Foreign Direct Investment and the Manufacturing Sector in Nigeria

Foreign Direct Investment and the Manufacturing Sector in Nigeria.

ABSTRACT

The importance of the manufacturing sector in the economic growth cannot be overemphasized. This has led to interests in the determinants of its performance over the years.

This study therefore, investigated the impact of foreign direct investment (FDI) on the performance of the manufacturing sector in Nigeria as well as the causal relationship between foreign direct investment and manufacturing capacity utilisation (MCU) from 1970-2012 under the framework of VAR.

The result of co-integration revealed that there is no long-run relationship among the variables. In addition to this, findings show that FDI is significant at 5% and positively related to MCU. On the other hand, other variables are not significant and both EXR and INT exhibit wrong apriori signs.

For causal relationship, the results show that there is a unidirectional causality running from MCU to DOP. There is also a unidirectional causality running from MCU to EXR. Also, causality flows from EXR to DOP without a feedback. It runs from INT to DOP as well as from INT to EXR, while it flows from FDI to MCU and from FDI to DOP.

The results of the variance decomposition and that of the impulse response function further reveal the link between FDI and MCU.

On grounds of these results, we recommend that policies that seek to achieve a realistic exchange rate of the country’s currency should be put in place.

INTRODUCTION

Economists are quick to support the free flow of capital across national borders because it allows capital to seek out the highest rate of return since international ventures seek higher profit as per the capital arbitrage theory propounded by Samuelson (1948).

Nigeria is believed to be a high-risk market for investment although blessed with abundance human resources. The co-existence of vast wealth in natural resources and pervasive poverty referred to as the “resource curse” or ‘Dutch disease’ (Auty, 1993) appears to bedevil the country.

In 2011 the country ranked 170 out of 213 countries with respect to the Gross National Income Per Capita; the country had US$1,200 (World Bank, 2011).

Many analysts and experts have suggested the use of foreign direct investment (FDI) as a variable injection to kick- start the Nigerian economy.

This is because; FDI is not only the transfer of ownership from domestic to foreign companies, but also a device for improved corporate governance and attendant transparency in business practice.

International investment also provides opportunities for global transfer of technology and human capacity development, in addition to the promotion of competition in the domestic input market.

Despite the contributions to corporate tax revenues to the host country from profits generated from FDI, the highly capital intensive technology engendered can exacerbate the unemployment situations in labour surplus host countries.

In addition, the creation of monopolies in areas where the entry barriers have been raised in some cases may crowd out domestic operators.

The importance of FDI in the growth dynamics of countries has created much interest amongst scholars and lots of researches have been focused on the impact of FDI on the economy.

REFERENCES

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