Verificación de Viabilidad en el Territorio

The institutional drivers of growth refer to other factors that enhance the quality of production or productivity of other factors of production. Examples include: infrastructure development (e.g. energy supply, access to markets, ports, communication facilities, etc), the political environment, and measures of institutional quality (e.g. the level of corruption, bureaucracy and the rule of law for enforcement of property rights and contracts).

However, only one of these factors is examined in detail - infrastructural development - as data on other variables are either unavailable or incomplete to conduct any meaningful analysis in the current study. For example, the political stability index developed by the world bank measures perceptions of the likelihood that the government of Nigeria will be disrupted or overthrown by violent or unconstitutional means, including terrorism and politically motivated violence (Kaufmann et al, 2011). The index is an average of several other indexes from the Political Risk Services, Economist Intelligence Unit, and the World Economic Forum among others. But data on this variable is incomplete and has been excluded from the empirical analysis. In addition, the rule of law index captures opinions of the extent to which agents in Nigeria have confidence in and obey the rules of society, and in particular the courts, the police, the quality of contract enforcement, property rights, as well as the likelihood of violence and crime (Kaufmann et al, 2011). Again, data on this variable is incomplete and has been excluded from the analysis.

The level of infrastructure development could affect economic growth. As noted earlier, good infrastructure tend to increase the productivity of investments and reduces operating costs of production and this is likely to attract foreign investments (e.g. Wheeler and Mody, 1992; Asiedu, 2002) which will lead to growth. Infrastructure development is often measured by the availability and reliability of telecommunication facilities, road and rail networks and power transmission. Here, we examine one known measure of infrastructure development in Nigeria, electricity consumption, which has been used in various studies due to data availability. Although Nigeria is a major net exporter of crude oil and flares more than 80% of its

gas reserve, shortage of energy supply is so marked that power interruptions and fuel shortages have become normal. This can be attributed to endemic corruption, inefficient management, lack of spare parts and manpower shortage (Akinlo, 2009). In fact, between 1980-2005, electricity generated has fallen short of electricity consumed creating huge energy losses of between 32-43% in Nigeria (ibid, p. 683). A number of studies have examined the relationship between electricity consumption and economic growth in Nigeria. Akinlo (2009) examined the causality relationship between energy consumption and economic growth in Nigeria during the period 1980-2006 and found a cointegration between real GDP and electricity consumption and there is only a unidirectional causality flowing from electricity consumption to real GDP.

However, after decomposing the trend and the fluctuation components of both variables, the results showed that there is cointegration between the trend and the recurrent components of the two series, which suggests that the relationship between both variables may be related to the business cycle. Iyke (2015) also examined the causal link between electricity consumption and economic growth in Nigeria for the period 1971-2011 and found that there is a distinct causal flow from electricity consumption to economic growth both in the short run and long run. Therefore, the implications of these findings show that investing more in electricity generation and reducing the inefficiency that exists in the supply and use of electricity can help stimulate economic growth in Nigeria. Apart from electricity consumption, the rapid rise in mobile phone subscriptions in Nigeria and Africa in general, could also be seen to influence economic growth. Theoretically, some studies have argued that telecommunications tend to increase productivity, improve employment opportunities and facilitate the work of many occupations and thus contributes to economic growth (e.g. Castells et al, 2007; Carmody, 2012). In addition, some argue that telecom is an important input that enhances the factor productivity of the traditional inputs such as land, labour and capital (e.g. Isaksson, 2010).

With respect to developing countries (including Nigeria), Cleeve and Yiheyis (2014) analysed the impact of mobile telephony on economic growth in Africa using a panel of 36 African countries over the period 1995 to 2010 and found evidence to support the view that increased mobile penetration contributes to the growth rate of real GDP. However, they could not find any evidence to suggest that increase in mobile phone usage significantly influenced GDP growth. As mobile phones effectively entered the Nigerian market in the early 2000s, data on mobile phone subscriptions

in Nigeria is not adequate to conduct any analysis given that the period of the current study dates back to 1970. Hence, this variable has been excluded from the list of variables in the empirical analysis.

3.9. Chapter Summary

This chapter has provided a detailed background on the subject of FDI, financial development and economic growth within the context of the Nigerian economy and economic and financial reforms. The first part of this chapter examined the determinants of FDI flows to Nigeria, analysis of FDI flows to Nigeria as well as the impact of FDI on economic growth. Nigeria has maintained its position among the top five destinations of FDI in Africa since the 1970s.The factors that determine the flow of FDI to Nigeria are numerous and they range from the large size of the market, to availability of natural resources, to considerable degree of trade openness, and good return on investment.

However, areas of significant challenge still remain the level of infrastructure development, political risk, macroeconomic instability, human capital and quality of institutions, among other factors. The trend analysis of FDI flows to Nigeria showed that the structure and flow of FDI into the country was influenced strongly by the regulatory regime, which was predominantly restrictive between 1970 and 1994, and later liberalised in 1995 with the promulgation of the Nigerian Investment Promotion Commission Act. Although there has been some diversification into other sectors like manufacturing and services sector in recent years, FDI in Nigeria has traditionally and predominantly been concentrated in the extractive industries (i.e. oil and gas, solid minerals, etc). The brewery, telecoms, miscellaneous services and retail industries are some of the major industries that have attracted inward FDI in recent times besides oil and gas.

Most studies that examined the economic impact of FDI on economic growth found a positive long run relationship between FDI and GDP, while causality between FDI and growth showed mixed evidence. In terms of sectoral impact, FDI was shown to have had more positive impact in sectors that have received FDI the most, namely manufacturing and telecoms.

The second half of this chapter has examined financial development in Nigeria, including the liberalisation and consolidation of the financial sector, which on the

banking sector, for example, reduced the number of banks significantly, almost doubled the number of bank branches, thrusted total banking assets, bank credit to private sector, stock market capitalisation and trading values to unprecedented levels. This chapter also presented an account of several studies that examined the relationship between financial development indicators and economic growth, with most of the studies finding a positive impact though the results was mixed on whether this impact was in the short run or long run or both.

One of the main critiques of these studies, however, is that nearly all the studies that have looked at financial development and economic growth failed to account for structural breaks in considering structural changes in the financial time series data, which means that many of these studies may have reported spurious or biased results. Studies that have examined financial development with FDI are few and most notably, these studies have failed to interact FDI with financial development to assess the role of financial development indicators in enhancing the relationship between FDI and growth. They have also failed to investigate whether a causal relationship exists between FDI and financial development itself. This study is an attempt to fill both these gaps.

Finally, a review of the literature also shows that apart from FDI and financial development, other drivers of growth in Nigeria include factor input drivers such as capital accumulation, labour and human capital, and technology, macroeconomic drivers such as inflation, interest rates, exchange rates, government expenditure and trade openness, as well as institutional drivers such as infrastructural development, political stability, and institutional quality. These factors are similar to the determinants of FDI in Nigeria and thus, help provide a more complete framework for understanding the relationships between FDI and growth.

Chapter 4

Methodological Framework

4.1. Introduction

This chapter lays out the methodological framework for the study in terms of epistemology, data and measurement variables, description of econometric methods and specification of relevant models. As stated in earlier chapters, this thesis empirically investigates the relationship between FDI and economic growth in Nigeria, with specific reference to the role of financial development in shaping this relationship. In addition, this study examines the direction of causality between FDI and economic growth and between FDI and financial development. Thus, the study attempts to provide answers to three research questions:

1. Does FDI promote economic growth generally in Nigeria?

2. What role does financial development play in enhancing the impact of FDI on the domestic economy?

3. Is there any causal relationship between FDI and financial development and between financial development and growth?

The setting out of the research questions of any study as above complies with the pragmatic stance or philosophical position that specifying research questions are key to the achievements of the aim of any study. Thus, section 4.2. reviews several epistemological issues, critiques, and positions that are relevant to the study on FDI and economic growth as with many other studies in business and social sciences. Next, section 4.3 examines the sources of data and describes the variables used in the study, including the measures of FDI, financial development and economic growth, and all the control variables to be used in the growth regressions. Section 4.4 describes the econometric methods used and lays out the hypotheses of the study and the relevant theories and assumptions that are made. The key econometric models used in this study are Unit root and Co-integration tests, Granger Causality test, and ordinary least squares (OLS). Section 4.5 specifies all the econometric models that would be run and analysed in this study and lays out the procedure for interpreting the results of the regressions in a systematic fashion.