IMPACT OF FOREIGN DIRECT INVESTMENT ON EMPLOYMENT GENERATION

IMPACT OF FOREIGN DIRECT INVESTMENT ON EMPLOYMENT GENERATION

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CHAPTER ONE

INTRODUCTION

1.1              BACKGROUND OF THE STUDY

In general, FDI can be described as a flow of capital, technology and know- how from one (home) country to another (host) country. Investopedia defines FDI as an investment made by a company or entity based in one country, into a company or entity based in another company. Foreign direct investment is net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum equity capital, reinvestment of earnings, other long term capital, and short term capital, as shown in the balance of payments (IMF, 2007). A recent and specific example is the perceived role of FDI in efforts to stimulate economic growth in many of the world's poorest countries. Partly this is because of the expected continued decline in the role of development assistance, on which these countries have traditionally relied heavily, and the resulting search for alternative sources of foreign capital. More importantly, FDI can be a source not just of badly needed capital, but also of new technology and intangibles such as organizational and managerial skills, and marketing networks. FDI can also provide a stimulus to competition, innovation, savings and capital formation, and through these effects, to job creation and economic growth.

Foreign direct investment flows might be associated with economic success and they do not exert an independent effect on growth (Carkovic and Levine, 2002). Foreign direct investment promotes growth in countries with sufficiently developed financial systems, a greater degree of trade openness, and an adequate level of human resources development (Balasubramanyaam, 1999). Indeed foreign direct investment has a great potential to increase the rate of technical progress in the recipient country through knowledge diffusion. This can improve efficiency and productivity in local firms that can copy new technology or learn how to use existing technology and resources more efficiently in order to compete in global markets (Lim, 2001).

However, it is also possible for FDI to have very little (or even negative) effects on employment. It may displace local investment, so that the net effect on jobs is lower than the number directly


employed by foreign affiliates. Where FDI involves the acquisition of local firms rather than new plants, there is no initial increase in employment and if the foreign owner subsequently rationalizes the firm, employment is even likely to decrease (Jenkins, 2006). Moreover, there may be few local linkages if most inputs used by the foreign affiliates are imported and these constitute an enclave within the local economy. Jobs that are created may be for labour that is relatively skilled rather than for the unskilled who are in excess supply. If investment is footloose and can easily move to alternative locations, then the jobs that are created are likely to be highly unstable (Jenkins, 2006).

Host countries often try to channel FDI investment into new infrastructure and other projects to boost development. Greater competition from new companies can lead to productivity gains and greater efficiency in the host country and it has been suggested that the application of a foreign entity’s policies to a domestic subsidiary may improve corporate governance standards. Furthermore, foreign investment can result in the transfer of skills through training and job creation, the availability of more advanced technology for the domestic market and access to research and development resources. The local population may be able to benefit from the employment opportunities created by new businesses.

According to Pinn, Ching, Kogid, Mulok, Mansor and Loganathan (2011), the effect of FDI on employment can be viewed in three scenarios. He said FDI inflow can increase employment directly through the creation of new business or directly by stimulating employment in distribution stage of production, FDI can maintain employment by acquiring and restructuring the existing firm and finally that FDI can reduce employment through disinvestment and the closure of domestic firms because of intense competitions. Li-wei and He (2006) studied the impact of foreign direct investment on the employment in China and found out that FDI inflow promoted employment in both foreign investment enterprises and the country as a whole in the long-run. Some Caribbean countries, for example Bermuda, the Cayman Islands and Trinidad and Tobago, have been more successful in attracting FDI over the past three decades, largely because these countries have either vibrant international business and financial services industries or abundant natural resources, particularly oil and other petroleum products (Craigwell, 2006). Similarly, studies done in Mexico, Fiji, Tanzania and even in Ghana found that increased FDI flows led to high levels of employment in the country.


For many developing countries, FDI is seen to complement scarce domestic financial resources and so attracting FDI has been a key aspect of their outward oriented development strategy, as investment is considered a crucial element for output growth and employment generation. It is also expected to help modernize production by transferring know-how and technology, while increasing domestic productivity and competition and improving international competitiveness. FDI should also facilitate integration into the world market, domestic participation in globalized production patterns, and the creation of forward and backward linkages with the domestic economy. In so doing, it will have a multiplier effect on the whole economy and could thus be a key element in spurring growth. With the foregoing, most third world countries made policies to attract FDI with the belief that it would bring the required tools for development. These among other benefits have been some reasons for developing countries like Nigeria to seek funds.

Nigeria is one of the economies with great demand for goods and services and has attracted some FDI over the years. Africa and Nigeria in particular joined the rest of the world to seek FDI as evidenced by the formation of New Partnership for Africa’s Development (NEPAD), which has the attraction of foreign investment to Africa as a major component. The Nigerian governments in recognizing the relevance of FDI have been pursuing various strategies involving the incentive policies and regulatory measures geared essentially towards the promotion of inflow of FDI to the country (Onu, 2012).In 1995, Nigerian Investment Promotion commission (NIPC) which was established, a successor to the Industrial Coordination Committee (IDCC) which was established to encourage foreign investors so as to boost FDI inflows into the country (UNCTAD, 2009). The Nigerian Investment Promotion Commission Act laid out the framework for Nigeria’s investment policy. Under the Act, 100% foreign ownership is allowed in all industries except for oil and gas, where investment is constrained to existing joint ventures or new production-sharing agreements. Investment from both Nigerian and foreign investors is prohibited in a few industries crucial to national security: the production of arms and ammunition, and military uniforms. Also, the National Economic Empowerment and Development Strategy (NEEDS) adopted in 2004, made FDI attraction an explicit goal for the government amongst others (UNCTAD, 2009).


Nigeria’s vast oil and gas resources have proven a magnet for foreign investors, especially in times of rising oil prices. Given the prominence of the oil industry in Nigeria, the main source countries for FDI inflows are those that are host countries of the major oil multinational companies (MNCs). The United States of America, present in Nigeria’s oil sector through Chevron Texaco and Exxon Mobil, had investment stock of USD3.4 billion in Nigeria in 2008, the latest figures available. The United Kingdom (UK), one of the host countries of Shell, is another key FDI partner. UK FDI into Nigeria accounts for about 20% of Nigeria’s total foreign investment. As China seeks to expand its trade relationships with Africa, it too is becoming one of Nigeria’s most important sources of FDI; Nigeria is China’s second largest trading partner in Africa, next to South Africa. From USD3 billion in 2003, China’s direct investment in Nigeria is reported to be now worth around USD6 billion. The oil and gas sector receives 75% of China’s FDI in Nigeria. Other significant sources of FDI include Italy, Brazil, the Netherlands, France and South Africa. Fortunately, captivated by high rates of return, investors from all over the world have now set their sights on Nigeria. As Africa's most populous country, Nigeria also boasts of the continent's second largest oil reserves. Nigeria is becoming a rather worthy recipient of foreign capital (World Bank 2012).

The  goal  of  achieving  full  employment  among  other  macroeconomic  goals  is  an  important one in many developing nations where unemployment and underemployment  has been a major cause and consequence of widespread poverty (Shodipe and Ogunrinola, 2011). However in many poor nations of the world, Nigeria included, in spite of the very high-sounding electioneering promises of political leaders, the achievement of impressive growth and decent employment remains a mirage. The history of unemployment can be traced back to the 1980s. According to the Central Bank of Nigeria (2003), the national unemployment rate rose from 4.3 percent in 1970 to 6.4 percent in 1980. The high rate of unemployment observed in 1980 was attributed largely to depression  in  the  Nigerian  economy  during  the  late  19670s. Specifically, the economic downturn led to the implementation of stabilization measures which included restriction on exports, which caused import dependency of most Nigerian manufacturing enterprises, which in turn resulted in operation of many companies below their installed capacity. This development led to the close down of many industries, while the survived few were forced to retrench a large proportion of their workforce; furthermore, the Nigerian government also placed an embargo on employment.


Specifically, total disengagement from the Federal Civil Service rose from 2,724 in 1980 to 6,294 in 1984. Owing to this, the national unemployment rate fluctuated around 6.0% until 1987 when it rose to 7.1%. It is important to state here, that the structural adjustment programmed (SAP) adopted in 1986, had serious implications on employment in Nigeria because though unemployment rate declined from 7.1% in 1987, to as low as 1.8% in 1995, it rose to 3.4% in 1996, and hovered between 3.4 and 4.7 % between 1996 and 2000.

The problem in Nigeria might best be interpreted as underemployment in contrast to unemployment proper. Many Nigerians work in the informal sector doing various low paying tasks that do not add up to regular employment, and work performed often corresponds poorly to qualifications. A large number of working age Nigerians are categorized as being out of the labor force. As reported by the, 44.6% of the working age population in Nigeria was categorized in 2011 as being either unemployed or out of the work force. Preliminary indications are that this upward trend continued in 2012.

1.2  STATEMENT OF THE PROBLEM

The issue of employment is very germane to any economy; this is why one of the main macroeconomic objectives of any country is to attain full employment. In other words, the goal of increasing the level of employment among other macroeconomic objectives is an important one in many developing nations where unemployment and underutilization of resources has led to rising rate of poverty. To increase the level of employment, some scholars have argued that the flow of goods and services (trade flows) could propel employment generation, especially in developing countries (Kareem, 2010). However, employment creation still poses a major challenge to the Nigerian government. World Bank (2013) reports that job creation in Nigeria has been inadequate to keep pace with the expanding working populace. As published by NBS (2010) in the Labour Force sample survey, among the youths in the 15-24 age brackets, the rate of unemployment was observed to be over 40%.


Figure 1.1: Employment to population ratio, total (%) in Nigeria, 1991- 2010


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