CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

In most developing countries there is the dearth of capital for investment which has affected the economic situation of these nations. In other to ameliorate the situation various governments of these nations has now focused much attention on investment especially foreign direct investment which will not only guarantee employment but will also impact positively on economic growth and development. FDI is needed to reduce the difference between the desired gross domestic investment and domestic savings.   Jenkin and Thomas (2002) assert that FDI is expected to contribute to economic growth not only by providing foreign capital but also by crowding in additional domestic investment. By promoting both forward and backward linkages with the domestic economy, additional employment is indirectly created and further economic activity stimulated.  

According  to  Adegbite  and  Ayadi  (2010)  FDI  helps  fill  the  domestic  revenue‐generation  gap  in  a developing economy, given that most developing countries’ governments do not seem to be able to generate sufficient revenue to meet their expenditure needs. Other benefits are in the form of externalities and the adoption of foreign technology. Externalities here can be in the form of licencing, imitation, employee training and the introduction of new processes by the foreign firms (Alfaro, Chanda, Kalemli‐ Ozean and Sayek 2006).

Foreign direct investment consists of external resources including technology, managerial and marketing expertise and capital. All these generate a considerable impact on host nation’s productive capabilities. The success of government policies of stimulating the productive base of the economy depend largely on her ability to control adequate amount of FDI comprising of managerial, capital and technological resources to boast the existing production capacity. Although the Nigerian government has being trying to provide conducive investment climate for foreign investment, the inflow of foreign investments into the country have not been encouraging.

Foreign direct investment (FDI) is a major component of capital flow for developing countries, its contribution towards economic growth is widely argued, but most researchers concur that the benefits outweigh its cost on the economy. (Musila and Sigue, 2006).   Mc Aleese (2004) states that “FDI embodies a package of potential growth enhancing attributes such as technology and access to international market” but the host country must satisfy certain preconditions in order to absorb and retain these benefits and not all emerging markets possess such qualities. (Boransztain De Gregorio and Lee 1998, and Collier and Dollar, 2001).

The growing interest in foreign direct investment (FDI), stand from the perceived opportunities derivable from utilizing this form of foreign capital injection into the economy, to augment domestic savings and further promote economic development in most developing economies (Aremu 2005).      FDI is believed to be stable and easier to service than bank credit. FDI are usually on long term economic activities in which repatriation of profit only occur when the project earn profit. As stated by Dunning and Rugman (1985) Foreign Direct Investment (FDI) contributes to the host country’s gross capital formation, higher growth, industrial productivity and competitiveness and other spin‐off benefits such as transfer of technology, managerial expertise, improvement in the quality of human resources and increased investment.    According to Riedel (1987) as cited  by  Tsai (1994) while the potential importance of FDI in less developed countries (LDCs) development process is getting appreciated, two fundamental issues concerning FDI remains unresolved. In the first place what are the determinants of FDI? Specifically from LDCs point of view are there factors in the control of the host country that can be manipulated to attract FDI?       Or as some researchers claim that by and large LDCs play a relatively passive role in determining the direction and volume of FDI.

A body of theoretical and empirical literature has investigated the importance of FDI on economic growth and development in less developed countries. For example see (Dauda 2007) (Akinlo 2004)   (Deepak, Mody and Murshid 2001) (Aremu 2005) e.t.c.

1. STATEMENT OF THE PROBLEM

In analysis  of  foreign  flow  into  the  country  so  far  have  revealed  that  only  a  limited  number  of multinationals or their subsidiaries have made Foreign Direct Investment in the country. Added to this problem of insufficient inflow of FDI is the inability to retain the Foreign Direct Investment which has already come into the country. Also what effect have foreign direct investment have on such variables as‐ Gross Domestic Product (GDP) and Balance of Payment(BOP).Moreover, what effect does inflation and exchange rate have on Foreign Direct Investment. However the focus of this paper is on the effect of inflation and exchange rate and the bidirectional influences between FDI and economic growth in Nigeria.   

According to Ayanwale (2007). The relationship between FDI and economic growth in Nigeria is yet unclear, and that recent evidence shows that the relationship may be country and period specific. Therefore there is the need to carry out more study on their relationship.    Developing countries economic difficulties do not originate in their isolation from advance countries. The most powerful obstacle to their development comes from the way they are joined to the international system. Also an economic policy that can provide a conducive economic environment that will help to attract FDI inflows into the country is desired. However the characteristics of monetary policy according to Kiat (2008) presents the impossible trinity, that is a trilemma problem where trade‐offs must be done in order to maintain economic stability. Two of these anchors are inflation autonomy and exchange rate variability. These trade‐offs can impact on the on FDI inflow (Lahrèche‐Révil and Bénassy‐Quéré, 2002; Gelb, 2005; Umezaki, 2006) as cited by Kiat (2008).

1. AIM AND OBJECTIVES OF THE STUDY

The aim of the study is to investigate the relationship effect of exchange rate on foreign direct investment and its connection with growth of Nigeria economy.

The specific objectives of the study are:

1. To determine the relationship between foreign direct investment and economic growth in Nigeria
2. To examine the effect of foreign direct investment on return investment capital
3. To examine the effect of foreign direct investment on openness of host economy to trade in Nigeria
4. To examine the effect of exchange rate on foreign direct investment
5. To examine the effect of exchange rate on economic growth of Nigeria

1. RESEARCH QUESTIONS

1. What is the relationship between foreign direct investment and economic growth in Nigeria?
2. What is the effect of foreign direct investment on return investment capital?
3. What s the effect of foreign direct investment on openness of host economy to trade in Nigeria?
4. What is the effect of exchange rate on foreign direct investment?
5. What is the effect of exchange rate on economic growth of Nigeria?

1. RESEARCH HYPOTHESIS

The following hypothesis is stated below:

H0 there is no relationship effect between exchange rate on foreign direct investment and economic growth of Nigeria.

H1 there is relationship effect between exchange rate on foreign direct investment and economic growth of Nigeri

1. SIGNIFICANCE OF THE STUDY

This study is very significant because it will try to reveal the nexus that may have exist between exchange rate on foreign direct investment and economic growth of Nigeria.

It will also enable Nigeria and Nigerians to know the advantages and disadvantages of exchange rate and foreign direct investment in an economy. Especially an economy that is just trying to develop like Nigeria.

Ultimately, the findings of the study and recommendation will enable the policy makers of the state to come out with policies that will help in develop Nigeria economy aside from foreign direct investment.

1. SCOPE OF THE STUDY

The study is limited to effect and relationship of exchange rate on foreign direct investment on economic growth of Nigeria.

1. LIMITATION OF THE STUDY

TIME CONSTRAINTS: One the challenges experienced by the researcher is the issue of time; the research will simultaneously engage in departmental activities like seminars and attendance to lectures. But the researcher was able to meet up with the deadline for the submission of the project.

FINANCIAL CONSTRAINTS: Every research work needs funding; however lack of adequate funds might affect the speed of the researcher in getting materials for completion of the project.

1. DEFINITION OF TERMS

Exchange Rate 

Is the rate at which one national currency will be exchanged for another. It is also regarded as the value of one country's currency in relation to another currency.

Foreign direct investment

A foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.

Economic growth

Economic growth can be defined as the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. ... Growth is usually calculated in real terms – i.e., inflation-adjusted terms – to eliminate the distorting effect of inflation on the prices of goods produced.