ABSTRACT
The aim of this
research work is to know the impact of foreign direct investment on stock
market performance in Nigeria. The study use secondary data as means of
collecting data, the quantitative
data collected included total
FDI remittances as a percentage
of GDP into Nigeria from 1987 to
2017 collected on an
annual basis from World Bank database. Data on
exchange rates and interest rates was
collected from the CBK website for
every year from 1987 to 2016. Data on
inflation was the CPI while data on economic growth was the Nigeria’s GDP per capita, both collected quarterly
from 1987 to
2016 at the
KNBS. The data was
analysed with the used of a multiple linear regression model to
determine the extent to which total variation in the
dependent variable (stock market
development) is influenced by the independent variables’ variation. The findings revealed that the
independent variables: FDI inflows,
economic growth, interest rates, exchange rates and inflation explains
only 35.7% of changes in the dependent variable
as indicated by the value
of R which implies
that there are other factors not included
in this model that account for
64.3% of changes in stock
market development in Nigeria .
The model was found to be fit at
95% level of confidence since the
p-value of 0.047 is less than
0.05. This implies that
overall the multiple regression model is statistically significant, in that it
is a suitable prediction model for explaining stock market development in
Nigeria. The
study therefore concludes that FDI inflows
are not one of the significant
determinants of stock market development.
TABLE OF CONTENTS
Title Page i
Certification i
Dedication ii
Acknowledgement iii
Abstract iv
Table of Contents v
Chapter
One 1
1.1 Introduction
1
1.2 Statement
of the Problems 2
1.3.0 Objective
of the study 3
1.3.1 Research
Question 3
1.3.2 Research
Hypothesis 3
1.4 Significance
of the Study 3
1.5 Scope
of the Study 4
1.6 Limitations
of the Study 4
1.7 Operational
definition of terms 5
Chapter
two 6
2.1 Conceptual
Review 6-12
2.2 Theoretical
Framework 12-14
2.3 Empirical
Review 15-19
2.4 Gap
of the Study 19
Chapter
three 20
3.1 Introduction
20
3.2 Research
Design 20
3.3 Data
specification 20
3.4 Data
collection 20
3.5 Diagnostic
text 21
3.6 Data
Analysis 21
3.6.1 A prior
expectation 22
Chapter
Four 23
4.1 Introduction
23
4.2 Diagnostic
text 23
4.3 Data
analysis 23
4.4 Correlation
analysis 24
4.5 Discussion
of findings 29
Chapter
five 30
5.1 Introduction
30
5.2 Summary
of Findings 30
5.3 Conclusion
33
5.4 Recommendation
34
5.5 Limitations
of the study 35
References
37
CHAPTER ONE
1.0.
INTRODUCTION
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.
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).
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