CHAPTER ONE
1.0. INTRODUCTION
1.1. Background of the Study
Foreign Direct Investment (FDI) not only
offers countries with much-needed resources for domestic investment but also
creates job opportunities, help transfer managerial expertise and technology
all contributing to the advancement of the economy. Most governments have
appreciated the critical role the FDI plays and have established various ways
of attracting it. In theoretical literature, the purpose of FDI is that of a
carrier of foreign technology that can promote economic growth (Jones, 1999).
The most outstanding motivation of FDI
has been resource seeking (Dunning, 2003). Economists consider FDI as an
essential component of economic progression. The need for better economies,
technological advancement, economic growth, poverty eradication and better standards
of living has seen Africa’s nations endeavor to get Foreign Direct Investments pumped
into their economies to help accomplish these (Mishkin & Eakins, 2009).
This study was guided by several theories such as the open system theory,
internalization theory and foreign direct investment dependency theory that
tried to explain the relationships between foreign direct investments and stock
market development. These theories examine the ways through which FDI
contribute to economic growth the irrespective countries. These theories
demonstrate the extent to which FDI contribute to technological change
enhancement through acquisition of new knowledge and capital goods, i.e. the
technological diffusion process. There was a lots of speculation about the contribution
of FDI in the recipient countries with many arguing that it is based on the
existing circumstances in those respective countries. The theories relate FDI
with economic growth of a country which in return leads to stock market
development.
The financial sector greatly contributes
to economic growth since it increases direct foreign investment. Studies have
shown that well organized and run stock markets increase investment, economic
growth and efficiency. Nigeria’s stock market has been defined as both shallow
and narrow. There has been less than 1% growth financing in the stock market
despite the aim to achieve an annual economic growth of 10% by 2030 with a 30%
investment rate which is to be mainly financed by use of domestic resources. A
lot of initiatives such as the institutional development of stock market was
established so as to put more focus on the stock market. These efforts are
assumed to facilitate adequate resources mobilization and efficient allocation
so as to attain growth objectives (Ngugi, Amanja & Maana, 2010).
1.1.1
Foreign Direct Investment
Foreign direct investment can be
described as an investment made in a corporation by an interested party from
another country for which the foreign investor has control over the acquired
company. This transaction brings about a long term association between the host
and home country investors (Olson, 2008). UNCTAD (2002) describes three
different types of FDI. These are: reinvested earnings, equity capital and
other capital which mainly consist of intercompany loans. FDIs create new job
opportunities as upon setting of the business, recruitment and training of the
locals in the host country is undertake transferring skills and technological
know-how as well as providing jobs. According to Ismaila and Imoughele (2010),
FDI represent long term commitments to the host country.
It is a preferred form of investment
because it has no obligations to the host country.FDI is important in adopting
new technologies, skills and managerial capabilities in the different sectors
of the economy which are traditionally difficult to raise through use of domestic
savings, and if not, there would be difficulty in importation of the technology
from abroad. This would be compounded by the fact that transferring technology
to firms with little experience is risky and they will find difficulty in the
use of it and it comes at a great cost (Olson, 2008). FDI is responsible for
many externalities that come in the form of benefits to the home country that
are not responsible for generating incomes to the host country. FDI is
important for developing countries as it avails resources necessary to optimize
the level of economic development (Ismaila & Imoughele, 2010). The reason for
this is that their economies face challenges such as low domestic savings,
revenues, low levels of productivity and low foreign exchange earnings. A
country’s appeal for FDI is affected by changes in restrictions that include
removal of government barriers to trade as well as privatization of government
agencies. The country’s economic growth potential influences the appeal for the
country for FDI since countries with higher economic growth potential make it
easier for firms to take advantage of that growth by setting up business there.
Tax rates and Exchange rates influence a country’s appeal for FDI. Low tax
rates on corporate profits encourage Foreign Direct Investment while firms
prefer to direct FDI to countries where the local currency is expected to
appreciate against their own currency(Mishkin & Eakins, 2009).
1.1.2 Stock Market Development
A stock market is a market where
individuals and entities trade shares at prices that reflect demand and supply
and low transaction costs (Yartey, 2008). Markets function through placement of
various interested sellers and buyers, including firms, households, private
firms and government agencies in one location at a given time so that trade can
take place. Stock market development involves the establishment of
institutions, markets and instruments that supports investments and growth
process. Stock market development enhances the capability of the stock market
to act efficiently as an intermediary. A highly liquid stock market is able to
accommodate large and varied issuance of stocks with minimum price effect (Adam
& Tweneboah, 2009). Stock market development and efficiency is influenced
by a number of factors and according to Garcia and Liu (1999), it is a
multifaceted concept which is measured by a number of factors namely, the stock
market capitalization, volatility, liquidity, concentration, integrating with
world capital markets and compliance with legal rules with regard to
supervision and regulations in the market. The main measures of stock market
development that was looked at in this paper were stock market liquidity and market
capitalization. Market capitalization or stock market capitalization or is the
sum of market value of the outstanding shares of a company. Market capitalization
is therefore the total value of domestic stocks. Stock market capitalization is
therefore used in the measurement of the stock market size and is among the
main indicators of growth and development in stock market (Levine, 2003). The
liquidity of the stock market can was used to measure stock market development
and it refers to the simplicity with which investors can buy and sell their
stocks or shareholdings on the stock exchange or on the stock market. It is
usually measured in terms of the total value traded of the shares to GDP and
the stock market turnover ratio to GDP.
The ratio of total value of shares
(domestic) traded to GDP is used to measure the value of equities traded
relative to the size of an economy; it doesn’t measure the costs and
uncertainties of trading the securities at the prices posted. There is one
shortfall with this measure as proxy to stock market liquidity in that when
investors anticipate large profits in firms, their share prices will rise. This
rise in price increased the stock value traded and thereby boosting the total
value traded to GDP (TVT/GDP) ratio (Levine, 2003).
This therefore means that the liquidity
indicator has increased without an increase in the number of transaction or
even might increase with the number of transaction falling. The solution to
this problem is to add the market capitalization to GDP ratio in the regression
to try and look at the extent of the price effect. In essence the price effect
affect both the total value traded and the market capitalization but the only
variable that is directly related to the pricing effect is the value traded
ratio (Levine, 2003).
1.1.3
Foreign Direct Investment and Stock Market Development
Theoretically, there has been a prove of
a triangular causal association between the FDIC and the development of the
stock market whereby FDI inflows is considered a well spring of progress in
terms of technology and decreasing unemployment in most countries that are
still developing. This will then increase the production of goods and services
which ultimately result to increased GDP. Therefore, increased GDP means the
growth of economy which has a positive effect to the development of the stock
market and the rise of share prices (Adam & Tweneboah, 2009). The lasting
effect of FDI inflows on both the increased investor’s involvement in stock
exchange and the domestic capital market’s development were earlier confirmed
by Errunza (1983). Yartey (2008) argued that the variety of investors and
trading volume is increased by the greater confidence in the domestic capital
market which is promoted by both institutional and regulatory reforms which are
encouraged by FDI. Batten and Vo (2009) confirmed a linkage between FDI and
stock market development whereby FDI possessed a stronger positive effect on
the economic growth in countries that had higher levels in the development of
the stock market. FDI has various positive effects which may be seen via the
positive influence of the economy. This results in economic growth. Other effects
are seen through the transfer of better technology in the market which assist
developing countries, the increase in knowhow and also indirectly, capital
markets.
The studies surrounding this reveal that
the justification for the increased long term association includes the
underlying presumption that the existence of FDI inflows results in spillover
effects on the local stock market and therefore motivates the law makers to put
into effect market-friendly regulations in their various countries, which encourage
stock trading (Rogoff, 2005). Adam and Tweneboah (2009) stated that in
developing economies, following financial and political transformation, FDI has
grown rapidly. Most countries have embarked on a number of practices so as to
increase their share of FDI flows. Such activities include relaxing FDI
restrictions, macro stability strengthening, domestic financial report, liberalizing
capital account, and instituting tax incentives and subsidies (Oseni
&Enilolobo, 2011). In addition, there is establishment and development of
stock markets so as to direct funds towards viable projects for investments.
Foreign investors have become major
players in the emerging and developing stock markets by either buying already existing
equity or disposing the same in capital markets though the resultant impact on the
development of these emerging stock markets especially in the developing
countries has been ignored. The foreign direct investment affect price of
companies shares either positively or negatively as it increases the supply and
demand for the shares (Al- Halalmeh & Sayah, 2010). 1.1.4 Foreign Direct
Investment and Stock Market Development in Nigeria FDI in Nigeria is covered in
all the sectors, be it in the banking, automobile or telecommunications sector.
Various multinational companies have set up operations in Nigeria and they
include Car and General, Coca-Cola as well as communication firms like Airtel.
In every aspect of our lives, FDI is
felt that is in the goods and services that we use. FDIs are not in isolation
as they have provided jobs and with them, technical knowledge as they train
their Nigeria n employees to maintain the standards that are therein their other
investments all over the world. They are the major source of foreign exchange
to the country. FDI has not been consistent over the years with some periods recording
low inflows. In the 1980s and 1990s, FDI inflow was low due to deterioration in
economic performance as well as rising problems of poor infrastructure and the
high cost of living greatly impacted negatively on FDI inflows in Nigeria
(KPMG, 2012).
1.2. Statement of the Problem
The stock market is a major section of
any given economy and its financial structures. It is considered to be a major
financing source for new entities and ventures based on the profitability level
expected. Further, for a country to increase the level of savings and investment
therefore resulting to a growth in the economy the securities market is considered
essential and its role is significant in any country or economy. It is
considered to be a replica around the world of the economic strength of most
countries. Studies by various scholars indicate the positive role of the stock
market which results to economic growth in various countries (Levine &
Zervos, 2005).Some factors that result in the securities market development
include the political stability of a country, the exchange rate, economic
liberalization and foreign direct investment (Adam & Anokye, 2008).
The importance of the development of
stock market in developing economies as a result of FDI is considered to be
very strong. Research from studies shows a triangular causal relationship in;
economic growth stimulation by FDI; positive effects are observed as a result
of economic growth and the ultimate effect is the development of the stock
market promoted by FDI (Adam & Anokye, 2008).
In the Nigerian context, the World Bank
issued the Doing Business 2017 report which showed that Nigeria was ranked
position 92nd out of 189 countries in terms of FDI inflows. From 2016, this was
a 16 gain of places and therefore an improvement. The reason behind this was
the fact that Nigeria simplified its procedures followed in creating business
and ownership transfer and improvement of electricity and credit access.
Nigeria has also embarked on several activities in order to enhance a positive
influence on FDI inflows in the coming years such as relaxing conditions for
obtaining business licenses and public-private partnership development which is
a strategy in the Vision 2030. In addition, Nigeria has also opened most
sectors to foreign investment such as the telecommunications sector which has
mostly attracted FDI due to the fiber optics that were introduced in 2009-2010.
Local researches done on the area of stock market include; Seile (2009) who did
a study on the association between stock market and specific macroeconomic
variables in the NSE such as inflation, GDP,
1.3.0 Objectives of the Study
This study seeks to determine the effect
of foreign direct investments on stock market development in Nigeria, while
specific objective are the following:
i.
To know the major problem facing foreign
direct investment on stock market in Nigeria
ii.
To determine the attitude of people to
direct investment.
1.4. Significance of the Study
The study findings are hoped to be of
benefit to policy makers in developing investment strategy policies and
developing the necessary institutional framework required to market Nigeria as
an ideal foreign investment destination. Also, it will help them in coming up
with policies that ensures consistent development of the stock market and thus protecting
the profit margins and net present values of current and potential investors
alike.
The finding of the study has formed a
future reference to researchers, scholars and students who may aspire to take
out research on the same or correlated field. The study will be helpful to
scholars and researchers in identification of further areas of research another
related studies by highlighting related topics that require further research and
reviewing the empirical literature to establish study gaps. The study findings
will inform the policy direction taken by the Capital Markets Authority and
other stakeholders through issuance of regulations that touches on the market
initiatives that would ultimately result in increased stock market development in
Nigeria.
1.5. Scope of the Study
This research work will base its work
majorly in and some specific area will be used to analyze the project.
1.6. Limitations of the Study
There are lots of constraints that
hinder the fast and development of this research work, a lots of problem were
faced that limit against the work carried out, such as:
1. Financial
Constraint: A lots of materials are needed for this work, but most of them are
been sold at high price that I'm unable to afford.
2. Time:
There is little time for this work, lots are supposed to be done but due to the
short time we have something’s are reduce or not mention.
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