The impact of foreign direct investments on the nigerian economy

Thesis Overview

<p> </p><p><strong>INTRODUCTION</strong></p><p><strong>&nbsp;</strong></p><p>In order to seek the highest of return for capital, economists tend to favour the free flow of capital across national boarders. It is against this backdrop that multinational companies seek investment in foreign countries with reasonable risk. Nigeria is believed to be a high-risk market for investment because of factors such as bad governance, unstable macro economic policies, investment as a way out of Nigeria’s economic state of underdevelopment.</p><p>&nbsp;</p><p>Since the enthronement of democracy in 1999, the government of Nigeria has taken a number of measures necessary to woo foreign investors into Nigeria. These measures includes the repeal of laws that are inimical to foreign investment growth, promulgation of investment law, various overseas trips for image laundry by the president, among others.</p><p>&nbsp;</p><p>The need for foreign direct investment is born out of the underdeveloped nature of the Nigeria’s economy that essentially, hindered the pace of her economic development. Generally, policies and strategies of the Nigerian government towards foreign investments are shaped by two principal objective of the desire for economic independence and the demand for economic development. There are four basic requirements for economic development namely.</p><p>&nbsp;</p><ol><li>i) Investment capital</li><li>ii) Technical skills</li></ol><p>iii) &nbsp; &nbsp; Enterprise</p><ol><li>iv) Natural resources.</li></ol><p>&nbsp;</p><p>Without these components, economic and social development of the country would be a process lasting for many years. The provisions of these first three necessary components present problems for developing countries like Nigeria. This is because of the fact that there is a low level of income that prevents savings, big enough to stimulate investment capital domestically or, to finance training in modern techniques and methods. The only way out of this problem is through acceleration of the economy by external sources of money (foreign investment) and technical expertise. Foreign direct investment is therefore suppose to serve as means of augmenting Nigeria’s domestic resources in order to carryout effectively, her development programmes and raise the standard of living of her people.</p><p>&nbsp;</p><p>According to Nwankwo, G.O.2 factors responsible for the increase need for foreign direct investment by developing countries are:</p><p>o The world recession of the late 1970s and early 1980s and the resultant fall in the terms of trade of developing countries, which averaged about 11% between 1980 and 1982.</p><p>o &nbsp; &nbsp; High real interest rate in the international capital market, which adversely affected external indebtedness of these developing countries.</p><p>o &nbsp; &nbsp; The high external debt burden.</p><p>o &nbsp; &nbsp; Bad macro economic management, fall in per capital income and fall in domestic savings.</p><p>&nbsp;</p><p>Foreign direct investments consist of external resources, including technology, managerial and marketing expertise and capital. All these generate a considerable impact on host nation’s production capabilities. At the current level of gross Domestic Product, the success of governments policies of stimulating the productive base of the economy depends largely on her ability to control adequate amount of foreign direct investments comprising of managerial, capital and technological resources to boost the existing production capabilities. The Nigerian government had in the past endeavored to provide foreign investors with a healthy climate as well as generous tax incentives, but the result had not been sufficiently encouraging (as we shall see in this research). Nigeria still requires foreign assistance in the form of managerial, entrepreneurial and technical skills that often accompany foreign direct investments.</p><p>&nbsp;</p><p>Total amount of income that will accrue to capital will be OR0BK0 while labour receives YBR0. Given that Q = F (K, L), the total output in this country is the area under the marginal efficiency of capital (MEC) curve and this output will be distributed between the two factors of production, that is labour and capital.</p><p>&nbsp;</p><p>For foreign direct investment to take place, the returns to capital in the United Kingdom must be less than returns to capital in Nigeria, given that United Kingdom is more endowed with capital utilization In response to this differential in returns to capital, there will be capital movement from the United Kingdom to Nigeria and this will continue until the returns are the same in the two countries. The amount of capital moved from United Kingdom to Nigeria is in the form of foreign direct investment and hence, Nigeria’s stock of capital or investment fund is increased.</p> <br><p></p>