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The study empirically analyzes impact of investment on economic growth in Nigeria (1980-2016). The specific objectives include were; to ascertain the impact of export earnings on economic growth of Nigeria; to ascertain the relationship between foreign direct investment economic growth of Nigeria and ascertain the relationship between exchange rate investment economic growth of Nigeria. Data used for the study were analyzed with trend analysis, multiple regression models using the Ordinary Least Squares (OLS) method. The result shows that export earnings and foreign direct investment have positive and significant impact on gross domestic product of Nigeria. While exchange rate has negative and significant impact on gross domestic product of Nigeria. It was recommended that the government should enact necessary control measures on macroeconomic variables and create a favorable environment, so that private sector (both domestic and foreign) can then come forward to strive in the country, since exchange rate has negative impact on economic growth. This is possible by implementing aggressive policy which promotes the trade sector by securing tariff-free access to the markets of developed countries.
1.1 Background to the Study
Since Nigeria got her independence in 1960, it has created policies which are geared towards promoting the Nigerian economic growth and development by influencing investment or indirectly policies which are aimed at stimulating the flow of finance in any growing economy. This is so given that in the literature there are divergent views on the nature of effects of investment. It has been argued to be the most growth stimulation sources of finance in any growing economy. There are different views on the nature of investment on host economies. There are views that investment produce positive effects on economies. Developing countries in Africa, Asia and Latin America have come increasingly to see that investment is a source of economic development, modernization, income growth and employment and poverty reduction. These countries are successfully developing their economies under outward oriented policies albeit in varying degrees (Omagbemir 2010).
Investment can be described as investment made so as to acquire a lasting management interest (for instance 10% of voting stocks) and at least 10% of equity shares main enterprise operating in another country other than that of investor country(Willima 2003, World Bank 2007). Policy makers believe that investment produce positive effects on host economies. Some of these benefits are in the form of externalities and adoption of foreign technology. Externalities can be a form of licensing agreement, limitation,employee training and introduction of new processes by the foreign firms (Alfaro 2006).
According to Utomi (2007) foreign direct investment (FDI) via transnational corporations do possess the needed capabilities which can be put to the services of growth in any host economy.The effects of investment on the economy in the host country are frequently studied and discussed in the literature (overviews can be found, e.g., in Mebratie & van Bergeijk 2013 and Iwasaki & Tokunaga 2014). The effects are manifold, occur on various levels and affect different aspects, including besides economic conditions also social and environmental conditions.
Investment is seen by countries, especially transition countries, as a way to boost the national economy and generate jobs and economic development (e.g., Jensen 2006). Two kinds of empirical studies on the impact of investment on the host countries economic exist: Studies on the firm level and studies on the national level. While the former studies usually examine the effects of investment on firm productivity, and only sometimes on growth and employment (overviews are given, e.g., in Mebratie & Bedi 2013 and Mebratie & van Bergeijk 2013), most of the latter studies examine the effects of foreign direct investment (FDI) on economic growth (an overview on some studies is given in Iwasaki & Tokunaga 2014).
Over the years countries of the world have mutually helped each other in growing and developing. This has been made possible through the instrument of international trade. This trade is necessitated by the fact that no country is an island therefore is naturally endowed with all her needed resources.
In line with this trade between the advanced countries and the developing countries is necessary so that the advanced countries with their technical knowledge can transform the raw materials of the developing nations into finished goods Ekweogwu, (2013).
The advantage of investment especially foreign direct investment cannot be over emphasised, some of which include the acquisition of relevant and required technology, employment, inflow of foreign direct investment, manpower and human capital development, increased foreign exchange to the host countries and international accreditation and relevance.In Nigeria the context, successive government supported by the strong industrial and academic forces have identified this machinery of international trade as an important tool for growth and development; using somemeasures like giving credit consideration provision, basic infrastructure and right environment for production and investment, quality tax concession and favourable lending rates Ekweogwu, (2013).
The impact of FDI on economic growth and domestic investment has been made between the East and West African countries. The overall results indicate that investment promotes economic growth that higher foreign direct investment promotes economic growth rate. Foreign direct investment is also found to crowd in domestic investments likely attributed to technology transfer and related spill overs effects comprising East and West African countries. It is found that the positive effect of FDI on growth is driven by West African countries while the negative effect of FDI on domestic investment is led by East African countries Ekweogwu, (2013).
Over the last decades, the macro-economic performance of Nigeria can be described as being chequered. The average GDP growth rate of 3.95% achieved between 1970 – 2008 translates into a low growth rate of 1.49% in per capita income terms. This rate of growth in per capita terms is insufficient to reduce in a significant ay the level of poverty which remains the primary goal of developing policies in Nigeria. Ajayi (2006) notes that the savings rate of Nigeria is lower than that of most countries and far lower than the required investment that can induce growth rates that are capable of alleviating poverty.
Recent studies however show that investment is what is needed to minimize the gap between savings and investment that exists in African and in Nigeria particularly. Prior to the 1970‟s investment was not seen as an instrument of economic development the perception of investment as parasitic and retarding the development of domestic industries for export promotion had engendered hospitality to multinational companies and their direct investments in many countries.
However, the consensus now is that investment is an engine of growth as it provides the much needed capital for investment, increased competition in the host countries industries and aids local firms to become more productive by adopting more efficient technologies or by investing in human and or physical capital. Investment contributes to growth in a substantial mannerbecause it is more stable than other forms of capital (Ajayi,2006). While the investment growth link is still ambiguous most macroeconomics studies nevertheless support the notion of a positive role of investment within particular economic conditions. There are three main channels through which investment can bring about economic growth. The first is through the release it affords from the binding constraints of domestic savings. In this case, foreign direct investment contributes to savings in the process of capital accumulation. Second investment is the main source through which technology spillovers lead to an increase in factor productivity and efficiency in the utilization of resources which leads to growth. Third, investment leads to export as a result of increased capacity and competitiveness in domestic production. This linkage is often said to depend on another factor called „‟Absorptive Capacity‟‟ which include the level of human capital development, type of trade regimes and degree of openness (Ajayi 2006; Borenztein et al 1998).
According to Xiaoqin Fan and Paul M. Dickie (2000), investment contributes to growth through several channels. It directly affects growth through being a source of capital formation. Capital formation refers to net additions to capital stock of an economy, including the creation of factories, new machinery and improved transportation. As a part of private investment, an increase in FDI will, by itself, contribute to an increase intotal investment. An increase in investment directly contributes to growth. Investment beneficially influences other macroeconomicvariables, such as employment, export, consumption andsaving. These, in turn, enhance growth. Investment also consists of a bundle of intangible assets,including capital, new technology, management skills andmarket channels. The inflow of investment can therefore contributeto improved technology, equipment and infrastructure in hostcountries.
Investment facilitates economic growth on one hand and on the other hand economic growth attracts investmentinto Nigeria. In other words investment and economic growth are endogenously determined in Nigeria.
1.2 Statement of the Problem
Interestingly there are some arguments about whether investment is really beneficial to economic growth and how significant this benefit is to economic growth which some supporters have said in the cost benefit analysis context, the less accruing to the host countries as a result of investment outweighs the guaranteed benefit. Typically, multinational corporations in developed countries have actually become a threat to host countries as they are now subversive and exploitative.
Also, multinational corporations are in reality the representation of the global corporation around countries as they see the state as a unit in international relation. These arguments above and indeed many more have necessitated a critical look and finding out of whether the often acclaimed benefits of investment are significant or not.
Dependency theorist has also focused on how investment of Multinational Corporation distorts developing nation economies. Developing nations generally depend on the foreign investors for the finance capital that they need. Multinational corporations carryout much of this foreign investment and many developing countries also borrow money from international financial markets by selling bonds, but they usually must pay higher interest rate (the cost of borrowing). Investors may refuse to buy bonds if they fear that a government may not be able to repay its loans.
However, it appears that export earnings, FDI and exchange rate are not making any impact in the nation’s economic growth. The problem of this study, therefore, is that the impact of export earnings, FDI and exchange rate in Nigeria is not clearly known. Empirical analysis of investment and economic growth will help relevant stakeholders in taking suitable measures to ensure that their objectives are achieved, hence the necessity for the study.
However the basis of this study is the general notion that investmentgenerates considerable benefits to the host country by helping to accelerate her development efforts
1.3 Objective of the Study
The main objective of this study is to examine and determine the impact of investment on the Nigerian economic development specifically.
Specifically, other aim of this research work includes;
1.4 Research Question
1.5 Research Hypothesis
H01: Export earnings have no significant impact on the economic growth of Nigeria.
H02: There is no significant relationship between FDI and economic growth of Nigeria
H03: There is no significant relationship between exchange rate and economic growth of Nigeria.
1.6Scope of the Study.
This research work focuses on investment and the economic growth in Nigeria and covers a period of time between 1980-2016. This period was chosen to sufficiently determine the long –run impact of investment on economic growth.
1.7Significance of the Study
This research will help policy makers‟ access or find out the extent to which investment has gone in influencing economic growth in Nigeria. It also serves as an eye opener for the Nigerian government in the area of investment and also a reference material to researchers.
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