Essay: Investment in a Global Business

Essay details:

  • Subject area(s): Economics essays
  • Reading time: 20 minutes
  • Price: Free download
  • Published on: July 24, 2019
  • File format: Text
  • Number of pages: 2
  • Investment in a Global Business
    0.0 rating based on 12,345 ratings
    Overall rating: 0 out of 5 based on 0 reviews.

Text preview of this essay:

This page of the essay has 5752 words. Download the full version above.

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.

FDI augments domestic investment to stimulate all their productivity; and positively impacts on trade for continuity of growth.China’s economic growth we all benefit today was stimulated by foreign investments. Some Latin American countries have followed suite.

Blomstrom et al, 1994; Borensztein et al, 1998 claimed that FDI could only be absorbed by some countries which had attained a certain level of income; and also the differential in human capital existing permits an educated population to welcome and utilize FDI maximally unlike an uneducated one. This spurs a lot of Research and Development when innovations have diffused.

Obwonna, 2001 claims Uganda’s macro economic, political stability, policy consistency determine the FDI inflows into Uganda and their impacts on growth positively and insignificantly.

Ekpo, 1995 claims that the political climate, economic climate, global climate shed light on variances observed under FDI in Nigeria.

FDI is external to Nigeria and carries within it external inputs. Government must initiate policies that would be successful in this regard of attracting FDI, infusing it all into her domestic productive base, boost production capacities all round, augment domestic resources by completing the savings – investment gap, undertake all her growth oriented programs for the populace, thereby raising living standards.

Domestic investment means buying and owning assets yielding income and profits inside an economy not overseas. These assets increase the nations capital stock totally. Domestic savings generated internally are not sufficient to attain high rates of economic growth and boost development. What domestic savings can do is to begin investments on a positive note until they get stronger in the long term.

World Bank, 2007 claims that countries having highest rates of investment do not translate to having highest savings rates because domestic forces motivate long term investments locally. Interest rates are another factor determining investments because of their inverse relationships with lending and asset values. The Central Bank should live up to its statutory roles of stabilizing the economy using all the instruments of monetary policy which would result in increased savings in the domestic economy.

Nigeria embarked on several reforms to liberalize her private sector making her attractive to investment opportunities and foster confidence in growth. These reforms included instructing and encouraging Multinational Companies to invest in key sectors of the economy such as oil and gas, banking, telecommunications, solid minerals, agriculture e.t.c. to eventually become stakeholders. The government has also set up the Nigerian Investment Promotion Commission to regulate Investors; undertake various overseas trips to woo investors and provide an enabling environment for investment to thrive. These efforts have paid off with results beyond expectations in terms of investment flows to accelerate growth.

2.2.1 Theories of Investment

Keynes theory, this theory claims that investment is real and must add to capital. Investment must raise production levels, sales and purchases of capital goods, purchasing power levels. Investment is buying and owning any property and asset increasing the existing goods in stock.

Accelerator theory, the theory of demand introduces us to the concept of derived demand. Housed and Consumer goods cause a derived demand for Capital goods which is cyclical in production and consumption. Acceleration principle enables us to explain the direct relationship and dependency linkage between consumption goods and investment goods.

Neoclassical theory, Hall and Jorgenson, 1971 claim that the output level and cost of capital determines the optimal investment stock. The variables involved are real interest rates, depreciation rates and prices.

Tobin’s Q theory, here new capital is acquired and installed to increase the firm’s value at a cost of replacement displaying a relationship between the firm and capital. Investment reveals the gap between market value of new capital against cost of replacement.

2.2.2 Theories of Growth

Rostow’s theory, Countries that want to advance to the level of development from the level of underdevelopment must undergo ascending numbers of stages or steps. One of these is the accumulation and mobilization of savings that were domestic and foreign which were in sufficient quantity to ignite the flames of investment which would result in economic growth. All the developed countries has undertaken these sacrifices and moved to the self sustaining growth stage leaving the take off stage behind. Only the underdeveloped countries lagged behind because they remained in the preconditions stage as traditional societies.

Harrod – Domar theory, this theory claims that GDP growth rate is the direct result of combined ratios of net national savings and net capital output. National Savings alone solely determine growth rate in the absence of government revealing a direct relationship. National Savings ratio is inversely related to Capital Output ratio.

Total Capital Stock = K, Total Gross Domestic Product = Y, Net Investment = I, Capital Output Ratio = k, Net Savings Ratio = s, Gross Savings = g, and the rate of capital depreciation = δ

The Capital output ratio is simply an additional increase to existing capital stock via way of new investments; all to increase GDP. Net savings ratio is determined by the level of total savings from new investments and GDP.

S = sY ……………………………………………………………..(2.1)

I = ΔK ……………………………………………………………..(2.2)

K / Y = k or ΔK / ΔY = k………………………………………..(2.3)

ΔK = kΔY ………………………………………………………….(2.4)

S = I ………………………………………………………………..(2.5)

I = ΔK = kΔY ………………………………………………………(2.6)

S = sY = kΔY = ΔK = I or sY = kΔY ……………………………..(2.7)

ΔY/ Y = s/ k………………………………………………………..(2.8)

ΔY/ Y = g/ k – δ ……………………………………………………(2.9)

Lewis theory, this theory contains a model of two sectors giving attention to transformations of a structural nature in an underdeveloped economy. First is the subsistence sector consisting of traditional rural agricultural overpopulation; and Secondly is the industrial sector consisting of modern urban under population. The industrial sector always absorbs surplus labor from the subsistence sector without any losses in output.Attention is given to the movement of labor from the subsistence sector to the industrial sector, the resulting output growth, employment determined by the industrial sector’s rate of capital expansion. This would continue until the industrial sector is saturated and further transfers would result in declines in the subsistence sector; leaving the industrial sector transformed.

Market Fundamentalism theory, this theory claims that Least Developed Countries factor and product markets are bedeviled by imperfections which forcefully necessitate Government intervention. Government intervention means creating an enabling environmentfor the private sector and all its enterprises to survive and flourish using non selective interventions. These take the forms of provision of physical infrastructure, social infrastructure, health infrastructure, and educational infrastructure. Developing countries have inherent in them market failures environmental areas and investment areas when referring to coordination and outcomes.

Traditional Neo – classical theory, this theory claims liberalization of the economy’s markets dismantles government control over them and attracts additional domestic and foreign investment to increase capital accumulation at prevailing rates.This rapidly increases GDP growth through rates of domestic savings and capital – labor ratios in countries that are desperately capital scarce.

Robert Solow’s neoclassical growth model is an exogenous growth model which amended the Harrod–Domar growth model to include newer variables. The newer variables are labor and technology. Solow’s model displayed labour and capital witnessing diminishing returns because they are not constant. Long term growth is determined by Technological progress exogenously. It has a formula which is:-

Y = Kα (AL) 1 – α …………………………………..2.10

The neoclassical growth theory claims that productive labor quantity and quality, capital increases and technological improvement result into growth whether the economy is a closed economy or an open economy.

Adams, 2009claims there arethree theoretical viewpoints reflecting FDI influences on developing countries which would host the FDI.They are: dependency, modernization, and integrative theories.

The dependency theorists lay claim to the fact that economic growth and income distribution are adversely affected by foreign investment because viewpoints of policymakers about developing countries fluctuate fromanimosity to knowing propulsion.

The modernization theories claim that FDI has positive effects on economic growth of their host nations because of desperate capital scarcity required to propel economic growth. FDI’s advantage also introduces new technologies to permeate all the sectors and spur innovations leading to growth.

The Integrative theories claim that the host countries and investors view the FDI process as a multiplicity of heterogeneous variables involved in everything. These heterogeneous variables are the macroeconomic variables and the microeconomic variables enveloping host country economies which are interwoven. It emphasizes more on the micro-level.

2.3 Empirical Review

This section is divided into four sub – themes namely:-

1) Foreign investment and economic growth

2) Domestic investment and economic growth

3) Foreign and domestic investment and economic growth

4) Crowding in and crowding out of foreign and domestic investments

1. Foreign Investment and economic growth

Many studies undertaken have estimated mechanisms FDI inflows spurring economic growth in host countries.

Zhang, 2001 claims that FDI spurs economic growth usingdirect and indirect impact. Economic growth is directly interdependent with FDI bringing along with it all its advantages which are productivity increases, managerial expertise, advanced technologies emanating from overseas countries. Buckley et all, 2002 claims that FDI upgrades human capital and technological advancement through productivity increases approved by the companies involved. Althukorala, 2003 claims that FDI gives developing countries all the advantages accompanying it such as technology, capital, entrepreneurial abilities just to alleviate the problems dislocating the host economies using the economic climate and existing infrastructure on the ground.Akinlo claims the host countries should have some basics such as open trade systems, upwards savings rates and technological advancements to tap into FDI increases. Zhao and Due, 2007 claim that the savings – capital gap is exposedby economic growth occurring at very rapid pace, thereby demanding additional investors of FDI to fill this gap. Wong and Jomo, 2005 claim that the Asian financial crisis revealed the flip side or negative side of FDI being non -growth contributing. Duasa, 2007; Pradhan, 2009 indicate that no relationship exists between Economic growth and FDI in Malaysia thereby reducing volatility.

Othersin this area arrived at positive findings in the Literature and they are Solomon and Eka, 2013; Alejandro, 2010; Obwona, 2001 using Uganda as case study; Zhang, 2001; Ewe-Ghee Lim, 2001; Otepola, 2002; Ricardo, Hwang and Roderick, 2005 claimed that FDI motivated export led growth.

Others studies in this area arrived at mixed findings in the Literature and they areMecinger, 2003; Saqibet all, 2013; Carkovic and Levine, 2002 discovered that a negative effect was what FDI made on economic growth. Lyroudi et al, 2004, Mohammed et al, 2013; Chowdary and Kushwaha, 2013 discovered that an insignificant relationship existed between economic growth and FDI.

Adelegan, 2000 claimed that an unrelated regression model reveals FDI tends towards entrenching a pro-consumption, pro-import, negative linkage to GDP.Ogiogo, 1995 claims distortions render negative the contributions of public investment to economic growth. Chenery and Stout, 1996 claimed that a two gap model revealed that FDI is negatively linked to Nigeria’s economic growth.Oyinlola, 1995; Badeji and Abayomi, 2001; Otepola, 2002claimed that FDI stifles economic growth thereby retarding it.

Al Khathlan, 2014 claimed that applied co – integration technique revealed a positive but insignificant linkage amidst long term economic growth and FDI for the period 1980 – 2010 in Saudi Arabia. Kotrajaras, Tubtimtong and Wiboonchutikula, 2011 claimed that co – integration and panel data analysis revealed that certain variable in an economy positively manipulate FDI like financial development, good governance, sound macro ¬¬- economic policies. Li and Liu, 2005 claimed that single and simultaneous equation systems application revealed FDI strengthens economic growth overtly and covertly for the 84 countries.

De Mello, 1999 claims that economic growth is enhanced by substitution and complementarity levels of FDI and domestic investment inflows. Two issues have arisen about Nigeria’s trend of FDIreceived. Firstly, Nigeria has been sidelined in the world of financial globalization making attraction of FDI compulsorily inevitable since the 1990’s. Secondly, the translation of these multiple FDI inflows to tangible development in Nigeria’s economy. This research work must undertake empirical studies on relationships between FDI and domestic investment on economic growth in Nigeria.

2. Domestic investment and economic growth

Domestic investment claims it is the foundation of employment creation and generation and the wellspring of economic growth to an economy. Firebaugh, 1992 claims that local factories and industries rely on it for take off and survival. Domestic investment widens a country’s stock of productive and capital goods to motivate aggregate demand.. It determines reforms undertaken by policymakers when studying business trends. Musgrave and Musgrave, 1976 claimed that government intrusion and intervention is very necessary in an economy to achieve economic growth because of the inadequacies of the market forces of demand, supply, price; unemployment plague; Inter – temporal equity, unrealistic perfect competition.

Apostolo and Crumbley, 1998 claimed that government performed roles of allocation, stabilization and distribution of national income and its resource bases fairly. Easterly and Rebelo, 1993 claimed that government initiated policies to streamline expenditures to affect economic growth.Nasiru, 2012 claimed that causality results revealedgovernment expenditure granger causes economic growth and has no long-term linkages with economic growth.Nenbee and Medee, 2011 claimed that error correction model and arcane approach of vector auto regression revealed government expenditure has no long-term impact on GDP; and has a short-term negative response to GDP. Delong and Summers, 1990 claimed that economic growth rate is partly controlled by private capital formation. Orji, 2012 claimed that Distributed Lag-Error Correction Model and Distributed model revealed government’s attempts to increase savings, private investment, decrease unemployment, increase per capita income to speed up economic growth; by manipulating bank variables for the period 1970 – 2006 in Nigeria.Ghazali, 2010 claimed that co-integration results revealed long run linkages and bidirectional causality amidst domestic investment and economic growth showing an inverse relationship for the period 1981 – 2008 in Pakistan.Tan and Tang, 2011claimed thatGranger causality test revealed that Domestic investment is co-integrated with the user cost of capital and economic growth; and has a long termunidirectional causality from Domestic investment to user cost of capital and economic growth.

3. Foreign and domestic investment and economic growth

The studies undertaken here reveal the linkages between, FDI, Domestic Investment (DI) and Economic Growth together and they are limited. They span across many countries to reveal any effects on Nigeria’s experiences with such flows and growth process.

Choe, 2003 claims that the panel VAR model discovered a bidirectional causality linking FDI to economic growth and unidirectional causalityfrom DI to economic growth for 80 countries for the period 1971 – 1995. Xu and Wang, 2007 claimed that a complementary linkage existed between FDI and DI for the period 1980 – 1999 in China. Bilgiliet all, 2007 claimed that VAR analysis revealed a bidirectional causality linkage amidst DI and economic growth for the period 1992 –2004 in Turkey. Tang et all, 2008 claimed that a multivariate VAR system co-integration revealed a complementary linkage between FDI and DI, a bidirectional causalityamidst GDP and FDI; a unidirectional causalityfrom FDI to DI, FDI to GDP, with DI impacting more on growth for the period 1988 –2000 in China.

Ghazali, 2010 claims that co – integration and causality tests reveals a bidirectional causality amidst FDI and DI; DI and economic growth; a unidirectional causality spanning the long term amidst FDI and economic growth. Lean and Tan, 2011 claim that Johansen – Juseliusco -integration combined with Granger causality revealed with a unidirectional causality that FDI inflows crowd in DI for the period 1970 – 2009 in Malaysia. Chakraborty and Mukherjee, 2012 claimed that co – integration and causality tests revealed a unidirectional causality amidst economic growth to FDI and from FDI to DI. Mohammed et al, 2013 claimed that vector error correction model, impulse response function and variance decomposition analysis revealed a short run crowding in effect amidst FDI to DI; having a bidirectional causality amidst DI and economic growth; and no causality amidst long run FDI and economic growth for the period 1970 – 2008 in Malaysia.Sooreea – Bheemul and Sooreea, 2013 claimed that panel Granger causality tests revealed a unidirectional causality amidst economic growth to DI and bidirectional causality amidst other existing variable pairs for the period 1989 – 1998 in 28 emerging economies. Chowdary and Kushwaha, 2013 claimed that Granger causality tests revealed that FDI was ineffective on DI, with bidirectional causality amidst DI and economic growth; and no causality amidst FDI and economic growth for the period 1992 – 2012 in India.

4. Crowding in and crowding out effect of foreign and domestic investment

Controversies dogged the linkages amidst FDI and DI. FDI inflows crowded in DI in many studies undertaken which are Xu and Wang, 2007; Tang et al, 2008; Chang, 2010; Lean and Tan, 2011; Mahmood and Chaudary, 2012; Mohammed et al, 2013.

FDI inflows crowded out DI in many studies undertaken which are Adams, 2009; Acar et al, 2012; Pilbeam and Obolevicuite, 2012. No linkages exist amidst FDI inflows and DI in some studies such as SaglamandYalta, 2011;Chowdary and Kushwaha, 2013. There exists some neutral crowding in and crowding out effects within country/ country group projectingFDIon DI which are Agosin and Machado, 2005; Wang, 2010.FDI inflows crowded in domestic investment; with a positive impact on economic growth when a threshold error – correction approach was applied; to reveal a unidirectional causality amidst economic growth to DI; and DI to FDI for the period 1981 – 2008 in Taiwan by Chang, 2010.

Ekpo, 1995 claims that real sector activities crowd out domestic investment while Social services crowd in domestic investment leaving the privates sector in a good stead to receive investment. Green and Villanera, 1991 claim that domestic investment on physical infrastructures augments private investment but can restrict domestic savings to crowd out private investment. Hatano, 2010 claims that an error correction model reveals public investment crowds in private investment. Balassa, 1988 claims that an inverse relationship exists amidst public and private investment.

Review of Empirical Literature

FDI is a wellspring of capital which is growth enhancing bringing with it numerous advantages mentioned earlier which are technology, entrepreneurial abilities, managerial capabilities to create and provide jobs, industrialize the country and alleviate poverty. Its impact is positive in some countries, negative in some countries, and insignificant in some countries when linking economic growth to FDI. Foreign investment inflows have been neutral, crowded in, and crowded out domestic investment across different country groups; leaving behind negative short run effects, positive long run effects, and complementary linkages in some countries. Nigeria with her trade openness remains sidelined making her unattractive in the era of financial globalization which dampened impacts of investment on economic growth. Domestic investment is the foundation of the local economy and its fruits; job creation, aggregate demand which shapes policies for investments sought by business communities. The Government of Nigeria must fashion out investment friendly policies to overcome this problem.

2.4 Summary of Literature Review

In this chapter, the study reviews some existing literatures that are related to foreign and domestic investment on Economic growth. This review is necessary to broaden our understanding on foreign and domestic investment on economic growth, and to chart a defined course for our investigation. There has been extensive numerous studies on foreign and domestic investment in various countries of the world, ranging from Europe, Africa and Asian countries. The focus of various study differs, some study focus on determinant of foreign and domestic investment on economic growth. While, some focus on which between foreign and domestic investment contribute more to economic growth?

This chapter is categorized into: theoretical and empirical review. The theoretical review dealt extensively on the meaning of investment (foreign and domestic) from various schools of thoughts. It also x-rays various theories of investment and growth. The empirical review shows various studies that investigate foreign and domestic investment on economic growth using different estimating techniques and data. The findings are also in various sides, while some support the fact that foreign investment contributes more in economic growth, than domestic investment, others against it. Some study also found that there foreign and domestic investment role in economic growth is complementary. Hence, this study seeks to add to literature review by using Nigeria data in estimating foreign and domestic investment on economic growth, in finding which is more economic growth promoting.

The essence of this chapter and majorly this research is that, it will enable us to know how far the literature on foreign and domestic investment had gone, and how this study contributes to the literature of foreign and domestic investment.

...(download the rest of the essay above)

About this essay:

This essay was submitted to us by a student in order to help you with your studies.

If you use part of this page in your own work, you need to provide a citation, as follows:

Essay Sauce, Investment in a Global Business. Available from:<https://www.essaysauce.com/economics-essays/investment-in-a-global-business/> [Accessed 18-11-19].

Review this essay:

Please note that the above text is only a preview of this essay.

Name
Email
Review Title
Rating
Review Content

Latest reviews: