• The Complete Research Material is averagely 47 pages long and it is in Ms Word Format, it has 1-5 Chapters.
  • Major Attributes are Abstract, All Chapters, Figures, Appendix, References.
  • Study Level: BTech, BSc, BEng, BA, HND, ND or NCE.
  • Full Access Fee: ₦4,000

Get the complete project » Instant Download Active

Chapter One


1.1.    Background of the study

Foreign Direct Investment (FDI) has persistently grown from strength to strength in the world’s inter-border trade. As such, FDI has become the most important source of development finance. Of all the three major foreign private flows (FDI, Portfolio, and Equity), FDI has been tipped as the most important in economic growth and development, attracting the concerns of many scholars. Foreign Direct Investment as put forward by Artige and Nicolini (2005), is the capital transaction that a “direct investor” carries out in a foreign “direct investment enterprise” (affiliate) to obtain a lasting interest in this foreign firm and a significant degree of influence on its management. Foreign Direct Investment (FDI) according to World Bank (1996) is an investment made to acquire a 10% lasting management interest in a business enterprise


operating in a country other than that of the investor and as defined according to residency. Such investments may take the form of either “Greenfield” investment or Merger and Acquisition (M&A), which entails the acquiring of existing business entity rather than new investment (Ayanwale, 2007). The threshold of 10% or more ownership of a firm’s capital is in general, required to be accounted for as a direct investment.

Development economists therefore, have over the decades developed theories, as well as emphasized the importance of FDI in breaking the vicious circle of poverty. Though most of the theories do not have direct bearing on macro-economic volatility, their aggregate transmission effects certainly have some explanation for the behaviour of macroeconomic variables. As contained in the work of Fan (2005), the classical Recardian theory finds that world production becomes more efficient if factors move from countries with low productivity and that trade is just a poor substitute for factor migration. Heeksher-Ohlin-Samuelson model argues that trade and FDI should be stimulated by cross-country differences in factor endowments. To this end, if commodity trade and factor movements are substitutes, then trade and FDI are negatively correlated. In a recent study however, Desai, et al (2001) opine that higher levels of capital expenditures by a firm’s foreign affiliates are associated with greater level of domestic investment; suggesting that foreign and domestic investments are complements rather that substitutes to such a degree that substitutes for output produced by horizontal investments have been made complementarily between foreign investment and domestic investment. This may emerge as foreign operations make use of functions performed by headquarters. The increase in global FDI flows is a result of firms deciding to invest in foreign markets rather than export to those markets (Mapetta, 2002). Close examination shows that there are more to it as


certain pull factors have been widely established to direct the flow of FDI which include market size, transport costs, production factor cost, agglomeration effects, fiscal incentives, business/business climate, and trade barriers (Artige and Nicolini, 2005, Krugell and Naude, 2002). Investors are often interested in the performance of specific sectors and characteristics of the economy they wish to invest in. They are in many instances interested in historical trend and likely impact of changes in specific macro-economic trends on competitiveness and expected profitability of investing in the sectors (Alaba, 2003). Hanson, et al (2003) in Juijarak (2007) conclude: “for developing countries, consumer potentials, abundant natural resources and labour cost advantages, are all attractive for FDI.

The impact of FDI on host economies is complex as foreign investors interact with bodies; thus influencing many individual firms and institutions. It is therefore important to state that it has remained unclear about the distributional properties of macro-economic fluctuations on FDI, and vice versa. In response, there are views and counter views on the relationship between economic fluctuations and FDI. One argument is that the unprecedented globalization of the security markets in 1990s resulted in high volatility of capital flows including FDI (Calvo and Mendoza, 2000, in Alfaro et al (2006). At the same time, the emerging economies have witnessed large and persistent fluctuations of aggregate economic activities. Desai et al (2005) note that FDI could be of negative consequence to macroeconomic environment when they wrote “the concerns of capital exporting countries while diffuse, often are based on concepts of outbound FDI as diverting economic activity”. They add that capital importing countries fear foreign control of domestic assets and the possible macroeconomic instability associated with rapid changes in foreign investment. The common intuition that outbound FDI reduces


domestic investment is a special case of a broader set of possible effects of FDI on domestic economic activity. For developing countries which are characterized by larger macro-economic fluctuations and more frequent policy regime switches, Jinjarak (2005) is of the view that stylized facts of macro-economic risks is a driving force of vertical versus horizontal FDI, and that FDI activity corroborates the institutional analyses to international trade.

1.2.      Problem Statement

One of the most salient features of today’s globalization drive is conscious encouragement of cross-border investments, especially by transnational corporations (TNCs) and firms (Hill, 2009). Many countries and continents (especially developing) now see attracting FDI as an important element in their strategy for economic development. This is most probably because FDI is seen as a source of capital, advanced technology, marketing and management skills.

Most countries strive to attract foreign direct investment (FDI) because of its acknowledged advantages as a tool of economic development. The growth and development of Africa and indeed Nigeria’s economy depends largely on foreign direct investment (FDI), which has been described as the major carrier for transfer of new scientific knowledge and related technological innovations. The need to step up Nigeria’s industrialization process and growth, calls for more technology spill-over through foreign investment. As a result, African countries – and Nigeria in particular – joined the rest of the world in seeking FDI as evidenced by the formation of the New Partnership for Africa’s Development (NEPAD), which has the attraction of foreign investment to Africa as a major goal.


However, these countries have been marginalized in terms of investment inflow. As a result many studies have tried to investigate determinants of foreign investment inflow especially in Nigeria and most of these studies have tried to establish a link between FDI and economic growth as well (Oseghale and Amonkhienan, 1987; Odozi, 1995; Oyinlola, 1995; Adelegan, 2000; Akinlo, 2004). However, these studies have not adequately addressed how macroeconomic volatility influence FDI inflows. Also, previous studies on FDI and growth in sub-Saharan Africa are multi country studies. However, recent evidence affirms that the relationship between FDI and growth may be country and period specific. Asiedu (2001) submits that the determinants of FDI in one region may not be the same for other regions. In the same vein, the determinants of FDI in countries within a region may be different from one another and from one period to another.

Macroeconomic volatility is constant fluctuations in the key macroeconomic variables such as exchange rate, GDP, interest rate such that their behavior becomes uncertain or unpredictable. Foreign investors according to Mankiw (2003) are worried about macroeconomic volatility (exchange rate risk and interest rate risk) and political instability. Incidentally, Nigerian macroeconomic environment has been described as one of the most volatile among emerging markets (Baltini, 2004, Okonjo-Iweala, 2005). For example, Baltini (2004) has shown “that average inflation is higher and average output growth lower in emerging market economies relative to developed economies. Among emerging market economies, Nigeria exhibits the highest inflation and exchange rate variability, the lowest output volatility, and an interest rate volatility that is slightly smaller than that of South Africa and much smaller than that of Brazil, but slightly larger than that of Chile. Nigeria’s average inflation over the period 1997-2006, for


instance, is the fourth highest in the emerging market economies group, following Colombia, Mexico and Hungary.

Various efforts have been made to explain macroeconomic instability1 in Nigeria especially with respect to the impact of external shocks such as oil price changes (Olomola and Adejumo, 2006; Ayadi, 2005; Adedipe, 2004; among others), terms of trade shocks, exchange rate changes (Busari and Olayiwola, 1999), capital flows, and changes in balance of payments as well as the effects of monetary and fiscal policy (Folawewo and Osinubi, 2006) but few studies have linked macroeconomic instability to FDI in Nigeria . As pointed out earlier FDI is important for the growth and development of African economies. Undoubtedly Africa and indeed Nigeria is facing an economic crisis situation featured by inadequate resources for long-term development, high poverty level, low capacity utilization, high level of unemployment, and other Millennium Development Goals (MDGs) increasingly becoming difficult to achieve by 2020. Promoting and facilitating technology transfer through foreign direct investment (FDI) has assumed a prominent place in the strategies of economic revival and growth being advocated by policy makers at the national, regional and international levels because it is considered to be the key to bridging the technology and resource gap of underdeveloped countries and avoiding further buildup of debt (UNCTAD, 2005).


1   An understanding of macroeconomic stability requires a clear understanding of macroeconomic instability and how to measure it empirically. Conceptually, macroeconomic instability refers to phenomena that make the domestic macroeconomic environment less predictable, and it is of concern because unpredictability hampers resource allocation decisions, investment, and growth (Ramey, 1995; Hnatkovska and Loayza, 2004). It focuses on the behavior of macroeconomic outcome variables including real output growth, inflation rate, exchange rate, and current account balance.


This study makes departure from existing studies by investigating how macroeconomic volatility (exchange rate, interest rate and output volatility) affects FDI in Nigeria. Existing empirical studies have focused more on the effect of exchange rate volatility on FDI. Our study therefore adds value to existing literature in Nigeria by going beyond exchange rate volatility to include the volatility of the other macroeconomic variables. In this way we may be able ascertain the extent to which the volatility of each variable affects FDI and this would have important policy implications as most policies have been centered on stabilizing exchange rate. We specifically address the following research questions:

1.      How does macroeconomic volatility affect aggregate nonoil FDI inflow in Nigeria?

2.      Does the origin of FDI affect how it responds to macroeconomic volatility?

1.3.    Research Objectives

a.      To ascertain how the volatilities of exchange rate, inflation, interest rate and output affect FDI inflow to Nigeria.

b.      To determine whether the origin of FDI affects how it responds to FDI

You either get what you want or your money back. T&C Apply

You can find more project topics easily, just search

Quick Project Topic Search