Essay: Investment in a Global Business

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Investment means the production of goods or capital utilized in the further production of other goods and services.Investment entails sacrificing current consumption in exchange for future utilization and benefits. Investment that accumulates over time compulsorily results in growth termed economic growth. Like every evolutionary stage, Investment started being concentrated on only physical production which created assets; but has evolved into other aspects of our very existence.

In our current world of globalization, Investment plays a vital role in global business. Investment provides firms with new markets, marketing channels, cheaper production facilities, access to completely new technologies, products, skills, and financing for any new firm which could be foreign or host nation that is a recipient of such investment. From this, Investment proceeds in becoming a source of new technologies, capital processes, products, organization technologies, management skills, thereby providing economic development a very strong impetus.

UNECA, 2006 claims that all progress made toward achieving development goals in Africa threw up many debates on Africa’s economic development pointing towards contributions of resource inflows external to Africa, including the widely acclaimed Foreign Direct Investment (FDI) which has contributed immensely.

Ndikumana, 2003 with all his evidence notes a rise of private capital flows to developing regions including African countries since the 1990’s in the form of Foreign Direct Investment (FDI).

The last forty years witnessed a trend in Nigeria’s macro economic performance revealing volatility. Okonet all, 2012 claims Nigeria achieved 3.95% growth rate for GDP from 1970 – 2008 that amounted 1.49% per capita income. This was a low growth rate. Poverty was prevalent which opposed Nigeria’s development policy of the day. This growth rate revealed insufficient capital.

Ajayi, 2006 claims Nigeria’s savings rate compared to other countries falls beneath their savings rates and is unable to generate from within investments required to minimize and alleviate poverty, then induce growth rates upwards.

Nigeria despite having a huge natural resource base is unable to meet her needs potentially to satisfy her market size. Endogeneity is an additional problem. The Nigerian government’s attempt to liberalize the entire economy has been resisted in some quarters reducing the government’s options of raising funds from available sources to finance her developmental needs.Nigeria has been unable to support herself with domestic financial resources because she is suffering from low capital formation. This is a characteristic of developing countries for which Nigeria is not an exception.These dampen efforts towards boosting economic growth.

Foreign Direct Investment (FDI) is therefore perceived as an alternative to augment local internally mobilized savings, capital, domestic investment to catalyze economic growth. Foreign Direct Investment (FDI) has contributed significantly to the economic growth of Nigeria for the last one hundred years since the colonial era. Many studies undertaken by Scholars, both theoretical and empirical discovered FDI and Economic growth are related closely. This raised numerous debates on their relationships.

Alternatively Domestic Investment (DI) is claimed to be most important driver of economic growth and a source of job creation for an economy. It has and plays a dual role in the economy revealing aggregate demand to enlarge the productive assets of a nation’s capital stock. Domestic Investment determines business cycles which prompt policy makers to consider when formulating and reviewing their policies. This research work determines the role of domestic and foreign investment played in the growth of Nigeria’s economy. The essence is to find out which of them (domestic or foreign investment) is more growth promoting then the other.

1.2 Statement of the Problem

Globally, the last twenty years has witnessed a rise in foreign and domestic investment because they were perceived as catalysts and bedrocks of generic growth and development. The last thirty years witnessed researchers focusing on the relationship between foreign and domestic investment revealing extensive empirical literature in this regard. Since the inception of democratic rule in Nigeria in 1999, Nigeria has made efforts to woo foreign investors and capital inflows by massive restructuring of frameworks, and institutions. Japan and South Korea were recipients of foreign investments to attain the levels of economic growths they currently possess.

HooiHooi Lean and Bee Wah Tan, 2001 claim Nigeria’s growth path must be assessed for the impact of foreign and domestic investment on her economy being a developing country. Using 1980 – 2012, they estimated VECM on Nigerian data aimed at improving their methodology.

Obadan and Odusola, 2011 used Granger Causality Test on Nigerian data to indicate that economic performance is enhanced by foreign and domestic investment. Their test results revealed a causal relationship between investment and growth. The causal relationship was unidirectional.

Iyoha’s study on investment trails their findings too.

Furthermore, empirical studies reveal that foreign investment’s impact on economic growth is more contentious unlike theoretical studies; this implies additional comprehensive studies undertaken to examine these two variables.

Okowa, 1996 claims “we have no choice but to welcome the imperialist and his capital”. In other words, foreign investors are not indispensable to Nigeria. No nation is an island all alone, they must co – exist enabling foreign capital to flow across their national boundaries and complement development efforts which seem laudable to all and sundry.

Nigeria’s government’s since independence have been beset by characteristics of underdeveloped economiescausing low and poor capital formation. This research study will attempt to examine the changes from one economic dispensation to another and to determine the contribution of foreign investments and domestic investments inflow in the economic growth of Nigeria between 1980 – 2013 linking exchange rate as a check variable to economic growth thereby ascertaining its effect.

1.3 Objectives of the Study

The main aim of the study is to compare the role of domestic and foreign investments in the growth of the Nigerian economy from 1980 – 2013. The specific objectives of the work are to:-

1) examine the flows of domestic and foreign investment in the economy during the period 1980-2012 covered by the study

2) Evaluate the trend in the growth of the Nigerian economy.

3) Determine which of these investments (domestic and foreign) contributed more to the observedgrowth than the other.

4) To evaluate the nature of the causal relationship betweengrowth and domestic and foreign investment.

1.4 Hypothesis

This study is guided by the hypothesis below:

Economic growth in Nigeria is enhanced by the flows of foreign and domestic Investments during the period under study.

1.5 Significance of the Study

The main motivations propelling this research study came from numerous studies. HooiHooi Lean and Bee Wah Tan, 2001used Malaysia for their investigations. Their results revealed FDI positively impacted economic growth, while domestic investment adversely impacted economic growth in the long – run.

Asiedu, 2001; Sjoholm, 1999; Obwona, 2001, 2004 claimed Sub – Saharan Africa is heavily on FDI.

Musgrave and Musgrave, 1976 claimed the government of a country must intervene in the economic affairs of the nation by compulsorily undertaking some expenses for people oriented capital projects.

Delong and Summers, 1990 claimed the private sector in a country’s economy can undertake investments dependent on its financial ability to alter economic growth.

Osinubi and Amaghionyediwe, 2010; Todaro, 1997 claim that FDI closes the gap created by the insufficiency of domestic investments, raises people’s standard of living, and permits development.

Chowhury and Mavtrotas, 2003 claim that an economy must be open and receptive to FDI to contribute to its economic growth.

This study contributes to the debate by providing additional evidence on the determinants of foreign and domestic investments to economic growth in Nigeria. The importance of this study lies in the fact that it will provide an insight into the relationship between both investments and growth; identify the reasons why Nigeria’s investment efforts have not provided the optimal result; guide the allocation of resources by the government; evolve policies, strategies, tactics in investment heads which have high propensities to contribute towards economic growth and development in Nigeria. This study will furnish future researchers having interests with useful information on this subject of the study.

1.6 Scope of the Study/ Limitation

The study is limited to Nigeria, using annual data to examine the relationship between foreign and domestic investment and economic growth for Nigeria for the period 1980-2013. The choice of this period and sample is based on the availability of data, and our interest which is to examine foreign and domestic investment and economic Growth in Nigeria.However, the majorlimitation is the quality of data. While public sector investments are easily obtained from budget estimates, there is no acceptable methodology to control for waste.

1.7 Organization of the study

This research work is divided into five chapters.Chapter one comprises of the Introduction (Background to the study), Statement of the Problem, Objectives of the Study, Research Hypothesis, Significance of the Study, and Scope of the Study.

Chapter two has examined the Theoretical Literature to begin building a foundation for the work; Empirical Literature to strengthen the foundation of the work, and the gap this work is intended to fill concludes the chapter.

Chapter three focuses on the research methodology which includes: techniques of estimation and model specification, used in finding statistical relationships used or considered.

Chapter four presents a trend analysis of the data in the model, the Presentation of the Data, Data Analysis all based on the Research objective of this topic’s work.

Chapter five concludes this topic’s Research work by focusing on the major findings through the Summary, Conclusions, and the Recommendations for Policy, for Further Studies, and the Contributions to Knowledge.

1.8 Definition of concepts

LDC: Least Developed Countries, these are countries which are still agrarian and not embraced modernization and technology.

FDI: this means the external ownership of resources and assets transferred via foreign capital inflows and non capital inflows from foreign nationals to other countries which host them for local and export usage.

DI: Domestic Investment, this refers to government capital expenditure at time; Domestic credit provided by the Banking sector to various sectors on a gross basis and Equity shares of indigenous companies.

MNC: Multinational Corporations, these are business organizations which spur businesses in the host countries but have their origins. Or,

TNC: Trans National Corporations, in foreign countries and are extensions of enterprisesoriginating from a foreign country.

GNP: Gross National Product, this is the aggregate production of goods and service in a country during the year.

2.1 Introduction

This chapter reviews various studies on foreign and domestic investment on economic growth in Nigeria, and the methods used in estimation. The chapter is categorized into:

 Theoretical review

 Empirical review

 Summary of Literature reviewed

The essence of this chapter is that, it will enable us to know how far the literature on foreign and domestic had gone, and how this study contributes to the literature of foreign and domestic investment. This navigation is an integral part of any study because it enables researchers to develop a roadmap along which to chart their study as well as identify the loopholes that will enable them to extend the frontiers of knowledge in the subject area under investigation. The major aim of this study is to achieve the objectives of this study as set by the researcher in the first chapter of this study.

2.2 Theoretical review

Stiglitz, 1993 defines investment as the acquisition of an a set with the sole purpose of obtaining profits or returns on it. It means producing capital goods, utilized in further production. Examples abound which could be railways construction, factory construction, land clearing, educating oneself in an institution. The leading motive of any or every investment is profit, but it could also have other several motives which are additional.

UNCTAD, 1999claims that the years 1970 –1990 witnessed 30% of FDI inflows to Africa absorbed by Nigeria; caused by the extractive sector implying oil attractiveness. Year 2007 witnessed 16% of all FDI inflows to Africa absorbed by Nigeria regardless of the oil boom. This disparity resulted from other African nations discovering oil reserves such as Angola and Sudan. Ibi–Ajayi, 2006 claimed Non oil sources advertised other African countries which tilted FDI inflows towards their directions. South Africa emerged Africa’s economic giant; while Egypt remained Africa’s ancient tourist haven. UNCTAD, 2007 report repeats their 1999 reports but narrowed down to West Africa alone.

UNCTAD, 1999, 2006, 2007 claim that substantialdeclines in the percentages and amounts of FDI into Nigeria were staggering. It revealed 60% representing actual amounts of $6bn in 2009 to $3.7bn in 2010. These were fluctuations which the government of Nigeria reflectedon these facts; and commenced rigorous confrontations through economic reforms to address and redress the ugly trend posed by challenges business interests and foreign investment inflow to Nigeria.These did not yield much because of the diverse nature of Nigeria. Insecurity led to instability which also led to dwindling investments.

IMF, 2008 defines foreign direct investment to involve having permanent interests and domination of a resident firm in the economy of a host nation for the investment.

Matjekana, 2002 claims that FDI inflows can be disaggregated in terms of their direction because of the restrictions they attract. Inward FDI and Outward FDI. Inward FDI is that which local resources receive an injection of foreign capital. Outward FDI is that which foreign countries receive an injection of overseas local capital. Literature on this area segregates FDI into vertical and horizontal FDI.

Fedderke and Romm, 2006 claim horizontal FDI is Multinational Corporations (MNCs) owning their headquarters for production in country of origin, and spreading out their production plants for their production lines between their country of origin and overseas countries.

Vertical FDI is defined as (MNCs) owning headquarters in their country of origin and all production plants spread across different overseas countries undertaking stages of production activities. Vertical FDI is preferable because labor is cheap, unskilled and in abundant supply; useful for production activities of an intense nature. But some authors cannot correlate Vertical FDI with positive effects.

Moolman, Roos, Me Roux and Due Toit, 2006 claim that FDI is segregated by motives which are: resource – seeking, market – seeking, efficiency – seeking FDI.Resource seeking FDI is linked to availability of existing natural resources in host nations having determinants such as cheap labor that is unskilled, skilled labor and physical infrastructure. Such are expected in the extractive industries dominating the primary sectors.

Asiedu, 2006 claim that Market seeking FDI have an aim to serve domestic markets by undertaking production locally and selling products locally because of local impetus which include large maker, increased demand, purchasing power which increases. They have features which are determined by market features necessary for growth to exist.

Kransdorff, 2010 claims that Efficiency seeking FDI are tailored to export products and their markets for buyers because of cheapness, secure environments without risks having necessary financial, social and administrativemachinery in place. They seek cheapness and comfort making them footloose and ready to exit at any available offer offshore.

Caves, 1996 claims that increased efforts to attract and mobilize more foreign investment arises from the long held notions concerning foreign investments which are its advantages: productivity gains, technology, new processes, management skills, expertise for domestic markets, further staff upgrading by training, global production networks and market access.

Borenstein et al, 1998 claims FDI contributes beyond domestic investment to growth when technology is transferred. Findlay, 1978 claims that contagion impact of advanced technology and management practices motivates technical progress.

Carkovic and Levine, 2002 claim that foreign investment results in externalities like spillovers, technology transfers.

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