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FOREIGN DIRECT INVESTMENT AND CAPITAL FORMATION IN NIGERIA
Dr. A.B.C. Akujuobi
However, despite the foregoing, there is still no conclusive evidence as to whether FDI favours host countries; and therefore justify the on-going policy interventions by countries towards attracting more multinational corporations. For instance, Hanson (2001), has argued that for small open economies, efficient taxation of foreign and domestic capital depends on their relative mobility. Essentially, both deserve equal treatment especially in such a situation where foreign and domestic capital are equally mobile internationally. On the other hand, it will be optimal for a country to lower taxes on foreign capital when foreign capital is more mobile internationally.
Other factors that seem to fuel policy interventions in favour of FDI over portfolio investment or multinationals over domestic firms include the presence of market failure in the host country, host-country characteristics as well as location-specific externalities etc.
On this premise therefore, the present study is to determine the impact of foreign direct investment on the level of capital formation in Nigeria. While the Central objective is to evaluate empirically, the contribution of foreign direct investment to capital formation in Nigeria, the specific objectives include: first, to ascertain the nature of relationship between foreign direct investment and the level of capital formation in Nigeria; second, to determine the extent foreign direct investment has influenced the level of capital formation in Nigeria; third, to isolate policy constraints to foreign direct investment inflow to the Nigerian economy and finally, to proffer some policy recommendations on how to effectively harness the positive sides of foreign direct investment so as to achieve the desired level of capital formation that will in turn usher in economic development.
Foreign Direct Investment, Capital Formation and Economic Development
Studies concerning the relationship between foreign direct investment and economic development abound. These include such studies as (Firebaugh, 1992; Chunlai, 1997; Kumar, 1998; OECD, 1998; Nunnenkamp, 2002; UNCTAD, 2003).
Besides, there are other schools of thought: one which examines the determinants of where multinationals locate production facilities and another which examines sources of market failure related to FDI. Past studies conducted by Dunning (1981, 1993), suggest that multinationals respond to three distinct advantages, viz-a-viz; the ownership advantage (a firm must own or control a unique mobile asset if it wishes to exploit); the location advantage (it must be cost efficient to exploit the asset abroad in addition, or instead of in, the firm’s home country); and the internationalization advantage (it must be in the firm’s interest to control the asset’s exploitation itself, rather than contracting out use of the asset to an independent foreign firm).
However, with the existence of externalities, promoting FDI may be welfare-enhancing. Accordingly, Clare (1996) noted that the arrival of multinationals increases an economy’s access to specialized intermediate inputs that can only be accessed through multinationals, being produced abroad. With these intermediate inputs labour and other factors in the host economy become more productive. Similarly, Markusen and Venables (1999b) and Gao (1999) in different studies, have developed models that support the assertion that the creation of multinationals seems to spread industry from more to less industrialized countries and so tend to reduce the concentration of industries in the former. This has the tendency to lessen the industrial agglomeration in the developed economies albeit, with a possibility to reduce their welfare level. But, through the multinationals, the overall welfare of the host countries stands to be improved.
However, one of the obvious shortcomings of creating multinationals is that they have a tendency to breed competition for the local firms, leading to income redistribution with negative consequences for some groups in the host economy (Matouschek, 1999). According to Glass and Saggi, (1999), FDI may lower host-country welfare in a situation where multinationals activities result in sufficient lower profitability for domestic firms.
The results of these schools of thought seem to have been laid to rest by the report of the Organization for Economic Co-operation and Development, OECD (2002a, 2002b) when it concluded thus;
Research Design and Methodology
Mathematically, we have;
CAPFOMt = β0 + β1MIQt, + β2MAPt, + β3AFFt, + β4TACt, + β5BACt, +
β6TABSt, + β7MISCSt + ųt ………. (ii)
Data Analysis and Results
In terms of the level correlation, there is at least 97% level of correlation (R) between all the variables taken together and the dependent variable, capital formation. Similarly, table 2 equally shows that the variations in the explanatory variables have been able to explain at least 95% of the total variation in capital formation (R2). While the highest relationship is exhibited between capital formation and foreign direct investment from transport and communication (about 96%) the least is between capital formation and FDI from Agriculture forestry and fisheries sector, about 46% (see table 3).
From equation (iii), it is obvious that while foreign direct investment from the Manufacturing and Processing (MAPt), Building and Construction (BACt) and Miscellaneous Sectors (MISCSt) bear an inverse relationship with capital formation, and therefore, contribute negatively to capital formation, others contribute positively to the level of capital formation. The positive contributors by their coefficients are foreign direct investment from the Mining and Quarrying Sector, (MIQt), Agriculture, Forestry and Fisheries (AFFt), Transport and Communication Sector (TACt) as well as the Trading and Business Services Sector (TABSt). However, in terms of the order of importance the display according to the coefficients, is thus;
TACt > TABSt > MIQt > MAPt > MISCSt > BACt > AFFt
Obviously, Transport and Communication sector exerts the greatest influence while the least contribution is from the Agriculture, Forestry and Fisheries. Other are trading and Business Services, Mining and Quarrying, Manufacturing and Processing, Miscellaneous and Building and Construction Sectors in that order.
Ho1: There is no significant relationship between foreign direct investment and capital formation in Nigeria.
From table 2, since F-ratio calculated (37.567) is greater than the theortical F-ratio (4:44 or 2.83), d.f; (7, 13), we reject Ho and therefore, accept Ha, to conclude that a significant relationship exists between foreign direct investment and the level of capital formation in Nigeria.
Ho2: FDI from Mining and Quarrying has not made significant positive impact on capital formation.
Ho3: FDI from the Manufacturing and Processing has not made a significant positive impact on capital formation.
Ho4: FDI from Agriculture, forestry and Fisheries has not made significant positive impact on the capital formation.
Ho5: FDI from Transport and Communication has not made significant positive impact on capital formation.
Ho6: FDI from Building and Construction has not made significant positive impact on capital formation.
Ho7: FDI from Trading and Business Services has not made significant positive impact on capital formation.
Ho8: FDI from Miscellaneous Sector has not made significant positive impact on capital formation.
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Table 1: Cumulative Foreign Investment in Nigeria and Corresponding Figures for Volume of New Issues
Source: CBN Bulletin, 2004 Federal Office of Statistics
Table 2: Result Summary
Source: Result of Computer Analysis of Table 1 Data using SPSS 13.0
Source: Result of Computer Analysis of Table 1 Data using SPSS 13.0
Mining and Quarrying - MIQt
Miscellaneous Services - MISCSt
Total Capital Formation (New issues) - CAPFOMt