THE IMPACT OF FOREIGN DIRECT INVESTMENT ON MANUFACTURING OUTPUT IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The underdeveloped nature of the Nigerian economy that essentially hindered the pace of her economic development has necessitated the demand for Foreign Direct Investment into the country. Aremu (1997), noted that Nigeria as one of the developing countries of the world, has adopted a number of measures aimed at accelerating growth and development in the domestic economy, one of which is attracting foreign direct investment (FDI) into the country. According to World Bank (1996), FDI is an investment made to acquire a lasting management interest (normally 10% of voting stock) in a firm or an enterprise operating in a country other than that of the investor defined according to residency. However, Foreign Direct Investment (FDI) is often seen as an important catalyst for economic growth in the developing countries because it affects the economic growth by stimulating domestic investment, increase in capital formation and also, facilitating the technology transfer in the host countries (Falki 2009).
Khan (2007) asserts that Foreign Direct Investment (FDI) has emerged as the most important source of external resource flows to developing countries over the years and has become a significant part of capital formation in these countries, though their share in the global distribution of FDI continued to remain small or even declining. The role of Foreign Direct Investment (FDI) has been widely recognized as a growth-enhancing factor in the developing countries.
The manufacturing sector has been one of the major contributors to Nigeria’s economic growth, but unfortunately, after witnessing tremendous growth between the mid-1970s and the 1980s, the sector experienced serious stagnation, and for most of the 1980s and the 1990s, Nigeria’s productivity declined. This serious problem can be attributed to the downward trend in the global oil market and the consequent fall in oil prices. Government revenue, coupled with foreign exchange earnings, were drastically affected by the problems experienced in the oil market, and the government was therefore forced to adopt a series of economic reform policies such as austerity measures. This prevailing situation has negatively affected the manufacturing sector. In addition to this, serious trade control policies, like the rationing of foreign exchange, import restrictions via import licensing and tariff hikes, as well as quantitative measures, were put in place.
Apart from this, the cost of doing business in the sector is high. To achieve a reasonable growth in the manufacturing sector, it has often been suggested that Nigeria, like other developing country, needs to embark on the intensive mobilization of both domestic and foreign capital in order to accelerate sustainable economic growth. However, a careful look at Table 1 below clearly shows that the cost of doing business is very high. Macroeconomic variables that are vital to the availability of financial resources in the manufacturing sector are considered in Table 1. The macroeconomic variables considered include Gross Fixed Capital Formation–GDP ratio (GFCF/GDP), Savings–GDP ratio (SAV/GDP), Lending Rate (LR), and Credit to Private Sector–GDP ratio (CPS/GDP).
With this trend, meaningful investment could not be generated domestically and a large proportion of income was spent on consumption. The savings–GDP ratio reached 8.6 by 2002 and by implication; a larger percentage of GDP went on consumption before this figure rose to 37.78 in 2010. The credit available to the private sector was not encouraging and the ratio of the GDP fell to an all-time low of 12.8 in 1993.Equally, the issue of the mobilization of savings in the Nigerian economy left much to be desired. The savings–GDP ratio is abysmal and not encouraging.
Table 1 clearly shows that the Nigerian manufacturing sector is confronted with the problem of financial resources, which are in short supply. The ratio of gross fixed capital formation (that is, domestic investment) to GDP, for instance, fell to 5.5 in 2005, before it rose significantly in 2010 to 13.7. In the same vein, the lending rate is prohibitive for any meaningful productive investment. Nigeria’s lending rate reached its peak in 1993, when it was 36.09 percent (CBN, 2014). This lending rate does not give room for any productive investment to take place, but is only good for the services sector, where quick rates of return are expected; it cannot propel any meaningful development in the manufacturing sector.
Table 1: Nigeria’s Selected Economic Indicators
| Year | LR | GFCF/GDP | SAV/GDP | CPS/GDP |
| 2000 | 21.3 | 7.2 | 8.4 | 12.3 |
| 2001 | 23.4 | 7.7 | 10.3 | 15.2 |
| 2002 | 24.8 | 7.9 | 8.6 | 13 |
| 2003 | 20.7 | 10.2 | 7.7 | 13.8 |
| 2004 | 19.2 | 7.6 | 7 | 13.1 |
| 2005 | 16.9 | 5.5 | 9 | 13.3 |
| 2006 | 16.9 | 8.3 | 9.4 | 13.3 |
| 2007 | 15.5 | 9.4 | 13 | 25.3 |
| 2008 | 18.4 | 8.4 | 16.9 | 33.9 |
| 2009 | 17.6 | 12.2 | 23.2 | 38.9 |
| 2010 | 14.1 | 13.7 | 20.4 | 29 |
| 2011 | 21.8 | 14.6 | 19.5 | 30.1 |
| 2012 | 22.6 | 15.2 | 17.4 | 33.9 |
| 2013 | 23.9 | 16.1 | 18.5 | 35.2 |
| 2014 | 14.1 | 10.2 | 21.8 | 36.1 |
Source: Central Bank Statistical Bulletin of Various Issues from 2000-2014.
In most developing countries, FDI can theoretically be employed to quicken the pace of industrial development, including in the manufacturing sector, by providing industry, capital infrastructure, employment, international market access, revenue and technology (Ratha, 2000).
Over the years, government of Nigeria has encouraged foreign direct investment through trade openness and there was a relative increase in FDI inflow into Nigeria in 1990s and the diversification of FDI into the manufacturing sector in particular. However, In spite of the huge amount of FDI inflow into the Nigerian manufacturing sector ranging from US$2.96 billion in 2003 and it rose to US$4.44 billion in 2004 and this figure rose again to US$ 5.08 billion in 2009 (World Bank, 2012), yet the output in the manufacturing sector is on the decline.
The centrality of FDI as a prime mover in the growth process of the Nigerian economy has often been emphasized by traditional neo-classical theory of the determinants of the growth process (Osaghali 1987). FDI encourages the inflow of technology skills fills the gap domestically available supplies of saving, foreign exchange and government revenue (Todaro 1997). In addition, gaps in entrepreneurship, managerial and supervisions personnel and expertise, innovation in production techniques are presumed to be partially or wholly filled by foreign investors.
From the extant literature, we realized that studies have been conducted on foreign direct investment and output of manufacturing sector in Nigeria but none of these studies used 36years from 1981 to 2017 to examine causal relationship between foreign direct investment and output of manufacturing sector in Nigeria.
1.2 STATEMENT OF THE PROBLEM
In line with the background argument of the Washington consensus, foreign private capital can theoretically expedite the process of industrial development as well as manufacturing sub-sector in poor countries by providing industry, capital, infrastructure, employment, international market access, revenue and technology. However, the wide variation in the success and failure of developing countries to practically maximize domestic benefits and minimize negative externalities of foreign investment extended the questioning of globalization of investment beyond its theoretical frontiers. In particular, the issue of how beneficial foreign direct investment is for developing countries forms the kernel of empirical controversy (see for example, Haddad and Harrison, 1993; De Mello, 1997; Aitken and Harrison, 1999; Lipsey and Sjoholm ,2004; Akinlo, 2004; Carcovic and Levine, 2005; Latorre,2008; Oladipo and Vasquez-Galan, 2009; Aizenman, et al, 2011; Iysa Ipek, 2011). Indeed, few issues have generated more controversy in the post-war history of North-South relations than those connected with the role of foreign direct investment in the industrialization of developing countries. The focus on FDI is not without reasons. First, unlike loans, FDI can bring development capital without repayment commitments. Second, FDI is far more than mere capital: it is a uniquely potent bundle of capital, contacts, managerial and technological knowledge with potential spillover benefits for host country firms. Third, unlike other forms of capital flows, FDI has proven to be resilient during crises. (Lipsey, 2001; Dadush, Dasgupta, Ratha,2000). This is evident in the Latin American debt crisis of the 1980s, during the Mexican crisis of 1994-95, and during the Asian financial crisis of 1997-98. These traits have engendered an intense competition for foreign direct investment by developing and transition economies. Despite these attributes, the controversy on whether or not FDI constitutes ladder to development rages on. In the midst of this controversy arises the need for country- specific assessments of the role of foreign direct investment in national industrialization efforts, with particular emphasis on the manufacturing sub-sector. This is the motivation behind this study.
1.3 OBJECTIVE OF THE STUDY
The objective of this study is to examine the causal relationship between foreign direct investment and output of manufacturing sector in Nigeria. The specify objectives of this study is to evaluate the causal relationship between foreign direct investment and industry production in Nigeria.
The Specific objective is to:
- Carry out a trend analysis on the flow of foreign direct investment and its impact on the manufacturing subsector in Nigeria within the study period.
- Examine the relationship between FDI and Manufacturing sector performance in Nigeria.
- Find out the significance of FDI on the Manufacturing sub-sector in Nigeria.
1.4 SIGNIFICANCE OF THE STUDY
The Significance of this study will reveal the outlook of the work which will expose the extent to which FDI contribute to output of manufacturing sector in Nigeria thereby highlighting some obstacles hindering increase in industrial output. This work shall be relevant to the government policies and entrepreneurs directing them on manufacturing growth plan. Furthermore, the work shall assist potential industrialist, economist, investors and other related users of this veritable material in this field of study, it is interesting to note that attaining an optimum industrial output is the shortest route to achieve industrialization and national development. The Significance of this thesis will ensure that managers understand the impact of FDI on the output of manufacturing sector in Nigeria. This shall also inform the policy makers and government on the negative impact of FDI on the output growth of manufacturing sector in Nigeria.
In view of the vision 20:20:20 of Nigeria, which is to be one of the top most 20 economies by the year 2020, the manufacturing sub-sector is key to Nigeria’s industrial quest. Therefore, it is important to find out whether or not FDI have impact on industrial development may be the key to understanding the path to industrialization in Nigeria. This will enable policy levers to be activated in the right direction, to maximize both FDI inflows and the gains from FDI.
1.5 HYPOTHESIS OF THE STUDY
The hypothesis of this study is stated below:
Ho1: There is no causal relationship between FDI and industry production in manufacturing sector of Nigeria.
H02: There is no positive relationship between FDI and Manufacturing sector performance in Nigeria.
1.6 SCOPE AND LIMITATION OF THE STUDY
This research shall cover the impact of foreign direct investment in Nigeria, paying special attention to the relationship between foreign direct investment and manufacturing output.
The research intends to study the trend of foreign direct investment in Nigeria with special reference to the manufacturing sector or industrial output of a country, the analysis shall restricted to the period between 1981 to 2017.
1.7 ORGANISATION OF THE STUDY
Sequel to the background of the study, previous studies will be examined to find out the nexus between FDI and manufacturing sector performance. Section 3 will examine the theoretical framework and the model specification, while section four presents the results of the analysis carried; section five concludes and recommendation of the study.