EFFECTS OF FOREIGN INVESTMENT INFLOWS ON MACROECONOMIC PERFORMANCE IN NIGERIA (1987-2012)

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CHAPTER ONE

 

INTRODUCTION

 

  • BACKGROUND TO THE STUDY

Globalization is the process through which economies, societies and cultures relate through trade, transportation and communication. Economic theory clearly points to the tremendous potential advantages of cross-border capital flows.Neoclassical economists support the view that capital flow is beneficial because they create new resources for capital accumulation and stimulate growth in developing economies with capital shortages. Various types of these flows are welcomed to bridge the gap between domestic saving and investment that accelerate growth. Capital flow play significant role in economics. Finance is the life blood of any enterprise. With sufficient finance, an entrepreneur can get other factors of production such as labor, machinery/technology, management as well as raw materials and be involved in any other business activity (Okafor and Arowshegbe, 2011). According to Fuch-Schtindekn and Herbert (2001), foreign investments usually have absolute impact on domestic investment, and the productivity of investment, technology overflow, and household financial development. Fitzgerald (1998) theoretically argues that higher capital inflows lower interest rates, which help increase investment and economic growth. On the empirical side, using data from seventeen emerging economics, Bekaert and Harvey (1998) find a positive relationship between equity capital flows and key macroeconomic indicators, including growth and inflation. Evidence from Latin America and far Eastern economies shows that capital inflows tend to appreciate real exchange rates, lower interest rates, and increase consumption, investment and economic growth (Antzolatus 1996; Calvo 1994; Carbo and Hernandez 1994; Fernandez-Arias and Montiel 1995, Khan and Reinhart 1995).

 

In contrast, the financial crisis that came up in Asia, Russia and Latin America have created doubts about the benefits of capital inflows and emphasized the necessity of capital controls. Agosin (1994) argues that capital inflows are used to finance imports and domestic consumption. Rodrik (1998) contends that capital flows have no significant impact on economic performance once the impact of other variable, such as education level, the initial level of income, the quality of government institutions, and regional dummies, are controlled for.

Foreign investment comes in two forms: Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). The former entails a controlling authority over the concerned enterprise; at times it means setting up of new projects. Portfolio investment by contrast is essentially a financial transaction – purchase of stocks, bonds and currencies as assets. Many developing economies have over the years depended heavily on the attraction of financial resources from outside in different ways. Official and private capital flows including FDI and FPI as a way of accelerating their economic growth (Odozi, 1988; Ekpo, 1997; Uremadu, 2008). Some nations exhibited a choice for FDI since they regard it as an avenue for overcoming the slow trend in official and private portfolio capital flow (Uremadu, 2008). The need to draw foreign capital in non-debt constituting way is one of the reasons, why emerging economies wish to encourage private capital flows. Thus, there has been a dramatic increase in the magnitude of capital flows from countries in the North to emerging economies across the South where the need is high. According to Siamwalla (1999) the relative low yields in industrial countries together with impressive economic growth and attractive returns in developing, countries motivated investors to relocate their funds to direct investments. He assumes that the growth in international foreign investment inflow is an aftermath of good mixture of macroeconomic variables as well as the drift towards trade globalization, international financial linkages and expansion of production bases overseas. He further states that macroeconomic variables are indicators or main signposts indicating the current trends in the economy. Some main macroeconomic variables identified by Keynes (1930), that study foreign inflows into an economy are gross domestic product (GDP), exchange rate, interest rate, inflation rate and money supply.

 

Nigeria as an import dependent economy needs foreign investment to enhance her investment needs. That is why since the emergence of democratic governance in May 1999, she has embarked on some concrete means to encourage cross-border investors into her domestic economy. Some of these means are: the repeal of laws that are adverse to foreign investment increase, promulgation of investment laws, introduction of policies with favorable atmosphere like ease of businesses, fast export and import processing methods, fight against advanced fee frauds, instituting economic and financial crimes commission. These definite measures seem to have been making positive impact on Nigeria’s foreign capital inflows (Uremadu, 2011).

 

Nigeria has also been a mono-cultural economy and relies heavily on crude oil as the major means of foreign exchange. Oil is vulnerable to the inconsistencies of production and prices at the international market. So returns from it may be subject to serious inconsistencies. This usually results in mono-cultural economies being deficient in investment capital.Poor economic management is another feature in Nigeria economy and which often leads to trade imbalances, persistent fiscal deficit, insufficient domestic savings, low high inflationary pressure, poor infrastructural facilities, unemployment, low output and excess dependence on imports (Okafor, 2012).

 

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