CHAPTER ONE
1.0.
INTRODUCTION
Output
of the Nigerian economy comes from six main sectors namely; agriculture,
manufacturing, mining and quarrying, real estate and construction, wholesale
and retail trade (general commerce) and service sectors. These six sectors
interact with one another using the stock of capital and other factors of
production within the economy to produce the desired goods and services. In the
process of production in these sectors, capital plays a key role. It enables
the producers to procure the necessary inputs of production and thereby helps
expand production capacities.
Therefore,
availability or non-availability of capital determines, to a greater extent,
the growth process in the various sectors and hence the economy as a whole.
Due
to abject poverty, low savings capacity and consequent low capital formation,
producers in developing countries like Nigeria are unable to finance their
activities and therefore have to depend on external sources of funding.
According to Uma (2001), availability of external funding, especially access to
long-term credit influences firms’ investments level in any economy, since
credit is viewed as a productive input and policy makers believe that it is
possible to promote specific economic activities by delivering pre-determined
amounts of loans to producers. Hence, bank lending has become an essential
feature in output growth process in Nigeria.
Foreign direct investment
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.
They 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 speculations 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 direct 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 were 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).
1.2 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.
1.3. OBJECTIVES OF THE STUDY
This study seeks to determine the effect of
foreign direct investments on stock market development in Nigeria .
1. To
ascertain the extent to which capital market influences economic growth
in Nigeria.
2. To
determine if there exists any relationship between foreign direct
Investment and economic growth in Nigeria
1.4 RESEARCH HYPOTHESIS
1.
Ho: The capital market does not have
positive significant impact on Nigerian economy
Hi: The
capital market have positive significant impact on Nigerian economy
2.
Ho: Foreign direct investment in Nigeria
has significant impact on
Economic Growth.
Hi: Foreign direct investment in Nigeria has no
significant impact on
Economic Growth.
1.5. 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.
1.6. SCOPE
OF THE STUDY
This
research work will base its work majorly in and some specific area will be used
to analyze the project.
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