Academic journal article Journal of Management Research

Impact of Foreign Direct Investment on Power Sector of Nigeria: 2000-2011

Academic journal article Journal of Management Research

Impact of Foreign Direct Investment on Power Sector of Nigeria: 2000-2011

Article excerpt

Abstract

Foreign direct investment is increasing in importance in the global economy due to the additional resources they pooled for development in the host country. The objective of this study is to ascertain the impact of foreign direct investment (FDI) on power sector in Nigeria using co-integration test, error correction model and time series data as research design. The result indicated that, most of the variables used were significantly related to the power sector output of the country. From the analysis of our study it was found that Foreign Direct Investment as macro-economic variables as well as openness to trade; infrastructural development; inflationary rate had a significant influence on power sector output in Nigeria. The result has an important implication in terms of policies that will attract foreign direct investment to the power sector of the country. We therefore recommend that, having seen that there is long-run relationship between foreign direct investment (FDI) inflow and power sector output in Nigeria and FDI in Nigeria induces the nation's power sector growth. There is need to encourage FDI in Nigerian power sector and since FDI has the highest potential for contributing growth, it needs to be properly channeled and integrated into the mainstream of the nation's power sector.

Keywords: Power Sector, FDI, FDI inward, FDI outward, Net FDI, Openness to trade

1. Introduction

Foreign direct investment is increasing in importance in the global economy due to the additional resources they pooled for development in the host country. They have also attracted great controversy concerning their positive or negative contributions to economic development of the host country. In recent years, foreign direct investment (FDI) has attracted renewed interest both in the underdeveloped and developed countries. Foreign direct investment (FDI) plays a major role in global business. FDI can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the foreign firm which receives the investment, it can provide a source of new technologies, capital, processes, products, organizational technologies and management skills, and as such can provide a strong impetus to economic growth (Raul, 2012).

The most widely accepted definition of FDI is known as "the IMF/OECD (2011) benchmark definition" which states that foreign direct investment (FDI) is an international venture in which an investor residing in the home economy acquires a long-term "influence" in the management of an affiliate firm in the host economy. This definition is accepted because it was provided by a joint workforce of these two international organizations with the objective of providing standards to national statistical offices for compiling FDI statistics. Based on the definition, the existence of such long-term influence should be assumed when voting shares or rights controlled by the multinational firm amount to at least 10 percent of total voting shares of rights of the foreign firm. Aggregate FDI flows are the sum of equity capital, reinvested earnings, and other direct investment capital; hence, aggregate FDI flows and stocks include all financial transfers aimed at financing of new investments, plus retained earnings of affiliates, internal loans, and financing of cross-border mergers and acquisitions. FDI flows can be observed from the perspective of the host economy, which records them as inward FDI along with other liabilities in the balance of payments, or from the perspective of the home economy, which records them as outward FDI, a category of assets. FDI may take many forms, such as a direct acquisition of a foreign firm, construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant input of technology, licensing of intellectual property.

In Nigeria and other countries in Sub-Saharan Africa, the provision of low-cost, affordable and regular electricity supply is critical to employment generation, poverty alleviation and industrial development especially in small scale industry. …

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