IMPACT OF FOREIGN DIRECT INVESTMENT ON EMPLOYMENT GENERATION

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IMPACT OF FOREIGN DIRECT INVESTMENT ON EMPLOYMENT GENERATION

ABSTRACT

Motivated by the rising unemployment in Nigeria, this study examined the impact of foreign direct investment on employment generation in Nigeria. The increasing unemployment rate and its vices in Nigeria questions the effort/policies that have been made to combat it or the degree of its implementation, and therefore the need to examine the impact of FDI as an external factor on employment. The study employed multiple regression analysis, Johansen co-integration and Granger causality to ascertain the specific objectives of the study. The study employed data from CBN Statistical Bulletin, National Bureau of Statistics, and the World Bank indicators. The findings of the study suggest that FDI has a significant and positive impact on employment, and other significant determinants of employment include; GDP and wage. Also the results show that there exist a significant long run relationship between FDI and employment. Finally the results suggest that FDI granger causes employment but employment does not granger cause FDI. This means that FDI has a significant role on employment in Nigeria and this should not be minimized. The study therefore recommends that policies be formulated to exploit the role of FDI on employment in Nigeria in an attempt to reduce the unemployment rate.

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In general, FDI can be described as a flow of capital, technology and know- how from one (home) country to another (host) country. Investopedia defines FDI as an investment made by a company or entity based in one country, into a company or entity based in another company. Foreign direct investment is net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum equity capital, reinvestment of earnings, other long term capital, and short term capital, as shown in the balance of payments (IMF, 2007). A recent and specific example is the perceived role of FDI in efforts to stimulate economic growth in many of the world’s poorest countries. Partly this is because of the expected continued decline in the role of development assistance, on which these countries have traditionally relied heavily, and the resulting search for alternative sources of foreign capital. More importantly, FDI can be a source not just of badly needed capital, but also of new technology and intangibles such as organizational and managerial skills, and marketing networks. FDI can also provide a stimulus to competition, innovation, savings and capital formation, and through these effects, to job creation and economic growth.

Foreign direct investment flows might be associated with economic success and they do not exert an independent effect on growth (Carkovic and Levine, 2002). Foreign direct investment promotes growth in countries with sufficiently developed financial systems, a greater degree of trade openness, and an adequate level of human resources development (Balasubramanyaam, 1999). Indeed foreign direct investment has a great potential to increase the rate of technical progress in the recipient country through knowledge diffusion. This can improve efficiency and productivity in local firms that can copy new technology or learn how to use existing technology and resources more efficiently in order to compete in global markets (Lim, 2001). However, it is also possible for FDI to have very little (or even negative) effects on employment.

It may displace local investment, so that the net effect on jobs is lower than the number directly employed by foreign affiliates. Where FDI involves the acquisition of local firms rather than new plants, there is no initial increase in employment and if the foreign owner subsequently rationalizes the firm, employment is even likely to decrease (Jenkins, 2006). Moreover, there may be few local linkages if most inputs used by the foreign affiliates are imported and these constitute an enclave within the local economy. Jobs that are created may be for labour that is relatively skilled rather than for the unskilled who are in excess supply. If investment is footloose and can easily move to alternative locations, then the jobs that are created are likely to be highly unstable (Jenkins, 2006).

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