THE EFFECTS OF FOREIGN DIRECT INVESTMENT ON ECONOMIC DEVELOPMENT IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND OF THE STUDY
    Foreign direct investment (FDI) is a direct investment into production or business in a country by a company in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds. It comes in different forms and shades, and in the broad sense, it entails mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans, while in the narrow sense, it refers to just building new facilities (Markusen,1995)
    Adeolu (2007) posited that one of the most salient features of today’s globalization drive is the conscious encouragement of cross-border investments, especially by transnational corporations and firms (TNCs). Many countries and continents (especially developing) now seeattracting FDI as an important element in their strategy for economic development. Thisis most probably because FDI is seen as an amalgamation of capital, technology,marketing and management.
    Unfortunately, the efforts of most countries in Africa to attract FDI have been futile.This is in spite of the perceived and obvious need for FDI in the continent. Thedevelopment is disturbing, sending very little hope of economic development and growthfor these countries. Further, the pattern of the FDI that does exist is often skewed towardsextractive industries, meaning that the differential rate of FDI inflow into sub-SaharanAfrican countries has been adduced to be due to natural resources, although the size ofthe local market may also be a consideration (Morriset 2000; Asiedu, 2001).This view was not quite different from that of Andreas(2005), thatDespite the straightforwardness of the argument, empirical evidence on a positive relationshipbetween FDI inflows and host country economic growth has been elusive. When arelationship between FDI and economic growth is established empirically it tends to beconditional on host country characteristics such as the level of human capital (de Mello, 1999 and Borensztein, et al1998).
    Hence, this difficulty in proving a positive effect fromFDI on economic growth provides a strong incentive for further empirical studies.
1. 2    STATEMENT OF THE RESEARCH PROBLEM
    The relationship between Foreign Direct Investment (FDI) and economic growth has motivated a lot of empirical literature focusing on both industrial and developing countries. Neoclassical models of growth as well as endogenous growth models provide the basis for most of the empirical work on the FDI-growth relationship. The relationship has been studied through four main channels: (i) by looking at the determinants of growth, (ii) by exploring the determinants of FDI, (iii) by examining the role of multinational firms in host countries and (iv) by studying the direction of causality between the two variables, which are (FDI and Economic Growth). Several empirical works on the role of FDI in Nigeria seem to suggest that FDI is an important source of capital that complements domestic private investment, which is usually associated with new job opportunities, in most cases,  related to the enhancement of technology transfer and overall, boosts economic growth in Nigeria .
Macro-empirical work on the FDI-growth nexus as it relates to developing countries in Africa, also suggests that FDI has a positive impact on economic growth, but this however is a function of other crucial factors, such as the human capital base, the trade regime and the degree of openness in the economy (Chowdhury and Mavrotas, 2003). In the literature, Balasubramanyam et al. (1996 and 1999),  Borensztein et al. (1998), Niar-Reichert and Weinhold (2001),  Baliamoune (2002), Aitken and Harrison (1999) and Harrison (1994)  provided more comprehensive empirical assessment of the impact of FDI on economic  growth, while the importance of Information Communication Technology (ICT) has also been documented in the recent empirical work of Addison and Heshmati (2003).
          FDI is now becoming very crucial for Nigeria in view of the increasing need for additional foreign capital to achieve the MDGs and vision 20-20-20. Infact, the entire sub-Saharan African countries are not also left out, considering their small share of FDI inflows relative to other developing regions in the world (Asiedu, 2003). It is also notable that FDI has potentially desirable features that affect the quality of growth with significant implications for poverty reduction, which may also reduce adverse shocks to the poor arising from financial instability, and helps improve corporate governance. Furthermore, FDI generates revenues that may support the development of a safety net for the poor; whereas in developing countries, it clearly suggests that infrastructure, skills, macroeconomic stability and sound institutions are major keys for attracting FDI inflows (Klein et al., 2001).
    Now, in view of the wide range of conflicting empirical studies on how foreign direct   investment in developing countries affect the rate of aggregate growth, distribution of income, employment and some non-economic indicators like culture and political structures, one cannot draw conclusions from them with any minimal acceptable level of confidence. More also, given the continuing growth of foreign direct investment (FDI) in Nigeria, there is a growing interest in examining its impact on the rate of economic growth. The numerous literature on economic growth in Nigeria is composed of studies that concentrate on measuring the domestic variables that affect the Nigerian economic growth. However, the impact of foreign direct investment on the economic growth of Nigeria has not received the attention that it deserves. The purpose of this study is to examine the impact of FDI on economic growth in Nigeria over time, and to see if there is any time-series support for the FDI-led growth hypothesis in the Nigerian context.    More specifically therefore, the study seeks to provide answers to the following research questions;
(i)    What is the relationship between Foreign Direct Investment and economic development in Nigeria?
(ii)    Does human capital (proxied by school enrollment rates at     secondary         level) affect the development of the Nigerian economy?
(iii)    What is the impact of     trade openness (ratio of exports plus imports to         GDP) on economic development in Nigeria?
(iv)    Does Labour force participation rate affecteconomic developmentin        Nigeria?
1.3    OBJECTIVE OF THE STUDY    
    The broad objective of the study is to examine the relationship between   Foreign Direct Investment and economic development in Nigeria. While  the specific objectives are to determine:
(i)    The impact of human capitalon economic development in Nigeria.
(ii)    Whether trade openness has any effect on the Nigerian economy
(iii)    Whether Labour force participation rate has any significant impact on the development of the Nigerian economy.
1.4    HYPOTHESIS OF THE STUDY    
    The following Hypothesis will be tested in the course of this study.
(i)     Foreign Direct Investment has a relationship with economic development   in Nigeria.        
1.5    SIGNIFICANCE OF THE STUDY
    The study will be of immense benefit to investors and potential foreign investors who would want to come into the country to do business..
    It will provideuseful information and guidelines to the Nigerian government as well as the policy makers in formulating appropriate economic policies that would ensure rapid economic growth and development through FDI.
    Again, Finance students and other related disciplines will also benefit immensely, as it will also constitute viable data source that will enable them conduct further studies.
    Finally, the study will also be very useful to both the academia and researchers alike, who may want to conduct further studies on the subject matter.
1.6    SCOPE OF THE STUDY    
The scope of the study is within the context of the Nigerian economy. It will cover a period of twenty-six years (1986 to 2011). Relevant data shall be sourced from the central bank of Nigeria statistical bulletin (2011, 2012).
1.7    LIMITATION OF THE STUDY
    The major limitations of the study are time and access to accurate data. The time limit for this research may not be enough for a study of this magnitude. Secondly, is the issue of obtaining accurate and reliable data from different sources also serve as strong limitation to the study.