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COMPARATIVE ANALYSIS OF THE EFFECTS OF FOREIGN PRIVATE CAPITAL INFLOWS ON SECTORAL OUTPUT IN NIGERIA

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CHAPTER ONE

INTRODUCTION

  • Background to the study

Globalization has influenced the interdependence of the world global economy and a major feature of this development is the rapid growth and mobility of international capital which take the form of foreign direct investments, foreign portfolio investments and other forms of private investment transfers. Meanwhile, the reason for this upsurge in foreign private capital flows is that in most economies, domestic private investment has proven to be insufficient in giving the economy the required encouragement to enable it meet its growth target because of the mismatch between their capital requirement and saving capacity. Foreign private investment, thus augment domestic resources to enable the country carry out effectively her development programmes and raise the standard of living of her people (Osinubi, 2010; Ekocha 2008).

 

Scholars have argued that the flows of foreign capital could fill the gap between desired investments and domestically mobilized saving and also may increase tax revenues and improve management, technology, as well as labour skills in host countries Stiglitz cited in (Onwumere, Ibe and Okpara;2011). However, the global financial crises of 2008-2009 and the recent windfalls in oil market have led to a call for re-evaluation of foreign capital inflows as a source of fund for development and growth in emerging economies. Indeed, Nigeria has been experiencing foreign private capital inflows into the country, but the effect of these inflows on the different sectors of the economy need to be examined. Because sectoral distribution of private capital flow in the country seems to favour few sectors of the economy such like Oil & gas and telecommunication sectors. (Kolawole and Henry; 2009).

 

It’s also important to note that, up to 1986 Nigeria did not record portfolio investment in the balance of payments, perhaps, partly because of the non-disclosure of information on portfolio investment abroad by Nigerian investors. This was attributable to the non-internationalization of the country‘s money and capital markets as well as the non-disclosure of information on the portfolio investments of Nigerian investors in foreign capital/money markets.

 

However, from the 1990s, the Nigerian government took measures to promote the internationalization of the domestic money and capital markets. Since 1999, foreign private capital inflows have been on the increase. Net portfolio investment inflow has been positive, rising up to N375, 858.9 million in 2005. Also in 2005, net portfolio investment and net direct investment went up to N116, 035.00 million and N654, 193.10 million indicating a growth rate of 127.17 and 464.19 per cent, respectively, compared to previous years. Furthermore, they both grew by 202.43 and 22.69 per cent to N350, 919.40 million and N802, 615.70 million in 2008 respectively. The Private capital flows as a total contribution to GDP in Nigeria was 3.82 percent in 2010. Its highest value over the past 33 years was 8.50 in 1992, while its lowest value was -1.15 in 1980 (Obiechina; 2010). This positive trend is attributable not just to the internationalization of the capital market but also to the increased efforts of the government at investment promotion.

 

However, in recent periods, the Central Bank of Nigeria (CBN) external sector development report for last quarter of 2014 showed that aggregate capital inflows stood at $2.64 billion, a sharp decline from $4.46 billion in 2013.  Also, in period under review, portfolio investment accounted for 78.38% of capital inflows in Nigeria, with portfolio investment into equities taking 57.63% of all capital imported in the period. Although portfolio investment inflows have remained generally strong, foreign direct investment (FDI), which arguably is more important for Nigeria’s long-term economic development, remains low for the economy’s size. FDI rose to US$544.5m in July-September 2014 from US$195.3m in the third quarter of 2013 (NBS). The report also showed that the main sources of foreign direct investments in Nigeria remain UK and US, which both provided 61.35% of capital imported in the third quarter, while China, which is often seen as a growing economic force in Africa, was not among the top ten.

 

However, it may be interesting to argue that the effects of private capital inflows on sectoral outputs vary, owing to the fact that the relative strength of a particular channel of monetary transmission mechanism may vary. There may also be the possibility of a differential response between sectoral output and aggregate output to inflows, (Granley and Salmon ;1997).Thus, this serve as the point of departure and the motivation of this study.

 

1.2 Statement of the problem

Nigeria like other developing countries faces a shortage of funds to meet her desire to diversify the economy and attain a sustainable economic growth. More worrisome is that even the foreign private capital inflow in Nigeria is not evenly distributed among most productive sectors of the economy. The sectoral distribution of private capital flow in the country is biased in favour of the oil & gas and telecommunication sectors. These are the sectors that soaked private capital inflow in Nigeria, including foreign capital meant for financing government’s infrastructure projects, (Kolawole and Henry; 2009). According to United Nation Conference On Trade and Development .UNCTAD (2005), the primary sector accounted for nearly 50 per cent of private capital flows between 1996 and 2000 in most African economies including Nigeria. The report went on to stressed that in 2005, the share of the petroleum industry exceeded 90 percent of total inflows to Angola, Equatorial Guinea and Nigeria.

However, given the current twist and turns witnessed in the Nigerian economy and the slumps in the price of oil at the international market, There is need to access  the sectoral responses to foreign capital inflow. Private capital flows, which according to International Monetary Fund. IMF (2007) consist of net foreign direct investment and portfolio investment. Foreign direct investment is net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments, (IMF ;2007). Essen and Onwioduokot (1998) argued that the trend of sectoral analysis of foreign direct investment in the economy from 1970 to 1998 reveals that investment by foreigners in Nigeria especially the transnational companies are concentrated in certain sectors that favour their type of business or investment to only 1.1 percent of the total cumulative foreign investment in Nigeria. This has since been on the decline, despite all the generous incentives including duty free imports of agricultural inputs and credit guarantee scheme to foreign investors.(Oladele; 2015)

Generally, policies and strategies of Nigerian government towards foreign direct investment are shaped by two principal objectives, the desire for economic independence and the demand for economic development. Multinational companies are expected to bring into Nigeria, foreign capital in the form of technical skills, entrepreneurship, and technology and investment fund to boost economic activities thereby raising the standard of living of Nigerians, (Odozi; 1995).

However, the position of research on this subject matter in Nigeria has been on the impact of foreign capital flows on economic growth which is done on an economy-wide level. Therefore, since there is a link between foreign private investments into each sectors of the economy and the aftermath effects on the total output in the country (GDP). Thus it is against this backdrop that this present study will serve as a point of departure from the previous studies, by focusing on comparative analysis of the effects of foreign private capital inflow on sectoral outputs in Nigeria. In line with the above aforementioned problem, this study seeks to answer the following research questions.

 

1.3 Research questions

  1. What is the effect of foreign private capital inflows on the agricultural sector in Nigeria?
  2. What is the effect of foreign private capital on the manufacturing sector in Nigeria?
  3. What is the effect of foreign private capital inflows on the building and construction in Nigeria?
  4. What the effect of foreign private capital inflows on service sector in Nigeria?

 

1.4 Objectives of the study

The broad objective of this study is to ascertain the effects of foreign private capital inflow on selected real sector’s output in Nigeria. Specifically, the study intends to:

  1. To examine the effects of foreign private capital inflows on the agricultural sector in
  2. To examine the effects of foreign private capital inflows on the manufacturing sector in Nigeria.
  3. To examine the effects of foreign private capital inflows on building and construction sector in Nigeria.
  4. To examine the effects of foreign private capital inflows on service sector in Nigeria.

 

1.5 Research hypotheses

Ho1:      Foreign private capital inflows have no significant effect on the agricultural sector of the Nigerian economy.

 

Ho2:     Foreign private capital inflows have no significant effect on the manufacturing sector of the Nigerian economy.

 

Ho3:     Foreign private capital inflows have no significant effect on the building and construction sector of the Nigerian economy.

 

Ho4:     Foreign private capital inflows have no significant effect on the service sector of the Nigerian economy.

 

1.6 Significance of the study

This study examines the effects of foreign private capital inflows on sectoral output in Nigeria. It would guide the government when making policies concerning foreign inflows in the economy. This is because the study would reveal the sectors which are mostly affected by foreign private inflows in terms of output contribution to GDP. Therefore since there is a linkage between foreign private investment into each sector of the economy and a consequential effect on the aggregate output in the economy, when the inflows are properly channelled to most productive sectors, there will be a general economic growth in the economy.

This study will also guide foreign private investors seeking to invest in a more profitable sectors of the economy. This is because the study will reveal the sectors that responds more productively to foreign inflows and can also generate quick return to investment.

 

1.7 Scope of the study

This study is country specific that focus on appraising the effects of foreign private capital inflows on real sector outputs in Nigeria. These sectors of interest include: agricultural, manufacturing, building and construction, and services. The study will use Quarterly time-series data from the central bank of Nigeria spanning the period 1980-2015. The study will estimate the following variables: Private Capital Inflow (PCI), Real interest Rate (RIR), Real Exchange Rate (RER), Trade Openness (TOP) proxy by Export+import/GDP, Financial Deepening (FD) proxy by PSC/GDP, Literacy Rate (LR),Government Expenditure on Education(GEE), Inflation(INF),Total Rain Fall (TRF), (TLA) Total Loan to Agricultural Sector, Government Expenditure on Infrastructure (GEI).

 

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