Foreign Direct Investment in the Developing Nations

Foreign direct investment is ideal in providing most of the developing nations such as Nigeria and other African Nations with the most regarded capital investment in order to realize economic growth and development. Foreign direct investments has been a major contributor towards developing countries in the African continent thus creates the notion among the policy makers that FDI has been enhancing economic growth and development as well as economic growths in the Low Income Countries. Besides, foreign direct investments are also perceived to have the notion of impacting positively on job creation, enhancement of managerial skills and effective transfer of technologies that contribute to economic growths. FDI within the developing countries has a perceived tremendous growth in recent times partly due to the financial, economic and long-term political transformation that has shaped most of the economies in the developing world and the Low Income Countries (Alfaro, 2003). Due to the important role attached to FDI, majority of the developing countries have also attempted to relieve restrictions made on FDI. The projection of FDI in developing countries has also been associated with strengthening the overall macroeconomic status of the countries.

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In Nigeria, FDI has been a major boost to the countrys economy. In particular, from the perspective of the underdeveloped nature of the Nigerian economy, it is clear that economic development of the Nigerian economy has been curtailed by the underdeveloped nature which restrains the pace at which economic development has occurred. Consequently, this state of the economy has necessitated considerably high demand for FDI into the economy. Nigeria is one of the developing economies worldwide that has adopted several measures towards accelerating economic growth in its domestic economy. One of the most virtual mechanisms of enhancing this growth has been through attracting wide range of FDI into its economy. The World Bank observes that FDI comprises of an investment that is established towards making long-term management projection in individual firms that are operating within a country as opposed to investors prescribed to a residency. Nonetheless, FDI is also perceived as an essential catalyst towards economic growth among developing nations since it influences economic growth through stimulation of the domestic investments, raise capital formation process and capacities as well as facilitating technology transfer processes within the host economy (Alfaro, 2003).

FDI has also been perceived as the most essential source of inflows of external resources towards developing countries over decades. Subsequently, FDI is also essential constituent in capital formation process in developing economies. However, despite its importance, the share of developing countries by virtue of FDI distribution is very insignificant despite the importance attached to it in stimulating growth. The main role of FDI has been largely identified as incapacitating growth in developing economies. In particular, FDI is credited with increasing employment, strengthening productivity, enhancing the quantity and qualities of exports from the host countries as well as promoting the actual prospects of technology transfer (Alfaro, 2003). The main advantages of FDI to the developing economies are: the facilitation of mechanisms of utilizing local raw materials and the introduction of modest approaches in marketing management and as well as overall use of novel technologies through enhanced foreign investment inflows. These processes results in capital accumulation that can be used in financing deficits in the current countries accounts.

On the other hand, Chinese FDI has been highly successful in the past decade. The FDI began at a base of $19 billion as at 1990 but the stock value of FDI grew immensely to more than $300 billion in 1990. Currently, China has been considered the leader in among developing economies in utilization of FDI as well as the second best placed among the APEC countries with regard to inward flows of FDI from US (Alfaro, 2003).

The Chinese FDI is mainly comprised of Greenfield investments. Inward flow of FDI in America has been characterized with takeovers from pre-existing businesses as opposed to new establishments. In this regard, most of FDI within China originates mainly from Asia except Japan. In particular, Hong Kong is the main source of FDI in China in record. However, some of the FDI listed in China to have originated from Hong Kong arises from elsewhere. Besides, other FDI listed in China to have originated from Hong Kong are in particular sourced from western nations as well as Taiwan that is mainly placed in the Chinese economic context with Hong Kong intermediaries. However, there have been little records of the quantity of FDI into China from Hong Kong originating from Hong Kong (Alfaro, 2003).

Generally, FDI (Foreign direct investment is used as a tool for accelerating development of the economy in the developing nations which are certain of that FDI stimulates economic growth of the home country. China restructured its economy by the adoption of external development strategies to steer on liberalization of the market as well as the policy of open door in 1978. The open door policy essentially aimed at encouraging and attracting FDI inflows through providing several financial and fiscal incentives like exempting import duty, giving tax concessions and financial subsidies to foreign countries.

The FDI seeks to make an investment in a business enterprise existing in a country other than that of the investor, in the process acquiring 10% of the voting stock. The acquisition enables the investor to be part of the management personnel with a lasting solution. FDI can invest in enterprises targeting the domestic market thereby influencing development and growth by harnessing and capitalizing on large domestic market demand and high-income levels of the host country. For enterprises seeking non-market FDI, the aim is to attract foreign direct investment to help boost their capacity into tapping foreign markets other than the producing Country. The FDI in this nature of investment benefits the host enterprise by improving the ease of exporting the products and projecting the products as highly competitive in the international market. The host Countrys economy growth and development are boosted through an increase in productivity of capital. As most developing Countries strive to attract FDI, once successful, they accrue numerous advantages that come with it. They include; transfer of technology in production, managerial and marketing expertise, advertising and business practices that maximizes global profits.

The underlying principle behind these was to spur economic growth through the use of external capital. Since china adopted FDI in 1979, from nearly being a closed economy, it is now the biggest host state of FDI among developing nations in the last 18 years being the second leading recipient globally. In 2008, 659,800 FDI project agreements had been signed by China and in reality; it had already collected $899.06 billion from foreign direct investment. Additionally, the percentage of FDI from 1979 to 2008 had risen from almost 0% to 2.49%. For the last three decades chain has reformed its economy, remarkably attaining an approximate of 10% economic growth rate annually on average.

However, FDI impact on the growth of the economy is debatable. Alternatively, various theories of growth offer contradictory forecasts. The neo-classical theories of exogenous growth do not view FDI as a serious accelerator of economy whereas the new models of endogenous growth more positively consider it as being vital to economic growth. The exogenous models state that growth of the economy in the long run is exogenous while endogenous models explain that FDI changes both growth rate and output level (Bengoa et al., 2003, pp.529-531). Moreover, various empirical literature shows mismatched results of FDI on the impact of economic growth. Some present positive effect of FDI on economic growth while others show that this effect is under particular conditions. Thus, the FDI impact on the growth of the economy is still ambiguous. This paper compares the concepts and components of FDI in both china and Nigeria, its impact on the countries, china policy reforms and how Nigeria can apply these policies in its FDI.

1.2. Objectives of the Study

To identify the impacts of FDI in Nigeria

To identify impacts of FDI in China

To provide an informed propositions on the lessons that Nigeria can learn from Chinese FDI towards enhancing positive impacts of FDI in Nigeria

To determine the negative impacts of FDI in both Nigerian and China.

1.3. Limitations of the Study

This study focused on analyzing the effect of Foreign Direct investment in the two economies. The study however will not be able to consolidate majority of the statistical references of all the variables involved in the FDI in both countries due to lack of critical evidence of the process. For instance, in China, there are various aspects of FDI investments into China form Hong Kong that are not recorded due to the absence of information regarding the actual origin. Similarly, this study acknowledges the different domestic characteristic by culture and resource endowment between the two countries. Subsequently, the impact of FDI identified in this study may not be able to present the real impact of this difference on the utilization of FDI and the overall impact due to lack of consistent information regarding the effect of specific cultural aspects to the economic growth and development of the two economy that remains largely scanty in both cases.

Chapter 2: Literature Review

2.0. Introduction

Foreign direct investments often come to capital-importing countries as subsidiaries of foreign firms. However, it may also come as an approach to establishment of new company where a firm invests in a company with equity holdings or development of fixed assets in other economies by nationals form the investing nations. In these instances, the foreign firms often exercise control on the assets that they generate in the host country. The objectives of every investor are anchored on the acquisition of a lasting interests as well as the effective control on the management of enterprises form which investments occur. The local investors however may not have the majority share holding in the company of establishment but have a significant voice in managing the assets of the company such that the foreign investors have the capacity to leverage or participate in enterprise management. This aspect distinguishes Foreign Direct Investments from Portfolio Investment.

FDI also pose lesser risks compared to external debts for borrowing countries despite the fact that external borrowing promise higher returns relative to FDI. Nonetheless, FDI has a major advantage that it does not complement a countrys quantity of contractual debts service obligations. In case an investment that is financed through external borrowing does not result into positive implication to the local economy, the country may face similar peripheral climes as in the case of a success scenario (Imoughele & Ismaila, 2014). However, in case the FDI is credited with unprofitability, the host country shares similar losses with the investing country.

In case of successful FDI, the host country share considerable component of the good fortunes with their foreign investment counterparts. This aspects defines the root of significance of FDI in the both developing economies and their developed counterpart. When...