IMPACT OF FOREIGN DIRECT INVESTMENT ON THE TELECOMMUNICATION SECTOR

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IMPACT OF FOREIGN DIRECT INVESTMENT ON THE TELECOMMUNICATION SECTOR

Abstract:

This study investigates the empirical relationship between Foreign Direct Investment and telecommunication growth in Nigeria. The work covered a period of 1981-2009 using an annual data from Central Bank of Nigeria statistical bulletin. A growth model via the Ordinary Least Square method was used to ascertain the relationship between FDI and economic growth in Nigeria, and sectorial composition table of FDI in Nigeria, 1970 – 2001 Percentage was used. The study also added Gross Fixed Capital Formation with a view to capture the effect of domestic investment on the growth of the economy for the period under review. Interest Rate and exchange rate were also added as control variables in the model. The result of the OLS techniques indicates that FDI has a positive and insignificant impact on the growth of Nigerian economy for the period under study. GFCF which was used as a proxy for domestic investment has a positive and significant impact on economic growth. Interest rate was found to be positive and insignificant while exchange rate positively and significantly affects the growth of Nigeria economy. Therefore, government should provide an enabling environment that will encourage foreign investors to invest in Nigeria economy by addressing the security challenges in the country, providing investment friendly environment by improved regulatory framework as well as encourage domestic investment.

Keywords: Foreign Direct Investment, Nigerian Economy

CHAPTER ONE

Introduction

The underdeveloped nature of the Nigerian economy that has essentially hindered the pace of her economic development has necessitated the demand for Foreign Direct Investment into the country. Aremu, (1997), noted that Nigeria as one of the developing countries of the world, has adopted a number of measures aimed at accelerating growth and development in the domestic economy, one of which is attracting Foreign Direct Investment (FDI) into the country. According to World Bank, (1996), FDI is an investment made to acquire a lasting management interest (normally 10% of voting stock) in a firm or an enterprise operating in a country other than that of the investor (defined according to residency).

Background of Study

In order to seek the highest of return for capital, economists tend to favour the free flow of capital across national borders. 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.

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.

Statement of the Research Problem

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.

i) Investment capital

ii) Technical skills

iii) Enterprise

iv) Natural resources.

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.

However, FDI is often seen as an important catalyst for economic growth in the developing countries because it affects the economic growth by stimulating domestic investment, increase in capital formation and also, facilitating the technology transfer in the host countries (Falki, 2009). Khan (2007), asserted that FDI has emerged as the most important source of external resource flows to developing countries over the years and has become a significant part of capital formation in these countries, though their share in the global distribution of FDI continue to remain small or even declining. The role of Foreign Direct Investment has been widely recognized as a growth-enhancing factor in the developing countries. Falki (2009), spoke on the effects and advantages of FDI to the host economy, noted that the effects of FDI on the host economy are normally believed to be: increase in employment, augmenting the productivity, boost in exports and amplified pace of transfer of technology.

Objectives of the Study

The potential advantages of the FDI to the host economy are: it facilitates the utilization and exploitation of local raw materials, introduces modern techniques of management and marketing, eases the access to new technologies, foreign inflows can be used for financing current account deficits, finance inflows from FDI do not generate repayment of principal or interests (as opposed to external debt) and increases the stock of human capital via on-the-job training. The realization of the importance of FDI had informed the radical and pragmatic economic reforms introduced since the mid-1980s by the Nigerian government. The reforms were designed to increase the attractiveness of Nigeria’s investment opportunities and to foster the growing confidence in the economy so as to encourage foreign investors to invest in the economy,(Ojo, 1998). According to Umah (2007), the reforms resulted in the adoption of liberal and market-oriented economic policies, the stimulation of increased private sector participation and elimination of bureaucratic obstacles which hinders private sector investments and long-term profitable business operations in Nigeria. This, for instance, is to encourage the existence of foreign

Multinational and other private investors in some strategic sectors of the Nigeria economy like the oil industry, banking industry, communication industry, and others. Reacting to this, Shiro (2009), noted that 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, he noted, include the repeal of laws that are inimical to foreign investment growth, promulgation of investment laws, various oversea

trips for image laundry by the President among others. Continuing on this, Umah (2007), asserted that the Nigerian government has instituted various institutions, policies and laws aimed at encouraging foreign direct investment.

For instance, in 1995, the Nigeria Investment Promotion Commission (NIPC) was established through Decree No 16 of 1995. The Law provides for a foreign investor to set up a business with 100% ownership which must be registered with the Corporate Affairs Commission (CAC) in accordance with the provisions of the Companies and Allied Matters Decree of 1990. The registration is finalized with the NIPC. To ensure adequate protection, the NIPC Decree guarantees foreign investments against Nationalization and expropriation by the government. The NIPC Decree repealed the Industrial Development Coordination Committee (IDCC) Decree No 36 of 1988 and the Nigeria Enterprise

Promotion Decree (NEPD) of 1972 as amended in 1977 and 1989 which, hitherto, reserved for Nigerians the ownership of certain businesses. The operation of the Autonomous Foreign Exchange Market (AFEM) as provided for in the decree liberalized the FEM operation. The Decree replaced the Exchange control Act No 16 of 1962 in its entirety. Dunning, (1994), however, noted that FDI was attracted to serve as a means of augmenting Nigeria’s domestic resources in order to effectively carryout her development programmes and raise the standard of living of her people. According to Bello, (2003), privatization was also adopted, among other measures, to encourage

foreign investments in Nigeria. This involved transfer of state-owned enterprises (manufacturing, agricultural production, public utility services such as telecommunication, transportation, electricity and water supply), companies that are completely or partly owned by or managed by private individuals or companies.

Qualified foreign firms were given open arms to take over most of these establishments to enhance efficiency. This is because such foreign firms are reported to possess the managerial acumen and technical prowess needed to resuscitate and sustain the weak industries in Nigeria (Umah, 2007).

This paper which looks at the impact of FDI on economic growth in Nigeria will be organized as follows: Section 2 reviews some related literature on the impact of FDI on economic growth. Section 3 introduces the model used in the analysis. Section 4 discusses the empirical results obtained in the estimation of the model formulated. Section 5 summarizes the main findings and then conclusions. In Theoretical Framework section, it will present a simple endogenous growth model in which FDI has a positive effect on growth, whereas the volatility in FDI flows has a negative effect. In the model FDI, as well as the volatility in FDI, affects growth via the cost of innovation. The model is in line with the recent theories emphasising the importance of FDI in enhancing technological change through technological diffusion. This model provides an illustrative framework, which explains a possible channel by which the volatility in FDI flows negatively affect growth. Using the framework of the technological change models it is possible to present a formal model which shows how FDI may increase growth.

The endogenous growth literature distinguishes two types of technological change

Significance of the Study:

Models with an expanding variety of products, or models with improvements in the quality of products (see chapters 6 and 7, respectively, of Barro and Sala-I-Martin, 1995).

The relative advantage(s) of foreign direct investment as a productivity-enhancing package is now widely acknowledged. This is evidenced in the new attention being given to the drive for private direct foreign investment especially in developing economies. For a developing country, the inflow of foreign capital may be significant in not only raising the productivity of a given amount of labour, but also allowing a large labour force to be employed (Sjoholm, 1999). Domestic consumers may also benefit from direct foreign investment in that when the private capital investment is reducing in a particular industry, consumers of the product may gain through lower product prices, hence another

industry that uses this product benefit from the lower prices. This creates profits and stimulates expansion in the second industry. Additionally, if the investment is product improving or product motivating, consumers benefit in the form of better quality products or new products. For most countries, taxes on foreign profits or royalties from concession agreements constitute a large proportion of total government revenue. This externality is the spillover effect from Foreign Direct Investment. According to Taylor and Sarno (1997), Foreign Direct Investment responded to economic fundamentals, official policies and financial market imperfections.

Research Questions

Research Hypothesis

Development economists have identified a strong association between investment and economic growth. It has been observed that the expansion of private investment should be the main impetus for economic growth in developing countries. Barro (1991), and Barro and Sala-I-Martin (1992), predicted that output can only grow through increased factor accumulation and/or through technical progress. However, most growth models have come to ascribe the rate of growth of an economy as being determined by the accumulation of physical and human capital, the efficiency of resource use and the ability to acquire and apply modern technology. Since investment determines the rate of accumulation of physical capital, it thus becomes an important factor in the growth of productive capacity and contributes to growth of the economy. Hence, increasing foreign private investment is an important channel for increasing aggregate investment. Obwona (2001), noted other benefits of foreign direct investment as:

i) The provision of managerial knowledge and skills including organizational competence and access to foreign markets;

ii) It enables the transfer of technology to occur from developed economies;

iii) It provides an array of goods and services to residents in the recipient country.

Furthermore, private foreign direct investment may also serve as a stimulus to additional investment in the recipient country through the creation of external pecuniary economies such as infrastructures. The acknowledged benefits of the foreign direct investment seems to be more than the demerits, and this seems to explain the current move of developing countries including Nigeria, seeking to attract private foreign direct investments by removing the structural barriers and encouraging foreign investors. Such encouragement includes offers of incentives such as income tax holidays, import duties

exemptions, and subsidies to foreign firms. In an apparent shift of long-held stance against foreign direct investment, the Nigerian government, like other developing nations introduced the Stractural Adjustment Programme (SAP) comprising a package of economic policy measures in 1986.

Conceptual and Operational Definition

This project incorporates trade and exchange reform reinforced by monetary and fiscal measures, which were geared towards diversifying the mono-export base of the economy by stimulating domestic production and encouraging use of improved inputs for local production. To reinforce the gains of the economic policy measures and further encourage foreign participation in the economy, the Nigerian Investment Promotion Decree was promulgated in 1995 to encourage, promote and coordinate foreign investment and enhance capacity utilization in the productive sector of the economy. It also provides an opportunity for foreign participation in Nigerian enterprises up to 100 percent ownership. To achieve these objectives, the decree established the Nigerian Investment Promotion Commission (NIPC) in conjunction with the foreign exchange (monitoring and miscellaneous provisions) decree No. 17 of 1995 that establishes the Autonomous Foreign Exchange Market (AFEM). Over the years, successive Nigerian governments have viewed foreign direct investment as a vehicle for political and economic domination of Nigeria. And hence the thrust of government policy

(indigenisation policy) through the Nigeria Enterprise Promotion Decree (NEPD) has been to regulate foreign direct investment, with a maximum of 40% foreign participation allowed. This has resulted in a decline in both private and foreign investment and has therefore, slowed down growth in all sectors of the economy including the Telecommunication sector. This has consequently reduced long-run levels of per capital consumption and income. The trend has been attributed to debt crisis and global shocks which affected the country in the 1980s, and which has set off a protracted period of macroeconomic instability with an eventual drop in external financing. This therefore discouraged foreign participation in the economy as foreign direct investment formed only a small percentage of the nation’s gross domestic product (GDP) though marginally rising from -0.80% in 1980, to 1.80% in 1990. In an attempt to create a suitable climate for investment and growth within the economy, and to stimulate her economic recovery efforts from a prolonged and severe recession, the Nigerian Government introduced the

Structural Adjustment Programme (SAP) comprising a package of economic policy measures in July 1986.

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