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JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT VOLUME 7 NO 2, DECEMBER, 2009

FOREIGN DIRECT INVESTMENT AS A MARKET PENETRATION STRATEGY IN NIGERIA: AN EMPIRICAL ANALYSIS

Agbo Joel Christopher Onu
Department of Business Administration, Ahmadu Bello University, Zaria

E-mail: foajconu@yahoo.co.uk

 

Abstract

This study investigates foreign direct investment (FDI) as a market penetration strategy in Nigeria within the period 1986-2007. The study used time series data and employed regression model to determine the macroeconomic variables that influence FDI inflow in Nigeria.. It was found that the growth in the Nigerian economy proxied by GDP has been the main reason for the inflow of FDI within the period under review. Results also revealed that foreign exchange, public expenditure on education and savings exerted positive but not significant impact, on FDI inflow during the study period. However, government tax revenue (GTR) and political stability proxied by Dummy (D1) had inverse relationship with FDI inflow. The study concluded that FDI is an appropriate tool for market penetration. Consequently,it was recommended that the creation of a viable business environment, improvement in the investment climate, ensuring and maintaining macro-economic stability and increased investment in human capital and public infrastructure be pursued.

Keywords: Foreign; investment; market; penetration; strategy.


Introduction

Most firms would prefer to limit their operations within the domestic market if it were large enough. It is easier and safer to conduct business operations in the home market. But because the domestic market is not large enough, firms extend their operations into foreign markets. This has culminated in increased global competition with enhanced international operations and improved global efficiencies.  The unprecedented emergence of global market segments were stimulated by economic, technological, industrial, political, demographic forces and the advent of improved communication technology, transportation and financial flows between different nations. This created opportunities for developing products and services targeted at these segments world-wide which investors have exploited to penetrate foreign markets.

Market penetration occurs when a company enters a market with current products; or when a company seeks increased sales for its present products in its present markets through more aggressive promotion and distribution. It is a strategy for  company growth by increasing sales of current products to current market segments without changing the product. Market penetration is not limited to only existing markets, but also a useful strategy for entering new ones. It involves forging alliances or relationships, developing networks, working closely with home country government officials and industry competitors to gain access to a target market. Market penetration can be achieved through gaining competitors’ customers or market share, attracting non-users of a company’s products or convincing current clients to use more of a company’s products.

One of the broad choices of foreign market penetration strategies available to an investor to employ is foreign direct investment (FDI). FDI is a whole package of physical capital, techniques of production, managerial and marketing expertise, products, advertising and business practices for the maximization of global profits. Direct ownership of foreign based assembly or manufacturing facilities is the ultimate form of foreign involvement. It enables foreigners to own the physical productive assets which they operate directly. FDI is considered as a strategic instrument for market penetration.

Statement of the problem

Nigeria has been making a lot of effort at creating enabling environment for FDI to penetrate the market. The country has liberalized her economy and provided generous investment incentives in the industrial, agricultural and non-oil sectors of the economy to attract FDI. Despite the battery of investment incentives provided by Nigeria, foreign

investors have not been able to penetrate some sectors of the economy. How friendly or otherwise the environment is to foreign investors who desire to penetrate the Nigerian market is yet to be determined.
Though Nigeria has embarked on some measures to create enabling environment for FDI to thrive, there has been the existence of insecurity due to ethnic conflict, inadequate infrastructure, vandalism of oil pipelines, inadequate power and low human capital development (www.wikipedia.org; 2007; Onu, 2000) which constrain foreign investors and private sector participation in the economy. It is, therefore, necessary to determine whether or not FDI can be employed as an instrument for market penetration in Nigeria.

Objectives of the study

The main objective of this study is to assess FDI as an instrument for market penetration in Nigeria within the period 1986 - 2007. The study also seeks to examine the factors influencing FDI inflow in Nigeria.

Methodology

Evaluation research was employed for this study. This approach was employed with the main purpose of determining the viability of FDI as a tool for market penetration. The major sources of data are the publications of the Central Bank of Nigeria, Nigerian Investment Promotion Commission (NIPC), Securities and Exchange Commission (SEC), and other secondary sources. The data covered a period of twenty-two years (1986-2007).

The study employed regression model to examine some factors that influence FDI in penetrating the market in Nigeria. FDI, as a market penetration strategy, is defined thus:

            FDI = f(GDP, Ss, FE, GTR, PEE, D1)
Where:
            FDI      = Foreign Direct Investment
            GDP     = Gross Domestic Product (proxy for economic growth)
            Ss         = Savings
            FE        = Foreign Exchange
            GTR     = Government Tax Revenue
            D1        = Dummy (proxy for political stability)
            The model to be used is specified thus:
            Xt = ao + a1Y1t a2Y2 t + a3Y3 t + a4Y4 t + a5Y5 t + a6Y6 t +e …………… (1.3.1)
Where there is a non-linear relationship, the model is expressed as:
Xt = AY1ta1 Y2t a2  Y3 t a3  Y4 t a4  Y5 t a5 Y6 t a6 + e t …………………………… (1.3.2)
If we log-transform this model, we obtain:
Log Xt =Log A + a1LogY1t + a2LogY2 t + a3LogY3 t + a4LogY4 t + a5LogY5 t  + a6LogY6 t  + e t …. (1.3.3)
sfdsdf             Log X = ao + a1LogY1 + a2LogY2 + a3LogY3 + a4LogY4 + a5LogY5 + a6Logy6 + e
Where:
X         =          FDI      =          Foreign Direct Investment
Y1           =          GDP     =          Gross Domestic Product proxy for Economic Growth
Y2        =          Ss         =          Savings
Y3        =          FE        =          Foreign Exchange
Y4        =          GTR     =          Government Tax Revenue
Y5        =          PEE      =          Public Expenditure on Education proxy for Investment in
human capital (representing management skills)
Y6        =          D1        =          Dummy (proxy for political stability)
Ao           =          Log A
e          =          Error Term

The parameters of these variables were tested by the use of R-Squared, F-Statistic and t-Statistic.

Literature review

Market penetration is one of the growth strategies employed by business organizations for market expansion and diversification. Firms use this strategy

to penetrate new market segments in the domestic market to enlarge their market share or to enter foreign markets.

The decision to enter foreign markets, according to Osuagwu and Eniola (1997), involves a number of factors. These include the company’s financial resources, the managerial culture and levels of international marketing expertise within the company, the nature and degree of competition within the market, the nature of the product and the market’s political infrastructure. The foreign investor needs to consider other factors including the investment needs of each market, the human resource requirements, the marginal marketing costs and the company’s expectations of the volume of business to be generated and objectives.

To enter foreign markets, the firm needs to consider two major components of the marketing strategy: how to address the competitive marketplace and how to implement and support the day-to-day operations. In determining the strategy, it must be noted that there is no one, single universally accepted foreign market entry strategy. The best strategy, as Kotler (2000) asserts, is one which is situationally feasible, optimally beneficial and takes into consideration market competition, perceived risk and established corporate policy with regard to forms of market entry.

The market entry strategy must be carefully chosen and should ensure a consistent approach to the marketplace. Equally important is a determination of the methodology for the day-to-day process of implementing the strategy for penetrating the market. Kotler (2000) sees market penetration as a situation where the company first considers whether it could gain more market share with its current products in their current markets. Kotler and Armstrong (2004) view market penetration from the same perspective. According to them, it is a strategy for company growth by increasing sales of current products to current market segments without changing the product. Baker (1992), in agreeing with this position, asserts that market penetration is a situation where the company seeks increased sales for its present products in its present markets through more aggressive promotion and distribution. Cateora (1996) adds pricing as one of the operational tools for market penetration. Market penetration can be achieved through gaining competitors’ customers or market share, attracting non-users of the firm’s products or convincing current clients to use more of the firm’s

products. A penetration pricing policy is used to stimulate market growth and capture market share. It is most often used to acquire and hold share of the market as a competitive maneuver.

Market penetration strategy is not limited to only current markets; it is also appropriate for entering new markets. Carter (1997) asserts that foreign market penetration involves forging alliances or relationships, developing networks, working closely with home country government officials and industry competitors to gain access to a target market. Achieving market penetration requires gaining competitors’ customers or market share, attracting non-users of the firm’s products or convincing current clients to use more of the firm’s products. The aim is to achieve profitable market share. FDI is one of the broad choices for entering foreign markets as a firm designs its global markets. Cateora (1996) sees it as a vehicle for penetrating foreign markets. This investment, Thirlwall (1994) asserts, involves not only a transfer of funds (including the reinvestment of profits) but also a whole package of physical capital, techniques of production, managerial and marketing expertise, products, advertising and business practices for the maximization of global profits. FDI is used to gain access to raw materials and other available resources in foreign markets. Thus, a company may manufacture locally to capitalize on low-cost of labor, to avoid high import taxes, to reduce the high costs of transportation to markets, to gain access to raw materials and/or as a means of gaining market entry.

The World Trade Organization (1996) observes that FDI occurs when an investor based in one country (the home country) acquires an asset in another country (the host country) with the intent to manage that asset. Also, the US Department of Commerce defines it to include such investments with at least 25% foreign equity participation in it. This equity participation should essentially allow the foreign investor some operational control of the enterprise. In this regard, Lall and Streeten (1980) argue that “control over management and profits” of the enterprise by the investor are the concepts used to classify an investment as foreign direct. Kotler (2000) sees FDI as the ultimate foreign involvement where the firm has direct ownership of foreign-based assembly or manufacturing facilities. It enables the firm access to the market in case the host country insists that locally purchased goods have domestic content. Kotler and Armstrong (2004); Kotler and Keller (2006) support this position. According to

them, FDI enables investors to enter foreign markets by developing foreign-based assembly or manufacturing facilities. Through FDI, the firm develops a deeper relationship with government, customers, local suppliers and distributors, allowing it to adapt its products to the local market better. The firm keeps full control over the investment and therefore can develop manufacturing and marketing policies that serve its long-term international objectives. FDI as a market penetration strategy is defined here as a function of gross domestic product

(GDP), foreign exchange, government tax revenue, public expenditure on education, savings and political stability. These variables determine the extent to which FDI can be employed as a viable tool for market penetration.

Data analysis

The data in Table 1 is used to run a regression to ascertain the determinants of FDI. The regression results were obtained by using the Ordinary Least Squares (OLS) method and employing E-Views Statistical Package.

Table 1            GDP, FDI inflow, savings, government tax revenue (gtr), foreign exchange and public expenditure on education (pee) for the period 1986-2007 (n’ million)

Year

GDP

FDI inflow

Savings

GTR

Foreign exchange

PEE

Political stability

1986

70,806.4

4,024.0

13,934.1

12,595.8

2.02

1,094.8

0.00

1987

71,194.9

5,110.8

18,676.3

25,380.6

4.02

653.5

0.00

1988

77,733.2

6,236.7

23,249.0

27,596.7

4.54

1,084.1

0.00

1989

83,179.0

4,692.7

23,801.3

53,870.4

7.39

1,941.8

0.00

1990

92,238.5

10,450.2

29,651.2

98,102.4

8.04

2,294.3

0.00

1991

94,235.3

5,610.2

37,738.2

100,991.6

9.91

1,554.2

0.00

1992

97,019.9

11,730.7

55,116.8

190,453.2

17.30

2,060.4

0.00

1993

99,604.2

42,624.9

85,027.9

192,769.4

22.05

7,972.1

0.00

1994

100,936.7

7,825.5

108,460.5

201,910.8

21.89

10,283.8

0.00

1995

103,078.6

55,999.3

108,490.3

459,987.3

21.89

12,728.7

0.00

1996

106,600.6

5,672.9

134,503.2

523,597.0

21.89

15,351.8

0.00

1997

109,972.5

10,004.0

177,648.7

591,151.0

21.89

15,944.0

0.00

1998

113,509.0

32,434.5

200,065.1

463,608.8

21.89

26,721.3

0.00

1999

116,655.5

4,035.5

277,667.5

949,187.9

92.69

31,563.8

1.00

2000

121,207.8

16,453.6

31

      385,190.9

1,906,159.7

102.11

67,568.1

1.00

2001

126,323.8

4,937.0

488,045.4

2,231,532.9

111.94

59,744.6

1.00

2002

131,489.8

8,988.5

592,094.0

1,731,837.5

120.97

109,455.2

1.00

2003

136,460.0

13,531.2

655,739.7

2,576,100.0

129.36

79,436.1

1.00

2004

527,576.0

20,064.4

797,517.2

3,960,800.0

133.50

93,767.9

1.00

2005

561,931.4

26,083.7

1,078,330.1

6,697,600.0

132.15

120,035.5

1.00

2006

595,821.6

41,734.0

1,604,174.5

6,061,000.0

128.65

165,213.7

1.00

2007

634,656.6

54,254.2

2,500,159.9

6,715,600.0

128.65

185,771.9

1.00

Source:      Computed from CBN Statistical Bulletin, Vol. 18, December 2007.

The regression results obtained to ascertain the factors that influence FDI inflow into the Nigerian market are shown in Table 2 below:

Table 2:           OLS test results

Dependent Variable: FDIINFLOW

Method: Least Squares

Date: 07/03/09   Time: 20:42

Sample: 1986 2007

Included observations: 22

Variable

Coefficient

Std. Error

t-Statistic

Prob. 

C

-0.860563

1.481637

-0.580819

0.5700

GDP

0.815303

0.537144

1.517849

0.1498

Foreignexchange

0.329596

0.744885

0.442479

0.6645

GTR

-0.149481

0.608717

-0.245567

0.8093

PEE

0.316141

0.479086

0.659883

0.5193

Savings

0.021015

0.813856

0.025822

0.9797

D1

-0.757723

0.328069

-2.309643

0.0356

R-squared

0.588011

    Mean dependent var

4.083083

Adjusted R-squared

0.423216

    S.D. dependent var

0.384307

S.E. of regression

0.291867

    Akaike info criterion

0.628333

Sum squared resid

1.277794

    Schwarz criterion

0.975483

Log likelihood

0.088333

    F-statistic

3.568128

Durbin-Watson stat

3.042369

    Prob(F-statistic)

0.021247

FDI Inflow =          -0.860563 + 0.815303X1t + 0.329596X2t - 0.149481X3t + 0.316141X4t + 0.021015X5t - 0.757723X6t

Table 2 indicates a statistically goodness of fit given that R2 is 0.588011 and Adjusted R2 of 0.423216. This indicates that over 55 percent variation in the dependent variable is explained by the explanatory variables. The constant term shows that the value of our FDI in 1986 was N860,563 million.

The results in Table 2 show a positive relationship between GDP and FDI. The estimated coefficient for GDP is 0.815303. The sign of coefficient for GDP is positive and it shows that GDP exerted a positive impact on FDI inflow during the study period.

Though GDP exhibited a positive impact on FDI, it was not statistically significant even at 10 percent level of probability. The economic performance in Nigeria affected FDI inflow. Table 3 reveals that the growth rate of GDP for the period under review was unhealthy and unattractive. It increased from 0.55 percent in 1987 to 10.89 percent in 1990, but declined to 2.12 percent in 1995. Thereafter, it rose to 3.90 percent in 2000, 6.51 percent in 2005 and 6.52 percent in 2007. This poor economic performance coupled with huge accumulated foreign debts made the domestic economy less competitive to attract FDI and take advantage of its benefits. Fischer and Easterly (1994), Ogiogio (1996) and Chete (1998) found that the country’s growth rate has a positive impact on FDI inflow. They concluded that the prospect that FDI would be profitable is brighter if the nation’s economic health is better and the growth rate of GDP is higher.

From the regression analysis, a unit increase in GDP gave rise to 0.81 increases in FDI on average within the period covered by the study. Even though this variable is not statistically significant, it plays a positive role toward FDI in the country.  Within the study period, Nigeria has witnessed increase in GDP growth. This has caused increase in personal disposable income, increase in interest rate and investment, increase in returns on domestic goods which are all attractive to FDI. A cursory examination

of the Index Values of GDP in Table 4 also supports this claim. There was an increasing trend from 51.89 in 1986 to 67.59 in 1990, 75.54 in 1995, 88.82 in 2000, 411.79 in 2005 and 465.09 in 2007. This was enhanced by the liberalization of the economy in Nigeria. Trade barriers which hitherto had constrained the inflow of FDI were removed, laws which impinged on FDI inflow were also abolished and favorable ones enacted, generous investment incentive measures to encourage FDI were provided and  the financial system was stabilized with reforms in the banking sector to assure foreign investors of the safety of their funds.

The substantial economic reforms undertaken by the new civilian administration opened up the market in Nigeria for penetration by foreign investors during the study period. The Nigerian market witnessed the entry of GSM service providers such as MTN, Econet (now Zain), GLO, Starcomms, Multilinks, Visafone and Etisalat. Unilever Nigeria Plc, Coca-Cola Nigeria Plc, Procter and Gamble, Nestle Nigeria Plc, PriceWater House, Arthur Anderson, Julius Berger, Afrinvest and other foreign-based firms operate freely in Nigeria. Products of foreign firms such as Toyota, Honda, Mitsubishi, Audi, Kia, Sony, Panasonic, Peak, Milo, Lemon Plus and many others are available in the Nigerian market. This implies that, given an enabling environment, FDI is an important tool for market penetration.

Table 3            Growth rates of FDI, FE, GTR, PEE, GDP AND SAVINGS


Year/Variables

FDI

FE

GTR

PEE

GDP

Savings

1986

 

 

 

 

 

 

1987

22.03

100

101.50

-40.27

0.55

34.03

1988

-24.76

25

8.73

65.75

9.18

24.49

1989

122.67

40

95.20

79.15

7.01

2.37

1990

-46.32

14.29

82.11

18.13

10.89

24.58

1991

109.11

25

2.95

-32.26

2.16

27.27

1992

263.35

70

88.58

32.56

2.96

46.05

1993

-81.64

29.41

1.22

286.99

2.66

54.27

1994

615.55

0

4.74

29.00

1.34

27.56

1995

-89.87

0

127.82

23.77

2.12

0.03

1996

76.34

0

13.83

20.61

3.42

23.98

1997

224.22

0

12.90

3.86

3.16

32.08

1998

-87.56

0

-21.58

67.59

3.22

12.62

1999

307.68

322.7

104.74

18.12

2.77

38.79

2000

-70.00

9.677

100.82

114.07

3.90

38.72

2001

82.07

9.804

17.07

-11.58

4.22

26.70

2002

50.53

8.036

-22.39

83.20

4.09

21.32

2003

48.28

6.612

48.75

-27.43

3.78

10.75

2004

30.00

3.876

53.75

33

      18.04

286.62

21.62

2005

60.00

-1.493

69.10

28.01

6.51

35.21

2006

30.00

-2.273

-9.50

37.64

6.03

48.76

2007

-67.12

0

10.80

12.44

6.52

55.85

Source: Computed from CBN Statistical Bulletin, Vol. 18, December 2007

 

Table 4:           Index values for FDI, FE, GTR, GDP and savings


Year/Variables

FDI

FE

GTR

PEE

GDP

Savings

1986

24.46

2.15

1.33

3.47

51.89

2.86

1987

31.06

4.30

2.67

2.07

52.17

3.83

1988

37.91

5.38

2.91

3.43

56.96

4.76

1989

28.52

7.53

5.68

6.15

60.95

4.88

1990

63.51

8.60

10.34

7.27

67.59

6.08

1991

34.10

10.75

10.64

4.92

69.06

7.73

1992

71.30

18.28

20.06

6.53

71.10

11.29

1993

259.06

23.66

20.31

25.26

72.99

17.42

1994

47.56

23.66

21.27

32.58

73.97

22.22

1995

340.34

23.66

48.46

40.33

75.54

22.23

1996

34.48

23.66

55.16

48.64

78.12

27.56

1997

60.80

23.66

62.28

50.51

80.59

36.40

1998

197.13

23.66

48.84

84.66

83.18

40.99

1999

24.53

100.00

100.00

100.00

85.49

56.89

2000

100.00

109.68

200.82

214.07

88.82

78.93

2001

30.00

120.43

235.10

189.28

92.57

100.00

2002

54.63

130.11

182.45

346.77

96.36

121.32

2003

82.24

138.71

271.40

251.67

100.00

134.36

2004

121.94

144.09

417.28

297.07

386.62

163.41

2005

158.53

144.09

705.61

380.29

411.79

220.95

2006

253.64

138.71

638.55

523.43

436.63

328.69

2007

329.73

138.71

707.51

588.56

465.09

512.28

Source: Computed from CBN Statistical Bulletin, Vol. 18, December 2007

The results in Table 2 also show a positive relationship between foreign exchange and FDI. The estimated coefficient for foreign exchange is 0.329596. The results show that a 100 percent increase in foreign exchange will lead to a 0.33 percent increase in FDI. The study found that foreign exchange exerted a positive impact on FDI within the study period. However, the t-Statistic value of 0.442479 is not statistically significant at 5 percent level of probability. The growth rate in Table 3 supports this. Table 3 shows a fluctuating trend in the growth rate. In 1987, for instance, it was 100 percent but declined to 25 percent in 1991. Between 1994 and 1998, it was stagnant at 0 percent. In 2000, it rose to 9.68 percent but declined to 3.88 percent in 2004, -1.49 in 2005 and -2.27 in 2006. The year 2007 recorded no growth. However, the probability value of 0.6645 in Table 2 shows that foreign exchange has the potential to impact significantly on FDI. This is evidenced by the Index Value in Table 4.

Table 4 shows a steady increase from 1986-1992, but between 1993-1998, it stagnated at 23.66 percent. Subsequently, it increased to 100 percent in 1999, 138.71 percent in 2003 and 144.09 percent in 2005, but declined to 138.71 percent in 2006 and 2007 respectively. Economic theory stipulates that the nature and structure of foreign exchange determines the way it affects the domestic economy. Meier (1984) notes that FDI provides additional foreign exchange needed by indigenous firms to finance essential imports such as capital goods and imported raw materials. This contributes immensely in enhancing foreign market penetration.

Table 2 also shows an inverse relationship between Government Tax Revenue (GTR) and FDI inflow. The coefficient estimated of GTR is -0.149481. The result shows that a 100 percent increase in GTR will lead to a -0.15 percent decrease in FDI inflow. The study found that GTR did not exert a positive impact on FDI inflow. The t-Statistic value of -0.245567 is

not statistically significant at 5 percent level of probability. This relationship is also explained by Table 3. The growth rate of GTR in Table 3 was not stable. In 1987, it was 101.50 percent, 82.11 percent in 1990, 127.82 percent in 1995, 100.82 percent in 2000, 69.10 percent in 2005 and 10.80 percent in 2007. The Index Value for GTR in Table 3, however, shows a progressive increase. In 1986, for example, it was 1.33, 10.34 in 1990, 48.46 in 1995, 200.82 in 2000, 705.61 in 2005 and 707.51 in 2007.

The economic progress of the nation depends largely on the government’s ability to generate sufficient tax revenues to execute projects that will enhance economic growth of the nation. Meier (1984) concluded that developing countries can hardly generate capital internally for investment purposes. This is because of the fragile and underutilized tax base and the general state of affairs in these countries. In the 1980s, for instance, Nigeria was confronted with the problem of rising fiscal deficits due largely to poor governance which created a gap in government revenue. In 2005, Nigeria’s central government had expenditures of US$13.54 billion but revenues of only US$12.86 billion, resulting in a budget deficit of 5 percent. Nigerian tax authorities face the challenge of wide-spread tax evasion, which is motivated by complaints about corruption and the poor quality of services (www.wikipedia.org, 2007).

Table 2 shows a positive relationship between Public Expenditure on Education (PEE) proxy for Management Skills or Human Capital and FDI inflow. The estimated coefficient for this relationship as indicated in Table 2 is 0.316141. This shows that a 100 percent increase in PEE will lead to a 0.32 percent increase in FDI inflow for the period under review. The t-Statistic value of 0.659883 is not statistically significant. This implies that PEE did not significantly promote FDI inflow in Nigeria during the study period. This is evidenced by Table 3. The table shows that the growth rate of PEE was negative in some periods. In 1986, for instance, it was -40.27 percent, -32.26 percent in 1991, 20.61 in 1996, -11.58 percent in 2001, 37.64 percent in 2006 and 12.44 percent in 2007. These results imply that human capital development require a long-term investment before it can adequately enhance FDI inflow.
Although this study found that PEE did not significantly enhance FDI inflow during the period under review, economic theory suggests that human capital accumulation can be an important source of long-term growth. Investment in human capital

enhances the productivity of both recipients of such capital and the society at large. This creates positive externalities and enhances technological progress. Romer (1986) asserts that policies that enhance public and private investment in human capital can promote long-term economic growth which will attract increased FDI inflow.

The results in Table 2 also show a positive relationship between Savings and FDI. The estimated coefficient for this relationship as indicated in Table 2 is 0.021015. This result shows that there is a positive relationship between savings and FDI inflow. The result further reveals that a 100 percent increase in savings will lead to a 0.02 percent increase in FDI inflow. However, the t-Statistic value of 0.025822 is not statistically significant. This implies that savings has a positive, but not significant, effect on FDI inflow for the period under review. This study supports economic theory which states that the growth rate of national income will be directly or positively related to the savings ratio and inversely or negatively related to the economy’s capital-output ratio. The fundamental strategy is simply to increase national savings and investment which will, in turn, induce FDI inflow.

Finally, an important variable estimated in this model is Political Stability proxied by dummy D1. The impact of political stability on FDI was captured by the dummy (D1). The years of civilian administration was assigned one (1) indicating political stability and zero otherwise. The estimated coefficient for this variable was negative and statistically significant. The t-Statistic value of -2.309643 shows that political stability negatively and significantly influenced FDI inflow during the period under review. This is evidenced by the personal security problems throughout the Niger Delta oil-producing region, strains in US-Nigeria relations over human rights abuses, the failed transition to democracy, the threat of crime and lack of cooperation from the Nigerian government (www.wikipedia.org; 2007).

Though political stability exhibits an inverse relationship, its contribution to FDI inflow in Nigeria during the period under review is statistically significant at 1 percent level of probability. The political stability of the nation greatly enhances the inflow of FDI. This is evidenced by the rate at which foreign investors penetrate the market in Nigeria during the civilian administration.

Conclusion

FDI plays a crucial role in inducing the inflow of capital, technical know-how and managerial capacity which can stimulate domestic investment necessary for market penetration. It is also evident that FDI has the potential to significantly impact upon the economy. However, this requires a domestic economy that is sufficiently competitive, enhanced human capital ready to take advantage of foreign technologies and promote long-term economic growth, a sufficient tax and revenue base and an increased national savings and investment. A viable business environment and investment climate are also crucial for FDI to penetrate the market in Nigeria.

The study found that Nigeria could hardly generate capital internally for investment purposes due to the fragile and under utilized tax base in the country. Also, the stock of human capital in Nigeria had not sufficiently grown to take advantage of foreign technologies necessary for economic growth. The paper also found that as the national savings and investment increase, there will be increase in economic growth which will stimulate FDI inflow. Finally, the relative political stability enjoyed by the new civilian administration enhanced the entry of GSM service providers, foreign firms and their products into the market in Nigeria during the study period.

Consequently, the paper recommends the creation of a viable business environment which will make the economy healthy, competitive and attractive for penetration, ensuring and maintaining macro-economic stability, reducing political risk by establishing stable and credible governments that would encourage foreign investment, increased investment in human capital and public infrastructure; and strengthening the financial sector with adequate regulations and procedures that attract the inflow of foreign investments.

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