The Impact of Foreign Direct Investment on the Nigerian Economy

The Impact of Foreign Direct Investment on the Nigerian Economy

In the contemporary arena, only few issues evoke stronger pause or condemnation than Multinational Corporations (MNC).  A casual exploration of the literature will demonstrate the strength of positive and negative feelings towards multinational firms (Hood and Young 1979).  Based on this dichotomy existing in the conception of the activities of MNC’s in a developing economy like Nigeria, convenience permits that the views of the cities and defenders be given critical attention.  The MNC’s most zealous cities maintain that MNC’s are agents of economic imperialism and political control to maximize profit without due regard to environmental or human consequences, and are under the control of elitist managers and technocrats who seek to expand their own power and influence. 

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On the extreme the MNC’s most ardent defenders argue that the MNC’s provide opportunities for global economic and entrepreneurial advancement, and employment, establish a rational efficient way to maximize the quality and quantity and minimize the cost of international production and offer a realist opportunity to move beyond the parochial national allegiance fostered by the national state.

Possibly, the main benefit associated with the global expansion of MNC’s is the transfer of information, specifically on products, process and managerial technology they carry out.

By making additional products available in host countries, MNC’s expand consumers choices.  By bringing in new technology and training local people to acquire the skill MNC’s improve each host country’s knowledge base.  Simply by operating in host country, multinational firms transfer many kinds of knowledge and skill about products, living conditions, business strategies and other matters.

The main criticism made by less developed countries is that the technology transferred by MNC’s is often inappropriate, that is it does not take the best advantage of host country’s factors of production.  Specifically, it is acquired that the technology is relatively poor, Less Developed Countries (LDC’s) should employ more labour intensive to capital than the technology used in developed countries since unemployment is generally so high on LDC’s.


The defenders and the critics of multinational corporations have two fundamental considerations in their views, that is the benefits of transactions efficiencies and the cost of monopolistic power.  We shall begin with a critical look of the views of the zealous critics under theoretical review.


According to Burnet & Muller (1974) MNC’s use managerial expertise and technical know how available only in the industrialized west and cheap labour – an inexpensive resources available in the non-industrialized third world to increase their profits without making significant contributions to the economy in which they operate.  Indeed, Burnet and Muller continued, multinational corporations do not bring large quantities of external capital but rather use existing capital that could best be devoted to other purposes within developing countries.

With the superior capital intensive production capabilities, MNC’s drive other labour intensive local market competitors out of business, thereby actually increasing unemployment in the host country.  Additionally, MNC’s are accused of destroying traditional cultures by use of sophisticated advertising techniques and replacing them with local versions of American and Western European consumer societies.  As profit on the global level is MNC’s primary objective, the multinationals are often accused of ignoring local questions such as environmental quality, resource conservation and health and nutrition.

Continuing their argument, Burnet and Muller are of the opinion that continued unbridled operations of MNC’s in developing countries will meritably lead to more inequitable distribution of wealth, environmental degradation and poorer nutrition and health standards in these their host countries.  As more and more MNC’s invest outside North American and Europe, they maintain, unemployment rates will go up there as well.  At the same time, as more developing countries form more producing contents such as OPEC to protect particularly their resources interest against MNC’s, the multinationals will charge high pieces for their products in the developed world.

Sunkel (1969:23) maintained that multinational corporations play a major role in neocolonialism.  In their home countries they plan new products and new methods, the machinery for both and the manufacturing strategy.

They specialize in the generation of new technical knowledge which is consumed in the under-developed countries but not shared with them.  Expanding his position, integrated scale of production, capital planning, market power, techniques, finance and other choices belong mainly to the home country.

The MNC’s intrude into the law politics, foreign policy and culture of the under-developed countries and landscape regulation, Sunkel argued.  Among the results are the persistence of the exporting or primary products (whose prices are held low by MNC’s bargaining) by the undeveloped countries, exogenous dynamism, decisions, indebtedness, denationalization, subsidizations the danger that the regional integration will favour the MNC’s and lead to the liquidation of local enterprise, and a growing income gap between the developed countries and under-developed.

Onah (1973:357) maintained that some of the countries have in their labour laws, provisions for local employment quotas.  However, because of the society of certain types of qualified local personnel, exemptions from expatriate quotas are sometimes specifically permitted under investment laws and are commonly granted in practice, regrettably, however, foreign friends takes undue advantage of this exemption by unjustifiably exceeding expatriate quota under the pretext of “standard maintenance”.  They argue that suitable qualified personnel are not sufficiently available locally.  Even where they appear to be adhering to the quota requirement, are finds that substantial senior management and professional posts are exclusively filled by aliens, nationals found in these categories are therefore only “window dressing” for they do not perform duties supposedly attached to their positions.

Kodjo (1982:49) argued that because of the presence of foreign direct investments in Africa, the situation in which African countries presently find themselves, under the overwhelming impact of the industrial economic system and the attendant biased international division of labour is a real desperate one due largely to the development inhibiting effects of an unregulated skewed economic competitiveness among nations at the advantage of industrial nations.  The much quoted theory of factor endowments supposedly gearing international divisions of labour, the world wide economic co-operation and activities allegedly moulded by it appears less and less convincing in reality if even elementary necessities of life such as food stuffs must also be supplied to African countries by industrial nations.

In peculiar circumstances, Africa is deeply tributary to their nations in virtually areas of existential need and human endeavour the fact is hereby taken for granted and self explanatory that also modern psychic and institutional perspective externally provided for African countries along the material commodities and related services.  This highly complex in cultural term traumatic situation promotes extension as well as intensive dependence of African the undifferentiated “benevolence” of the industrial world taken as a whole.

Expounding his argument, exaggerated, quasi absolute preferences for his consumption of foreign commodities, as this has been observed to be the case in Africa today, frustrate local capital formation, local entrepreneurship as well as infant industries emanating from tentative efforts at putting to meaningful economic use of idle resources including technological potentials.  There is therefore a logical connection between empirical models of consumption on one hand and availability of capital, the capacity of a country to mobilize its human and material endowments, etc on the other hand.

Drawing his conclusion, he said that attracting foreign investment in this situation does not half the drain of resources out of African, rather it helps to compound problems if it is considered that multinational firms interacted and involved in African have enormous political-ideological influence and potentials as a result of their financial strength, that individual African counties or groups thereof do not have a more liberal open door policy viz-a-viz foreign capital will definitely suffocate the economy of Africa States.

Akusawya (1980:97) is of the view that foreign direct investment possess considerable influence in their inter state system.  Because many multinationals are much more powerful and wealthier has the host government, these facets of multinational corporations tend to create dislike, fear and uneasiness among officials of the host country.  To be sure, the activities of many multinationals such as International Telephone and telegraph (ITT), Inter Petroleum Company, etc have tended to create dislike, fear and uneasiness among political relevant groups in the host state, namely student organizations, intellectuals and trade unions, since top corporations executives have often interfered with domestic policies and have been accrued of offering bribes to officials in order to circumvent the laws of the host states.

Above all, the home states of MNC’s have occasionally intervened through covert or overt actions, on behalf of their nationals abroad, thus giving credence to the view that MNC’s are a primary determinant of the foreign policies of foreign policies of their home states towards the LDC’s.

Essentially, while the 1950’s and early 1960’s were eras during which investment codes were promulgated to encourage and promote foreign investments in many third world countries, many third world countries from 1960’s particularly the late 1960’s have generally become more circumspect.  They no longer believe that the development as they desire it will automatically flow from the importation of multinational investments.  Indeed, the leaders of many LDC’s do not any longer believe that foreign direct investment brings the much needed and secure capital, nor do they believe that multinationals (FDI) transfers technology and managerial skills to LDC’s.

Consequently, the leaders of LDC’s believe that MNC’s have contributed to the underdevelopment of many LCD’s by drawing of irreplaceable and vital natural resources and distorting the path of economic development.  Today, MNC’s are feared and disliked rather than revered by the leaders of some third world countries, he concluded.

According to Onimode (1988) the most serious consequence of these multinational control mechanisms over African economics is de-capitalization of the region, a related effect of the displacement of local entrepreneurship.  To him, de-capitalization (meaning outright transfer of capital; from Africa to the advance countries) and local displacement constitute two basic ways in which the MNC’s generate and sustain the underdevelopment of this region.

By allocating factors of production and controlling investment flows, no doubt activities of MNC’s seriously influence the character of economic development.  Payment of taxes and royalties, establishment of new plants or closing down of old ones, decisions on whether to locate plants and advertising, these and other decisions can crucially affect a developing country’s economic structure, tax, revenues, level of employment and consumption patterns, it can be argued for example, that by fostering America’s style of consumerism through advertising.  MNC’s seriously distort development patterns in poor countries, rather than promoting rural development, public transportation or commercial enterprises, MNC’s try to create markets for middle class needs and aspirations.  Other critics may be added to the ones explained here for further collaboration.

Having looked at the views of the MNC’s cities, efforts will be made in the present to being in the views of the supporters and defenders of the course of MNC’s in the third world countries (developing countries).

This group of scholars believes that multinational corporations have engendered an unqualifiedly does of development in their host societies.  The developed nations of America, Europe, Japan have attained an advanced or significant level of development.  The newly industrializing countries (NIC’s) mostly found in Asia, are pursuing vigorously these goals also.  It should be emphasized that these countries have been able to achieve this partly with the help of their indigenous NNC’s.  Most countries encourage the multi-nationalization of their indigenous enterprises because of the numerous benefits derivable from their operations.  These benefits are themselves catalysts of economic development.  It becomes realistic to disperse most of the benefits of indigenous multinational business activities.  They include:-

  1. Multinational corporations and their investments create the much needed employment opportunities.
  2. They increase the flow of innovation:-   Encourage research and development efforts and transfer of technology to the host nation.  By so doing they carry out onerous function of international diffusion of innovations.
  3. They integrate their operations into the local economy:  This is because they are found in all the strategic sectors of the economy and therefore help to link up the various economic sectors of a nation.  They are also veritable agents of backward and forward integration.
  4. They help to develop local sources of supply especially new materials and spare parts, stimulate the business sector generally by developing local markets and diversifying overseas outlets for locally produced goods, hence earning the much needed foreign exchange for the country.
  5. MNC’s train local personnel’s thus helping them to attain the much talked about transfer of technology urgently needed by a developing country as Nigeria.
  6. Because of the marketing management and production expertise, coupled with adequate financial resources, they are known to be producing better and cheaper products and services thereby raising the standard of living in the prevention of armed conflicts and perhaps removing their causes, particularly the economic ones.  As peace and development agents, they help to promote regional business and economic activities and co-operation.
  7. MNC’s ensure they are good corporate citizens and pertness in progress with government in the quest for economic emancipation.  They do this by:

a.       Taking steps to abate environmental pollution.

b.        Providing accurate statistical data to government for economic development planning.

c.        Paying correct taxes and all other approved government levies.

d.        And getting actively involved in research and development

viii.     MNC’s are corporate contributors.  They do this by:

a.         Awarding scholarships

b.        Corporate sponsorship e.g. sports

c.        Donation to worthy national causes, charitable organizations and disaster situations, and

d.        Supporting educational institutions materially and financially by growing grants, donations, equipments and endowing professional chairs.

Strecton (1974) in his theory of development policy, lent credence to the activities of multinationals.  The impact of foreign direct investment on national development policies, he said can be listed under their contribution to filling various gaps and their effects on their variable relevant to the development objectives.

i.        The contribution of filling the resource gap between the desired investment and locally mobilized savings.

ii.       The contribution to filling the exchange or trade gap between foreign exchange earnings plus official net aid.  While this gap, requirements or target for foreign exchange are not identical with those for savings if there is a structural balance of payment problem.

iii.      The contribution to filling the budgetary gap between target services and locally raised taxes.

iv.      The contribution of filling the management and skill gap between providing foreign management and training local managers and workers.

Expounding his theory, he is of the view that analytical value of looking at the contributions in terms of one or more of these gaps is that the value to the economy may exceed the value accruing from a particular project.  Gap analysis brings out the multiplier effect of the foreign contribution.  If domestic resources are under utilized because some crucial component is missing (e.g. foreign exchange or a particular kind of skill) the breaking of this bottleneck has a magnifying affect upon resource mobilization in the rest of the economy, unless such externalities are properly allowed for in project appraisal.

Robert and Duane (1992) maintained that the main benefit associated with global extension of MNC’s is the transfer of information, specifically about product, process and managerial technology that they carry out.  By making additional products available in host countries MNC’s expand consumer’s choices.  By bringing in new technologies and training local people to use them, MNE’s improve each host country’s knowledge base simply by operating in a host country, a multinational firm transferring many kinds of knowledge about product, living conditions, business strategies and others.


The phenomenon of growth is complex and the lines of causation go from supposed cause to growth and from growth to supposed cause.

However, for sake of clarification and focus, our attention will be drawn to the factors, which causes growth as an impact of FDI in the host societies.

These factors are looked upon as an inward FDI in its host country, which increase host country’s productivity and export, which comes in various forms.


Financial as capital is a determinant of the productivity level of any country and FDI causes MNC’s to direct investible fund to areas like LDC’s where market exist for their product or where the integration of their activities encourages expansion.  A lot of reasons are given by John Payeweather as the supposed cause of financial move by MNC’s to less developed countries.  They are:

i.                   MNC’s try to elite their profit to less taxable areas like the LDC’s in order to pay a lower tax.

ii.                 Through subsidiarization, MNC’s expand its business thereby increasing monetary policy of the host society.

iii.              The MNC’s avoids tariffs by carrying out transfers to offset the duty imposed in exportation.


For the LDC’s, the shortage of technology and managerial skill causes the MNC’s to transfer the productivity techniques to LDC’s and the reliability of sustaining this technology is often greater problem than the lack of capital.

To acquire technology from abroad, the less developed countries confront the problem of choosing straight subsidiaries joint venture or licensing arrangements.

The joint venture usually brings in technology but it may not keep it up to date due to the fact that it goes with contracting on what technology is at hand.

The subsidiaries may be too independent to be in line with the policies of the host country.  A licensing venture also have the problem of keeping technology up to date.

While the LDC’s are crying for modern day technology, and modern production facilities, the very real problem being confronted is how to use them in a manner conducive to health and long run economic development.  Political necessities offer frustrate the best way of transferring technology to LDC’s.  National scale plants are found where regional scale would have been were efficient, labour intensive processes are used for the sake of creating jobs when market saturation and minimum cost to the consumer should be the primary social policy.  And political division push expensive plants into areas where a single larger plant would have better serve as in the case of Nigeria and Kenya were two plants compete for same regional supply and market.


Considering what skill is expected here, the method and effectiveness of the transfer of advance management practices to less developed countries is crucial to both the multinational corporations and their host societies.

Advance management here have been defined as the special capabilities that makes a manager what he is.  Management transfer involves three inter-related elements:-

  1. Management knowledge
  2. Management skills and
  3. Management attitudes

Management knowledge refers to the tools and techniques concerning the management of production enterprises e.g. quality control, cost accounting, budgeting etc.  Management skills involve management ability to implement and effectively use management tools and techniques.  Management attitudes refer to the point of view or perception of managers concerning managerial tasks, human beings and environmental settings.

In Gennimo’s position, international transfer of management knowledge and skill involves three subjects of the problem.  One is concerned with the transmission of information, the second is the leasing process and the third is the transfer process.  The transfer of information itself involves three aspects – technical, semantics and effectiveness.


This search for explanation on economic growth has been pursued in several different ways.  Many of the earlier studies traced the long term growth of countries, mostly those that were then developed few developing countries at that time had data extending over long periods for even a few of the aggregate standard measures used in research.

Studies of economic growth of these cater generation proceeded on two ways: for the most past, they examined growth over a whole period covered by whatever version of data were available at that time.  The combination of such characteristics such as capital formation, education of the labour force and openness to trade or flow of FDI explained the growth of aggregate real income.  One mayor problem with these studies is the difficulty in disentangling the direction of causation.  Was one economy growing more rapidly because level of capital formation was higher or was the rate of capital formation higher because the economy was growing faster?  What is certain however is that high growth rate and inflow of FDI tend to go together.

One study reported a significant relationship between inflows of FDI as a percentage of GDP and growth of per capita GDP across all developed countries.  It suggested that though the gap in technology and productivity between foreign owned firms and locally owned ones is larger in poorer countries than in richer ones that does not necessarily mean that the poorer countries may gain from inward FDI.  It argued, “the least developed countries (LDC) may learn little from the MNC’s, because local firms are too far behind in their technological level to be either initiators or competitors to MNC’s”.  And it found in confirmation of this supposition that inflows of FDI were significant as determinant of growth for the upper half of the distribution of LDC’s by per capita income but not in the lower half.

A similar conclusion was reached in a study of 69 developing countries on growth in per capita GDP from 1970-1989 (Broonszetein De Gregorio and Lee 1995).  The FDI to these countries from the presumably more advanced ones that make up the Organization for Economic Co-operation and Development (OECD).  FDI itself was a marginally significant positive influence on growth, but FDI interacting with a measure of average educational attainment was a stronger and mere consistent influence.  The higher level of education of the labour force, the greater the gain in growth from a given inflow of FDI.

Efforts would be geared to see that data collected from various sources are developed to enable the researcher to find out if there is any relationship between the activities of Nigerian Bottling Company Plc and the economic development of Nigeria, the degree of correlation could be maximized to ascertain the significance.



International trade theories are developed to generalize the factors that determine the patterns of trade among nations.

Theories of FDI are proposed to consolidate the causes of the patterns of foreign direct investment.  Compared with international trade theories, however, the focus of FDI theories is more on microeconomics of forms since they aim at explaining the investment behaviour of firms rather than countries.

If the world confirmed to the classical microeconomic model of perfect competition spearheaded by Taylor, FDI would not take place at all.  Producers and sellers of given product in a perfect competition could be so numerous and their market shares so small that the actions of any one participant would not influence the market as a whole.  Product differentiation would never take place.  Market information and manufacturing know-how would be equally shared among all sellers.  Total product demand would be unaffected by any sellers action or would product supply be influenced by demand.  No seller acting alone could change the prevailing market price at any time.

Any business that tried to initiate international operations would incure the transportation and management costs and risks of operating across national boundaries.  In any perfect competitive market, foreign investors would be at a disadvantage relative to indigenous firms that has no additional operating cost in their countries.  The higher cost of operating overseas would eventually drive foreign investors out of the market.  Therefore, in the world that approximates perfect competitive marker conditions, there would be no foreign direct investment FDI.

In reality, we see proliferation of foreign direct investment by companies from many nations.  Foreign direct investment is in effect the product of imperfect market competition.



In 1960, Hymer Stephen postulated in his Massachusetts Institute of Technology – Mit doctoral dissertation that foreign direct investment occurred most permanently in those industries with oligopolistic structures.  He also demonstrated that the traditional theory of international capital movement – the flow of capital from area in the world where returns on capital are low to area where they are higher – does not explain the appearance of foreign direct investment.  In Hymers view, an investing firm’s strength must he in the production economies of scale allowing it to operate more efficiently than a smaller company or in that expertise which would enable it to offer for sale differentiated products demanded by customers through out the world.


in refining Hymer’s theory of foreign direct investment, we should add that manufacturing economy of scale is achieved not only from large scale operation, which Hymer emphasis but also from the company’s cumulative learning and manufacturing experience.  The importance of a firm’s cumulative and experience was postulated by Kenneth Arrow in his learning by-doing model (dynamic economy of scale) and has been popularized by the Boston Consulting Group’s adoption of the “experience curve” as a strategic planning paradigm.  For a variety of manufacturing operations, we can empirically observe the so-called experience or learning curve effect on productivity.

The crudest form of the experience curve effect shows that the amount of work required to produce one unit of product tends to decline by about 20% each time production volumes are doubled, similar experience curve effect are seen in complex modern factories.  Each time the cumulative units of production are doubled average production costs tend to decline by 20-30%.  In this case, maintaining economy of scale is a function of cumulative production waits.


The successful pursuit of market share maximization requires a long-range view of the profitability of a firm.  Rather then maximizing short-term and immediate profits, firms would waste time, managerial attention and funds in developing new products and production processes and in opening up world markets for firm’s products.

Managers and employees would have to be trained to stay abreast of market and technological innovations.  Furthermore, a corporation can only reap the benefits of the experience curve effect if it maintains the loyalty and co-operation of its office and factory workers.  Job security, which produces the lowest possible employee turnover, is a necessary condition to gaining the maximum benefits of experience curve effects.


As a product natures in a given market, the price elasticity of demand for such product increases.  At this juncture, the firm must find ways of lowering production costs.  Since the production process are already standardized to permit absorption by less industrially sophistiested nations, the sales people are likely to take their standardized production process abroad, to lower wage countries and import the same product manufactured by their overseas subsidiaries.  This is called off share production arrangement.


The product life cycle of FDI, which was developed, by Raymond Veruan and his colleagues at the Harvard Business School in the 1960’s is blending of the Hymer’s theory of FDI with product life cycle models initially developed by marketing scholars of Graduate Business School.  The Plc theory states that “when a new product is first created and marked, it is more likely to be sold only in the home country.  The cost and risks would be too great to justify attempting to sell the product in a foreign country”


In reality, when one firm sets up overseas subsidiaries, its domestic competitors often follow suit immediately.  Followers often choose the same area of the same country as the leaching firm.  This follow-the-leader phenomenon has long been observed in national industries such as oil, copper, bauxite and tropical timber.

Of late this phenomenon has been increasingly observed among oligopolistic firms in diverse manufacturing.  Two theories of FDI based on oligopolistic behaviour have been advanced.  One by Knucker- Bocker and another by Graham.  Knucker-Bocker reasoned that this follow-the-leader bahaviour must be explained by Oligopolistic initiation.  Graham voted that in certain industries European multinationals have already made direct investments in Europe.

The exchange of hostage theory however is an explanation that is largely united in United State investment by majors U.S firms in highly oligopolistic industries.


A vertical integration of a firms operations from the raw materials to the final products have long been observed among such natural resources industries like oil, copper, timber and rubber.  This structural characteristic is closely related to the oligopolistic and imperfect market competition of these products worldwide.


Conclusively as stated as initial, direct foreign investment transfers capital, technology and management from countries where they are abundant to countries where they are secure.  It is evident that efficiency has been increased and pareto optimality approached.  Whether world welfare has been increased depends on the observer’s international social welfare functions.

Labour in the home country will be worst off having to be combined with less capital, technology and management and hence receiving lower returns and perhaps own experiencing unemployment.

The gain for the investing country may include special benefits for capital and losses for labour which are regarded as unattractive on the other hand, in the host country there are likely to be gains for labour and losses for capital as well as the world cosmopolitan gain.  There are also dynamic gains, timing of workers or stimulating earrings and capital formation through private and governmental increases in income.

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The Impact of Foreign Direct Investment on the Nigerian Economy

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