated at US$2.23 billion in 2003 and the rose to US$5.31 billion in 2004 representing an increase of 138 percent. The figure rose again to US$9.92 billion or 87 percent increase in 2005. The figure, however, slightly declined to US$9.44 billion in 2010/11. The question that comes to mind is, does FDI actually contribute to economic growth in Nigeria? If FDI actually contributes to growth, then the sustainability of FDI is a worthwhile activity, and a way of achieving its sustainability is by identifying the factors contributing to its growth with a view to ensuring its enhancement.

This is even more so as Africa and indeed Nigeria is undoubtedly facing an economic crisis situation featured by inadequate resources for long-term development, low capacity utilization, high level of unemployment, high poverty rate, high state of insecurity and Millennium Development Goals (MDGs) increasingly becoming difficult to achieve by 2020.

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). Nigeria as a country, given her natural resource base and large market size, qualifies to be a major recipient of FDI in Africa and indeed is one of the top three leading African countries that consistently received FDI in the past decade. Despite in the enormous amount of literature in this field of study, the empirical linkage between FDI and economic growth in Nigeria is yet unclear (Akinlo, 2004). The results of studies carried out on the linkage between FDI and economic growth in Nigeria are not unanimous in their submissions. A closer examination of these previous studies revealed that conscious effort was not made to take care of the fact that more than 60 percent of the FDI inflows into Nigeria is made into the extractive industry (oil). Hence this study actually modeled the influence of natural resources on Nigeria’s economic growth. There is also the problem of endogeneity, which has not been consciously tackled in previous studies in Nigeria. Again, most of the studies on FDI and growth are cross-country studies, however; FDI and growth debates are country specific. Earlier studies, for example, Otepola (2002), Oyejide (2005) etc, examine the impacts of FDI on growth and the channels through which it may be benefiting the economy. The concerned of this study, therefore, is to examine the long run impact of FDI on Nigeria’s economic growth, hence addressing the country’s specific dimension to the FDI growth debate. The study is different from previous studies, even as the effect of the major components of FDI on economic growth will be examined thereby offering the opportunity to assess the differential impact of oil FDI and non-oil FDI on Nigeria’s economic growth.

1.2 Statement of the Problem

In view of our weak economy structure, unemployment, budget deficit, weak currency, high taste for foreign goods and consistence unfavorable balance of trade, foreign direct investment, thus, became imperative for Nigeria to sustain her economy and remain relevant in the committee of nations.

Unlike Ghana, South Africa, Benin Republic and some other African countries that enjoy and felt the impact of foreign direct investment steady, Nigeria is not, due to her socio-political challenges which in-turns affected her economic policies. Hence the need for this study is to ascertain the impact of FDI in the Nigerian economy and its obstacles.

1.3 Objectives of the Study

The general objective of this is to assess the impact of FDI on the economic growth of Nigeria. Other specific objectives are:

1. To ascertain the impact of FDI on Market Capitalization.
2. To determine the impact of FDI on Trade Openness.
3. To suggest measures for facilitating the steady flow of FDI into the Nigerian economy.

1.4 Research Questions

The research intends to ask the following questions:

1. What is the impact of FDI on Market Capitalization?
2. What is the influence of FDI on Trade Openness?
3. What are the measures that could facilitate the steady flow of FDI into the Nigerian economy?

1.5 Statement of Hypothesis

Hypothesis is a tentative statement put forward to test the validity of a given phenomenon, (Osuala 2007). Thus, our hypotheses for this study are:

HO1:  FDI does not have impact on Nigerian economy

H11 : FDI has an impact on the nigerian economy

HO2 : FDI does not have any significant impact on Trade Openness

H12:  FDI has a significant impact on Trade Openness

1.6  Significance of the Study

The study will broaden the knowledge of the researcher as well contribute to the existing literature on the subject matter by providing an expository analysis of the pattern of FDI in the Nigerian economy. This would enhance policy formulation in the economic policy and as well address our economic challenges in general.

It would also be an invaluable tool for students, academic, institutions and individuals that want to know more about the link between FDI and economic growth.

1.7 Scope of the study

The scope of the study is to assess the impact of FDI in the stock market of Nigeria (1986-2010). Thus, the research is limited to the above stated title alone.

The study will review useful literature and theoretical framework that are directly and indirectly related to the subject matter.

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