Academic journal article International Review of Management and Business Research

Determinants of Foreign Direct Investment in Nigeria

Academic journal article International Review of Management and Business Research

Determinants of Foreign Direct Investment in Nigeria

Article excerpt

Introduction

Advancement in technology and communication has made the world to become more globalized, witnessing an increasing growth in international economic transactions. Arising from this, foreign direct investment (FDI) has gained importance as the avenue for international resource flows, especially from the developed to the developing nations. Gorg and Greenaway (2004), found evidence that FDI can affect development by complimenting domestic investment and facilitating international trade, transfer of skills and technology.

Recognised as an engine of growth, FDI provides investment capital, boost competition and aids local firms in adapting more efficient technology and management styles in their operation. FDI also serves as a source of infrastructure, employment generation, resource utilization and access to the international markets as well as managerial and technological transfers. Given the expected role of FDI in enhancing socio - economic transformation, countries are generally interested in attracting it. Most countries are therefore taking steps to improve their scores on the principal factors influencing the location of choices of foreign direct investors. Emerging and developing economies have thus realised the potency of FDI as the panacea for stimulating aggregate demand and are positioning themselves as preferred investment destinations (World Bank, 2003).

In recognition of the role of FDI in economic transformation, researchers and policy makers are interested in those factors that can swing FDI one way or the other. They also want to know its effect on the domestic economy, by asking if FDI actually leads to development in all cases and at all times.

In doing this, some scholars have isolated a two-way casual relationship between economic development and FDI. For them, though they recognise the empirical evidence which suggest that FDI impact positively on economic growth, they see economic growth itself as a determinant of FDI. The question therefore is; will developing countries grow as a result of FDI or should they grow first and by this attract FDI?

Theoretically, the literature on FDI identifies and classifies the motives that encourage companies to invest overseas into four (UNCTAD, 2008). These are:

1) Market-seeking motives, which highlight access to markets that are attractive because of their present size and the identified potential for expansion.

2) Efficiency-seeking motives aimed at taking advantage of cost-efficient methods of production. This is approximated by the cost and productivity of capital, labour, infrastructure and the administrative cost of doing business.

3) Natural resource-seeking motive which seeks to tap into the natural resources endowments in the locations being considered as against others.

4) Strategic asset-seeking motive oriented towards man-made assets, as embodied in the quality of the work force, the brand names, and market shares.

These motives are however never considered alone, as they usually combine to determine FDI location, based on expected profitability (Ajayi 2006).

With annual growth rate of 5.3% and a population of 167 million as at 2012, which is 25% of Africa, the Nigerian economy was the 2nd largest in Sub-Sahara Africa. The population is young, with 40% below 15 years and the urban population representing 48.2% (CBN Statistical Bulletin, 2012). Nigeria is immensely blessed with natural resources, such as vast agricultural land suitable for cultivation of crops, an estimated 124 trillion cubic feet of proven natural gas reserves, huge deposit of crude oil and gas, and large expanse of solid mineral deposits that have hardly been exploited.

Despite this, economic growth and development has been modest when compared to countries with similar economic history. Corruption, mismanagement and inefficiencies had resulted to the country having a GDP of about US$212b, and an annual growth rate of 5. …

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