Foreign Direct Investment and Capital Formation in Nigeria

Introduction

Globalization has been the greatest issue that clearly affects the countries across the globe. Tailing the movement of the globalization is the issue of modernization which emphasizes the idea of competitiveness. The developing countries are also yearning to increase their capability in achieving the economic development. Due to the participation of the foreign direct investments (FDI), the developing countries find an opportunity where they can increase their strategic actions towards the achievement of their goals. Preparedness, on the other hand, is another basic action that an economy should emphasize.

Background of the Study and Problem Statement

Due to the global expansion of the various organizations and targeting the unsaturated market, the organizations can create a huge market. From the learning gained from the Foreign Direct Investments (FDI), organizations like the small and medium scale enterprises gains the opportunity toward the international trade and serving in domestic and international markets. The existence of FDI in the market is to promote the global effectiveness and has been the center of the international organizations. FDI targets the evolution of the economic system and as one of the contributor of development. Gaining the knowledge regarding another success in international market, the businesses are now more open in accepting the possibilities and opportunities to be more profitable. Based from the past researches pertaining the economic development and sustainability, the door for the developing countries has been left open by FDI promising the possibilities to gain more success. However, what would be the effect of FDI in the capital formation of Nigeria as one of the developing countries in the world.

Research Aim and Objectives

The main aim of the study is to identify the relationship of Foreign Direct Investments (FDI) in the capital formation of Nigeria. In order to facilitate the investigation there are four objectives that needs to be considered. First is to identify the strategy or implementation of capital formation in Nigeria. Second is to determine the entrance level of FDI in the country. Third is to recognize the significant contribution of FDI in enhancing the economy of Nigeria. And fourth is to investigate the collaboration of FDI and capital formation in targeting the total growth.

Literature Review

The direct investment is determined by specific assets to accommodate the disadvantages faced by foreign firms in relations to local firms. The contribution of the investment increases as countries become more similar in terms of income, and the allotment of factors and technology. Basically, the foreign firms hold advantages over domestic firms like the foreign firm can decide about the internalization of the ownership. The foreign firm can decide to produce in the host country if there are sufficient local advantages. The firms can justify the production in the same country because of the compatibility between the foreign investment and the firm’s long stream strategy. In Nigeria, it is identified that there is an empirical relationship between fluctuations in export earnings and investment which results to the implications for policy. For example, if export fluctuation were confirmed to retard capital formation in Nigeria, this would dramatize the desirability of accumulating foreign exchange reserves to smooth fluctuations in export earnings in the short run. These findings could also serve to bolster current efforts at trade and exchange rate liberalization as a mechanism for mitigating fluctuations in export earnings in the long run. However, the results of the short-run applied business models for the private and public capital stocks may reveal that savings and output affect capital formation in both sectors. While private savings have a significant impact on capital formation in the private sector, public savings do not significantly affect public capital formation. The tables also reveal that export earnings fluctuations adversely affect capital formation in both sectors. Therefore, the impact is relatively larger in the public sector. The openness of the country on investments can motivate the possibility of high profitability in foreign markets, along with the possibility of financing the interested developing countries.

Methodology

The applied method in the study is the use of secondary information coming from the past researches, economic reports, and national reports. All the materials are reviewed based in the applied policies and its implementation, economic reforms, and national programs. Through this method, the study can identify the relationship exist between the FDI and capital formation and may create recommendations to strengthen this relation and promote the total growth of the country.

References:

Akpokodjie, G., (2000) The Effect of Export Earnings Fluctuation on Capital Formation in Nigeria [Online] Available at: http://www.aercafrica.org/documents/rp103.pdf [Accessed 23 August 2010].

Banga, R., (2005) Foreign Direct Investment in Services: Implications for Developing Countries, Asia-Pacific Trade and Investment Review, 1(2). [Online] Available at: http://www.unescap.org/tid/publication/aptir2383_banga.pdf [Accessed 23 August 2010].

Nonnemberg, M., & Mendonca, M., (2000) The Determinants of Foreign Direct Investment in Developing Countries, [Online] Available at: http://www.anpec.org.br/encontro2004/artigos/A04A061.pdf [Accessed 23 August 2010]

OECD, (2002) Foreign Direct Investment for Development: Maximizing Benefits, Minimizing Costs, Organization for Economic Co-Operation and Development, [Online] Available at: http://www.oecd.org/dataoecd/47/51/1959815.pdf [Accessed 23 August 2010].