The impact of FDI on GDP in Nigeria

Topics: Economics, Economic growth, Macroeconomics Pages: 10 (2484 words) Published: June 14, 2014
When investigating the impact of Foreign Direct Investment (FDI) for host countries, most research focuses on the effect of FDI on economic growth. FDI can be defined as cross-border expenditures to acquire or expand corporate control of productive assets (Froot, 1993). It is a key element in the rapidly evolving international integration. It may help the competitive position of both the recipient (host) and the investing (home) economy, by transferring know-how and technologies and under the right policy it can help the development of the host economy (OECD, 2008). According to the literature the impact of FDI is expected to be growth enhancing (Blomstrom et al, 1996; Feenstra and Markusen, 1994; Bengoa and Sanchez-Robles, 2003), however this relationship is far from conclusive and depends on the host country’s economic, institutional and technological conditions (Li and Liu, 2005; Hansen and Rand, 2006). In the last few years a main focus of research has been the impact of FDI in developing countries and even more the BRIC (Brazil, Russia, India and China) countries. These economies are characterised by expanding middle classes, abundant natural resources, healthy trade surpluses, and market reforms aiming for global commerce (Dillow, 2014). While these countries still remain important for development studies, a new group of economies is starting to play an important role, one of them Nigeria. Nigeria is Africa’s largest oil producer, which causes macro-economic security. Contrary to that corruption, high poverty rates and social unrest creating risks to projects and investments. Nonetheless Nigeria, with its GDP of 262.6 billion USD ‎(2012) is expected a growth rate for 2014 of more than 7 percent, and has grown over the past years making it one of the most developed countries in Africa. However due to the lack of diversity within the economy, the benefits of the robust energy sector do not necessarily apply to all Nigerians (Dillow, 2014). In the last few years foreign companies invested heavily in Nigeria, making it the top FDI destination in Africa. According to the World Investment report 2012, Nigeria recorded $8.92bn of inward FDI in 2011 compared to $6.10bn in 2010. However the report of 2013 saw FDI inflows fell to $7.0bn in 2012, not affecting its position as top FDI destination in Africa (Mordi, 2013). The aim of this essay is to tackle the issue whether FDI has an impact on GDP growth in Nigeria, drawing upon current theories and empirical evidence, and concluding with a comprehensive analysis of the literature found. GDP refers to the market value of all final goods and services produced in a country in a certain year, commonly used to indicate growth and the standard of living in a country.

Literature review: Theoretical and empirical evidence
In the current literature a debate is ongoing about the costs and benefits of FDI inflows to the host economies. Current theories that predict the positive relationship between FDI and economic growth are typically based on the fact of filling in gaps between the domestically available supplies (e.g. savings, foreign exchange, government revenues, and human capital skills) and the desires levels of these resources to achieve growth and development targets. The first most cited contribution is filling the resource gap between targeted investment and locally mobilised savings. A second contribution is to fill the gap between targeted foreign exchange requirements and those derived from net export earnings and net foreign aid. The third gap said to be filled between targeted governmental tax revenues and locally raised taxes. Fourth, the knowledge gap that is filled by knowledge transfer and technology know-how that MNC’s bring with them to capital-poor developing countries (Todaro and Smith, 2011). The last argument of positive contribution of FDI to economic growth is in line with the endogenous growth theory. According to this theory FDI...

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