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UGWU, Chinyelu. U.

PG/M.Sc /11/59878

FOREIGN DIRECT INVESTMENT AND EMPLOYMENT NEXUS: A CASE OF

NIGERIA (1981- 2012)

FACULTY OF SOCIAL SCIENCES

DEPARTMENT OF ECONOMICS

Ameh Joseph Jnr

Digitally Signed by: Content manager’s Name

DN : CN = Webmaster’s name

O= University of Nigeria, Nsukka

OU = Innovation Centre

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FOREIGN DIRECT INVESTMENT AND EMPLOYMENT NEXUS: A

CASE OF NIGERIA (1981- 2012)

By

UGWU, Chinyelu. U.

PG/M.Sc /11/59878

An M.Sc dissertation submitted to the

Department of Economics

Faculty of the Social Sciences

University of Nigeria

In Partial Fulfillment of the Requirements for the Award of Master of Science

(M.Sc) Degree in Economics

Supervisor: Prof S. I. Madueme

May, 2014.

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TITLE PAGE

Foreign Direct Investment and Employment Nexus: A Case of Nigeria (1981- 2012)

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CERTIFICATION

This is to certify that Ugwu, Chinyelu. U. an M.Sc student of the University of Nigeria Nsukka

with registration number PG/M.Sc /11/59878has successfully completed the research required

for the Award of Masters of Science Degree in Economics in the afore mentioned institution.

Ugwu, Chinyelu. U Date

PG/M.Sc/11/59878

Supervisor Date

Prof S. I. Madueme

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APPROVAL

The research work titled: “Foreign Direct Investment and Employment Nexus: A Case of Nigeria

(1981- 2012)” has followed due process and has been approved to have met the minimum

requirement for the award of the Master of Science degree in the Department of economics,

University of Nigeria Nsukka.

Approved

Supervisor Date

Prof S. I. Madueme

Head of Department Date

Prof C. C. Agu

Dean of Faculty Date

Prof. C. O. Ugwu

External Examiner Date

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DEDICATION

This work is dedicated to the Almighty God for His Grace and Mercies and for His stronghold

throughout my stay in school.

It is also dedicated to my parents and siblings.

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ACKNOWLEDGEMENT

I would like to take this opportunity to express my profound gratitude and deep regards to

my supervisor Prof Mrs S.I. Madueme for her useful comments, remarks and engagement

through- out the course of this thesis.

I also take this opportunity to express my deep sense of gratitude to Dr Ezebuilo and

other lecturers in economics department and my course-mates for their cordial support, valuable

information and guidance which has helped me in completing this research.

I am obliged to my friends Emeka Ogbonnaya, Ebere Ogbonna, Denis Yuni, Amaka

Utuwanne, Emmanuel Dickson, Sundayson, Jamila, Chidoomebube, Paul Haaga and Charles

Obutte amongst others and not forgetting Anthonia Awansia and Mrs Asotibe, my room-mates,

for the valuable information provided by them; I cannot begin to express my gratitude and

appreciation for their friendship.

Also, I extend my sincere gratitude to my relations, Uncle Ralph, Aunt Helen, Aunt

Ebere, Nkechi and my grandma, Mrs Cecelia Ugwu for their unwavering encouragement.

Most importantly, none of this could have happened without my parents Mr & Mrs Cyril

Ugwu for their constant encouragement and prayers as well as financial support and to my

siblings, Chinonso, Ifunanya and Toochi for their unwavering moral and emotional support. This

dissertation stands as a testament to your unconditional love and encouragement.

Above all, my utmost appreciation goes to the Almighty God for His divine sustenance

and intervention in this my academic endeavor.

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ABSTRACT

Motivated by the rising unemployment in Nigeria, this study examined the impact, causality and

long run relationship between foreign direct investment and employment in Nigeria. The

increasing unemployment rate and its vices in Nigeria questions the effort/policies that have

been made to combat it or the degree of its implementation, and therefore the need to examine

the impact of FDI as an external factor on employment. The study employed multiple regression

analysis, Johansen co-integration and Granger causality to ascertain the specific objectives of

the study. The study employed data from CBN Statistical Bulletin, National Bureau of Statistics,

and the World Bank indicators. The findings of the study suggest that FDI has a significant and

positive impact on employment, and other significant determinants of employment include; GDP

and wage. Also the results show that there exist a significant long run relationship between FDI

and employment. Finally the results suggest that FDI granger causes employment but

employment does not granger cause FDI. This means that FDI has a significant role on

employment in Nigeria and this should not be minimized. The study therefore recommends that

policies be formulated to exploit the role of FDI on employment in Nigeria in an attempt to

reduce the unemployment rate.

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TABLE OF CONTENTS

Cover Page…………………………………………………………………………..…………....i

Title page…………………………………………………………………………….…………...ii

Certification Page …………………………………………………………………….………….iii

Approval Page ………………………………………………………………………......……….iv

Dedication …………………………………………………………………………….………….v

Acknowledgements …………………………………………………………………….…….......vi

Abstract………………………………………………………………………………….…….....vii

Table of Content ….……………………………………………………………...………..........viii

List of Tables …………………………………………...……………………………..………… x

List of figures…………………….…………………...……… ……………………..………… xi

CHAPTER ONE: INTRODUCTION

1.1 BACKGROUND OF THE STUDY …………………………………………………........... 1

1.2 STATEMENT OF THE PROBLEM …………………………………………….........……. 5

1.3 RESEARCH QUESTIONS .................................................................................................... 8

1.4 OBJECTIVES OF THE STUDY ………………………………..………………..........…... 9

1.5 RESEARCH HYPOTHESIS ………………………………………………….........………. 9

1.6 SCOPE OF THE STUDY ……………………………………………….........…………….. 9

1.7 SIGNIFICANCE OF THE STUDY ……………………………….........………………..... 10

1.8 LIMITATIONS OF THE STUDY ........................................................................................ 10

CHAPTER TWO: LITERATURE REVIEW

2.1 CONCEPTUAL FRAMEWORK …………………………………….........………………. 11

2.2 THEORETICAL LITERATURE ………………………………………..................………13

2.2.1 THEORIES OF SPILLOVER EFFECTS ………………………………............……14

2.2.2 THEORIES OF ABSORPTIVE CAPACITY ……………………………….........…15

2.2.3 THEORY OF THE ECLECTIC PARADIGM OF DUNNING ……….........……… 17

2.2.4 THEORY OF LABOUR DEMAND …………………………….......….……………20

2.3 EMPIRICAL LITERATURE ……………………………………………….......…………. 21

2.4 LIMITATIONS OF PREVIOUS STUDIES ………………………….........………………. 27

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CHAPTER THREE: METHODOLOGY

3.1 THEORETICAL FRAMEWORK ........................................................................................ 29

3.2 ANALYTICAL FRAMEWORK ………………………………….....…………………….. 30

3.3 MODEL SPECIFICATION ………………………………………….......………………… 31

3.3.1 UNIT ROOT TEST ……………………………………….......…………………...... 33

3.3.2 CO-INTEGRATION TEST …………………………………………………............ 33

3.3.3 THE ERROR CORRECTION MODEL ……………………………….........……… 34

3.4 ESTIMATION OF PROCEDURES …………………………………….........………….… 35

3.5 SOURCE OF DATA AND STATISTICAL SOFTWARE ………………………..........…. 36

CHAPTER FOUR: PRESENTATION OF RESULTS

4.1 STATIONARITY AND CO-INTEGRATION TEST ......................................................................... 37

4.1.1 Stationarity Test ........................................................................................................... 37

4.1.2 Co-integration Test for OLS results ............................................................................. 37

4.2 IMPACT OF FDI ON EMPLOYMENT ............................................................................... 38

4.3 LONGRUN RELATIONSHIP BETWEEN FDI AND EMPLOYMENT IN NIGERIA ..... 42

4.4 CAUSALITY ANALYSIS BETWEEN FDI AND EMPLOYMENT IN NIGERIA .......... 42

4.5 EVALUATION OF WORKING HYPOTHESES .............................................................. 43

4.5.1 Test of Working Hypothesis 1 ............................................................................. 43

4.5.2 Test of Working Hypothesis 2 ............................................................................. 43

4.5.3 Test of Working Hypothesis 3 .............................................................................. 43

CHAPTER FIVE: SUMMARY, POLICY IMPLICATIONS AND CONCLUSION

5.1 SUMMARY ........................................................................................................................... 45

5.2 POLICY IMPLICATIONS .................................................................................................... 46

5.3 SUGGESTIONS FOR FURTHER RESEARCH ..................................................................47

5.4 CONCLUSION ...................................................................................................................... 47

REFERENCES ........................................................................................................................... 49

APPENDIX

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LIST OF TABLES

Table 4.1 Unit root on variables and residuals of all the regressions ......................................... 37

Table 4.2 ADF Co-integration Results ........................................................................................ 38

Table 4.3 Multiple Regression results for the Impact of FDI on Employment .......................... 39

Table 4.4 Multiple Regression results for the Impact of FDI on Employment ........................... 40

Table 4.5 ADF Co-integration Results ........................................................................................ 42

Table 4.6 Granger Causality Results between FDI and Employment ......................................... 42

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LIST OF FIGURES

Figure 1.1 Employment to population ratio, total (%) in Nigeria, 1991- 2010.............................. 6

Figure 1.2 FDI net inflows in Nigeria 1991- 2010 ........................................................................ 7

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In general, FDI can be described as a flow of capital, technology and know- how from one

(home) country to another (host) country. Investopedia defines FDI as an investment made by a

company or entity based in one country, into a company or entity based in another company.

Foreign direct investment is net inflows of investment to acquire a lasting management interest

(10 percent or more of voting stock) in an enterprise operating in an economy other than that of

the investor. It is the sum equity capital, reinvestment of earnings, other long term capital, and

short term capital, as shown in the balance of payments (IMF, 2007). A recent and specific

example is the perceived role of FDI in efforts to stimulate economic growth in many of the

world's poorest countries. Partly this is because of the expected continued decline in the role of

development assistance, on which these countries have traditionally relied heavily, and the

resulting search for alternative sources of foreign capital. More importantly, FDI can be a source

not just of badly needed capital, but also of new technology and intangibles such as

organizational and managerial skills, and marketing networks. FDI can also provide a stimulus to

competition, innovation, savings and capital formation, and through these effects, to job creation

and economic growth.

Foreign direct investment flows might be associated with economic success and they do not exert

an independent effect on growth (Carkovic and Levine, 2002). Foreign direct investment

promotes growth in countries with sufficiently developed financial systems, a greater degree of

trade openness, and an adequate level of human resources development (Balasubramanyaam,

1999). Indeed foreign direct investment has a great potential to increase the rate of technical

progress in the recipient country through knowledge diffusion. This can improve efficiency and

productivity in local firms that can copy new technology or learn how to use existing technology

and resources more efficiently in order to compete in global markets (Lim, 2001).

However, it is also possible for FDI to have very little (or even negative) effects on employment.

It may displace local investment, so that the net effect on jobs is lower than the number directly

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employed by foreign affiliates. Where FDI involves the acquisition of local firms rather than new

plants, there is no initial increase in employment and if the foreign owner subsequently

rationalizes the firm, employment is even likely to decrease (Jenkins, 2006). Moreover, there

may be few local linkages if most inputs used by the foreign affiliates are imported and these

constitute an enclave within the local economy. Jobs that are created may be for labour that is

relatively skilled rather than for the unskilled who are in excess supply. If investment is footloose

and can easily move to alternative locations, then the jobs that are created are likely to be highly

unstable (Jenkins, 2006).

Host countries often try to channel FDI investment into new infrastructure and other projects to

boost development. Greater competition from new companies can lead to productivity gains and

greater efficiency in the host country and it has been suggested that the application of a foreign

entity’s policies to a domestic subsidiary may improve corporate governance standards.

Furthermore, foreign investment can result in the transfer of skills through training and job

creation, the availability of more advanced technology for the domestic market and access to

research and development resources. The local population may be able to benefit from the

employment opportunities created by new businesses.

According to Pinn, Ching, Kogid, Mulok, Mansor and Loganathan (2011), the effect of FDI on

employment can be viewed in three scenarios. He said FDI inflow can increase employment

directly through the creation of new business or directly by stimulating employment in

distribution stage of production, FDI can maintain employment by acquiring and restructuring

the existing firm and finally that FDI can reduce employment through disinvestment and the

closure of domestic firms because of intense competitions. Li-wei and He (2006) studied the

impact of foreign direct investment on the employment in China and found out that FDI inflow

promoted employment in both foreign investment enterprises and the country as a whole in the

long-run. Some Caribbean countries, for example Bermuda, the Cayman Islands and Trinidad

and Tobago, have been more successful in attracting FDI over the past three decades, largely

because these countries have either vibrant international business and financial services

industries or abundant natural resources, particularly oil and other petroleum products

(Craigwell, 2006). Similarly, studies done in Mexico, Fiji, Tanzania and even in Ghana found

that increased FDI flows led to high levels of employment in the country.

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For many developing countries, FDI is seen to complement scarce domestic financial resources

and so attracting FDI has been a key aspect of their outward oriented development strategy, as

investment is considered a crucial element for output growth and employment generation. It is

also expected to help modernize production by transferring know-how and technology, while

increasing domestic productivity and competition and improving international competitiveness.

FDI should also facilitate integration into the world market, domestic participation in globalized

production patterns, and the creation of forward and backward linkages with the domestic

economy. In so doing, it will have a multiplier effect on the whole economy and could thus be a

key element in spurring growth. With the foregoing, most third world countries made policies to

attract FDI with the belief that it would bring the required tools for development. These among

other benefits have been some reasons for developing countries like Nigeria to seek funds.

Nigeria is one of the economies with great demand for goods and services and has attracted some

FDI over the years. Africa and Nigeria in particular joined the rest of the world to seek FDI as

evidenced by the formation of New Partnership for Africa’s Development (NEPAD), which has

the attraction of foreign investment to Africa as a major component. The Nigerian governments

in recognizing the relevance of FDI have been pursuing various strategies involving the incentive

policies and regulatory measures geared essentially towards the promotion of inflow of FDI to

the country (Onu, 2012).In 1995, Nigerian Investment Promotion commission (NIPC) which was

established, a successor to the Industrial Coordination Committee (IDCC) which was established

to encourage foreign investors so as to boost FDI inflows into the country (UNCTAD, 2009).

The Nigerian Investment Promotion Commission Act laid out the framework for Nigeria’s

investment policy. Under the Act, 100% foreign ownership is allowed in all industries except for

oil and gas, where investment is constrained to existing joint ventures or new production-sharing

agreements. Investment from both Nigerian and foreign investors is prohibited in a few

industries crucial to national security: the production of arms and ammunition, and military

uniforms. Also, the National Economic Empowerment and Development Strategy (NEEDS)

adopted in 2004, made FDI attraction an explicit goal for the government amongst others

(UNCTAD, 2009).

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Nigeria’s vast oil and gas resources have proven a magnet for foreign investors, especially in

times of rising oil prices. Given the prominence of the oil industry in Nigeria, the main source

countries for FDI inflows are those that are host countries of the major oil multinational

companies (MNCs). The United States of America, present in Nigeria’s oil sector through

Chevron Texaco and Exxon Mobil, had investment stock of USD3.4 billion in Nigeria in 2008,

the latest figures available. The United Kingdom (UK), one of the host countries of Shell, is

another key FDI partner. UK FDI into Nigeria accounts for about 20% of Nigeria’s total foreign

investment. As China seeks to expand its trade relationships with Africa, it too is becoming one

of Nigeria’s most important sources of FDI; Nigeria is China’s second largest trading partner in

Africa, next to South Africa. From USD3 billion in 2003, China’s direct investment in Nigeria is

reported to be now worth around USD6 billion. The oil and gas sector receives 75% of China’s

FDI in Nigeria. Other significant sources of FDI include Italy, Brazil, the Netherlands, France

and South Africa. Fortunately, captivated by high rates of return, investors from all over the

world have now set their sights on Nigeria. As Africa's most populous country, Nigeria also

boasts of the continent's second largest oil reserves. Nigeria is becoming a rather worthy

recipient of foreign capital (World Bank 2012).

The goal of achieving full employment among other macroeconomic goals is an

important one in many developing nations where unemployment and underemployment has

been a major cause and consequence of widespread poverty (Shodipe and Ogunrinola, 2011).

However in many poor nations of the world, Nigeria included, in spite of the very high-sounding

electioneering promises of political leaders, the achievement of impressive growth and decent

employment remains a mirage. The history of unemployment can be traced back to the 1980s.

According to the Central Bank of Nigeria (2003), the national unemployment rate rose from 4.3

percent in 1970 to 6.4 percent in 1980. The high rate of unemployment observed in 1980 was

attributed largely to depression in the Nigerian economy during the late 19670s.

Specifically, the economic downturn led to the implementation of stabilization measures which

included restriction on exports, which caused import dependency of most Nigerian

manufacturing enterprises, which in turn resulted in operation of many companies below their

installed capacity. This development led to the close down of many industries, while the survived

few were forced to retrench a large proportion of their workforce; furthermore, the Nigerian

government also placed an embargo on employment.

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Specifically, total disengagement from the Federal Civil Service rose from 2,724 in 1980 to

6,294 in 1984. Owing to this, the national unemployment rate fluctuated around 6.0% until 1987

when it rose to 7.1%. It is important to state here, that the structural adjustment programmed

(SAP) adopted in 1986, had serious implications on employment in Nigeria because though

unemployment rate declined from 7.1% in 1987, to as low as 1.8% in 1995, it rose to 3.4% in

1996, and hovered between 3.4 and 4.7 % between 1996 and 2000.

The problem in Nigeria might best be interpreted as underemployment in contrast to

unemployment proper. Many Nigerians work in the informal sector doing various low paying

tasks that do not add up to regular employment, and work performed often corresponds poorly to

qualifications. A large number of working age Nigerians are categorized as being out of the labor

force. As reported by the, 44.6% of the working age population in Nigeria was categorized in

2011 as being either unemployed or out of the work force. Preliminary indications are that this

upward trend continued in 2012.

1.2 STATEMENT OF THE PROBLEM

The issue of employment is very germane to any economy; this is why one of the main

macroeconomic objectives of any country is to attain full employment. In other words, the goal

of increasing the level of employment among other macroeconomic objectives is an important

one in many developing nations where unemployment and underutilization of resources has led

to rising rate of poverty. To increase the level of employment, some scholars have argued that

the flow of goods and services (trade flows) could propel employment generation, especially in

developing countries (Kareem, 2010). However, employment creation still poses a major

challenge to the Nigerian government. World Bank (2013) reports that job creation in Nigeria

has been inadequate to keep pace with the expanding working populace. As published by NBS

(2010) in the Labour Force sample survey, among the youths in the 15-24 age brackets, the rate

of unemployment was observed to be over 40%.

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Figure 1.1: Employment to population ratio, total (%) in Nigeria, 1991- 2010

SOURCE: WORLD DEVELOPMENT INDICATORS, 2012

As seen in Figure 1 above, employment rate declined continuously from 52.7% in 1991 to 50.6%

in 2004. In 2005, however, the employment started to increase, rather sluggishly, from 50.8% to

51.4% in 2010. It can be noted here that in 2004, the National Economic Empowerment and

Development Strategy (NEEDS) was adopted. One of the reasons why NEEDS was adopted was

to curb the rising unemployment problem. The government hoped that the NEEDS would create

7 million new jobs, diversify the economy, boost non-energy exports, increase industrial capacity

utilization, and improve agricultural productivity (Wikipedia, 2013). Despite this fact, there has

been no significant increase in employment rate in the country.

FDI is assumed to benefit a poor country like Nigeria, not only by supplementary domestic

investment, but also in terms of employment creation, transfer of technology, increased domestic

competition and other positive externalities (Ayanwale, 2007). According to UNCTAD world

investment report 2012, Nigeria is the dominant recipient of FDI within the Economic

Community of West African countries. Also, Nigeria receives the largest amount of Foreign

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Direct Investment (FDI) in Africa. Foreign Direct Investment inflows have been growing

enormously over the course of the last decade: from USD1.14 billion in 2001 and USD2.1 billion

in 2004, Nigeria’s FDI reached USD11 billion in 2009 according to UNCTAD, making the

country the nineteenth greatest recipient of FDI in the world (Essiet, 2013).

Figure 1.2: FDI net inflows in Nigeria 1991- 2010

SOURCE: WORLD BANK INDICATORS 2012

As figure 1.2 illustrates, there have been fluctuations in the FDI flows in Nigeria from the period

of 1991 and 2010. FDI inflows increased significantly from 2.61% in 1991 to 8.28% in 1994. It

can be noted here that the Nigerian Investment Promotion commission (NIPC) was established in

1995 to encourage foreign investors so as to boost FDI inflows into the country.

Between 2006 and 2009, there was a significant increase from 3.31% in 2006 to 5.08% in 2009.

The high FDI level of 2009 is attributed to the fact that, FDI is a sensitive flow that is most at

times planned for the medium and long term, such that a sudden downturn in economic activities

might not immediately affect it since it is sponsored by already safe guarded funds (Igbatayo,

2011). However, in 2010 FDI declined to 3.07%. This is because Nigeria’s leading role in

attracting FDI started declining due to the surge of FDI inflows to other oil rich countries such as

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FDI Net Inflows (% of GDP) in Nigeria

FDI Net Inflows…

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Sudan and Angola (Izuchukwu and Huiping, 2012). In 2012, FDI inflows into Nigeria further

declined due to political insecurity and a weak global economy (UNCTAD, 2013).

In summary, despite the plethora of programmes implemented to increase the inflow of FDI into

the country, Nigeria’s employment growth rate is still not substantially high. There is no general

agreement in literature however on whether FDI may really increase employment. Several

authors like: Abor and Harvey (2008), Mpanju (2012), Craigwell (2006), Xiaoqing and Dwyer

(2008), Jayaraman and Singn (2007) claim that FDI affects employment positively. Others

like:Jenkins (2006), Rizvi and Nishat (2009) and Pinn et al (2011) emphasize that FDI does not

create employment but might instead reduce employment by crowding out domestic firms.

Surprisingly however, only a limited number of studies have looked into the effect of FDI on

employment but focused more on the impact of trade on employment , especially in Nigeria.

Most of the studies focused more on FDI- growth nexus.

Overall, the impact of FDI on employment is far from clear and the impact varies across

countries under different economic conditions. Also, from a cursory look at the Nigerian data, as

seen in figure’s 1.1 and 1.2, on employment level and FDI respectively, it appears that the recent

economic trends and the policies and establishments made specifically to attract FDI into the

country have been insufficient to make any appreciable impact on employment generation. This

therefore calls to mind pertinent questions such as;

1. How has FDI impacted on employment level in Nigeria?

2. What effect does FDI have on employment in the long- run?

3. Is there a causality relationship between FDI and employment?

1.3 RESEARCH QUESTIONS

1. To what extent has FDI affected employment in Nigeria?

2. What is the long-run relationship between FDI and employment in Nigeria?

3. What is the direction of causality between FDI and employment in Nigeria?

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1.4 OBJECTIVES OF THE STUDY

This study is to investigate the relationship between foreign direct investment (FDI) and

employment in Nigeria. As such, the objectives are stated as follows:

1. To investigate the impact of FDI on employment.

2. To examine the long-run linear relationship between FDI and employment in Nigeria.

3. To determine the direction of causality between FDI and employment level.

1.5 RESEARH HYPOTHESIS

Ho1: There is no significant impact of FDI on employment growth in Nigeria.

Ho2: There is no significant long- run relationship between FDI and employment in Nigeria.

Ho3: There exist no significant impact of causality between FDI and employment in Nigeria.

1.6 SCOPE OF THE STUDY

The study will cover the years 1980- 2012. Within this specified period, the study will capture

the long-run relationship between foreign direct investment and employment level in Nigeria.

The variables for this study include employment, FDI, wages and Gross domestic product. These

relevant variables to be used would be sourced from World Development Indicators (2012) and

the National Bureau of statistics, 2008.

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1.7 SIGNIFICANCE OF THE STUDY

This study shall provide the government with relevant and reliable information on the economic

growth trend, employment fluctuations and also the FDI fluctuations in the country. This will

enable the government and monetary institutions design policies and programs that will

encourage foreign investors to invest in Nigeria.

Also, it is hoped that findings obtained from this research work should sway policy makers and

advisers in closely related fields in framing and implementing policies in positioning the sector

for economic growth.

To the researchers, this shall become another body of literature that provides adequate

information on the relationship between FDI and employment in Nigeria. This work also seeks to

expand the existing literature on closely related works so as to readily provide a pool of data for

subsequent works.

1.8 LIMITATIONS OF THE STUDY

All research works generally record a number of limitations as the hindrances in the course of the

research and this was not an exception. The availability of data was a constraint to the analysis

given that it took a lot of time to assemble the data from the various data banks as well as getting

the indicators for all the years under consideration. Also finance was another major constraint

that is more general to research which stems from the high cost of IT application, transportation,

data sourcing and maintenance amongst others.

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CHAPTER TWO

LITERATURE REVIEW

2.1 CONCEPTUAL FRAMEWORK

Foreign Direct Investment has two concepts. One is that FDI is a particular form of the flow of

capital across international boundaries from home countries to host countries. The United

Nations World Investment Report (UNCTAD,1999) defines FDI as ‘an investment involving a

long-term relationship and reflecting a lasting interest and control of a resident entity in one

economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy

other than that of the foreign direct investor (FDI enterprise, affiliate enterprise or foreign

affiliate)’. Foreign direct investment is net inflows of investment to acquire a lasting

management interest (10 percent or more of voting stock) in an enterprise operating in an

economy other than that of the investor. It is the sum equity capital, reinvestment of earnings,

other long term capital, and short term capital, as shown in the balance of payments (IMF, 2007).

The other concept of direct investment is that it is a set of economic activities or operations

carried out in a host country by firms controlled or partly controlled by firms in some other

(home) country. These activities are, for example, production, employment, sales, the purchase

and use of intermediate goods and fixed capital, and the carrying out of research. The operating

mechanism of FDI considers establishing a subsidiary of parent firm in a foreign country, which

can be investor's full ownership or partial foreign ownership. In this study however, FDI is

conceptualized as defined in the latter concept.

Employment also has varying concepts. Employment is a relationship between two parties,

usually based on a contract, one being the employer and the other being the employee. It is also

defined as the percentage or number of people gainfully employed. Employment rate is the

proportion of total number of employed persons to the total number of persons in the labor force.

Full employment, a term normally used by economists and public officials alike, does not mean

zero unemployment. Consequently, economists define full employment as the level of

employment that results when the rate of unemployment is normal, considering both frictional

and structural factors. Closely related to the concept of full employment is the natural rate of

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unemployment, the amount of unemployment reflected by job shopping and imperfect

information. The natural rate of unemployment is not temporarily high or low; it is a rate that is

sustainable. Economists sometimes refer to it as the unemployment rate accompanying the

economy’s maximum sustainable rate of output. When unemployment is at its natural rate, full

employment is present, and the economy is achieving the highest rate of output that it can

sustain. This natural rate of unemployment is not fixed. It is affected by the structure of the

labour force and by changes in public policy.

Labour force is the number of persons in the population 15 years old to sixty fiveyears who

contribute to the production of goods and services in the country. It includes those who are either

employed or unemployed. Those who are neither employed nor unemployed are considered not

in the labor force, e.g. persons who are not working and are not available for work during the

reference week and persons who are not available and are not looking for work because of

various reasons. Examples are housewives, students, disabled or retired persons and seasonal

workers.

For the course of this study, employment is conceptualized as the number of people gainfully

employed from ages 15 and above, that is, the employment to population ratio (+15), which is

the proportion of the country’s population that is employed. It refers to persons in employment

that are aged 15 years and above who work for pay.

Multinational corporations (MNCs) are the main drivers of FDI and are a powerful and effective

means to disseminate technology from developed to developing countries, and are often the only

source of new and innovative technologies that are usually not available through the market.

Multinational corporations are business entities that operate in more than one country. The

typical multinational corporation normally functions with a headquarters that is based in one

country, while other facilities are based in locations in other countries. In some circles, a

multinational corporation is referred to as a multinational enterprise (MNE) or a transnational

corporation (TNC).

The exact model for an MNC may vary slightly. One common model for the multinational

corporation is the positioning of the executive headquarters in one nation, while production

facilities are located in one or more other countries. This model often allows the company to take

P a g e | 13

advantage of benefits of incorporating in a given locality, while also being able to produce goods

and services in areas where the cost of production is lower. Another structural model for a

multinational organization or MNO is to base the parent company in one nation and operate

subsidiaries in other countries around the world. With this model, just about all the functions of

the parent are based in the country of origin. The subsidiaries more or less function

independently, outside of a few basic ties to the parent. A third approach to the setup of an MNC

involves the establishment of a headquarters in one country that oversees a diverse

conglomeration that stretches to many different countries and industries. With this model, the

MNC includes affiliates, subsidiaries and possibly even some facilities that report directly to the

headquarters.

Foreign direct investment inflow into a given country is expected to bring about significant

changes in her economic development and output growth. FDI is seen as an engine of growth to

developing countries (Izuchukwu and Huiping, 2010). Multinational companies (MNCs) come

into a country and either set up new subsidiaries in the host country (or expand an existing one)

or they acquire an existing business through merger or acquisition. These new investments

generate employment. The employment that MNCs creates is both direct, in the form of people

employed in the new production facility, and indirect through the impact that the MNC has on

the local economy (Sloman and Hinde, 2007).

2.2 THEORETICAL LITERATURE

The theoretical approach of foreign direct investment (FDI) on underdeveloped economies has

prevailed to give rise to prolific writings on the effect of FDI (Akrami, 2008). The theoretical

foundation of FDI for this study comes from three theories: theories of spillover effect,

absorptive capacity theory and eclectic paradigm of Dunning. The earliest studies on the impact

of MNCs on host countries started from an assessment of the general welfare effect of FDI. The

focus was largely on tangible, as opposed to intangible, gains. MacDougall (1960), for instance,

analysed tangible gains from FDI in terms of the respective impact on three notional agents in an

economy, namely capital owner, labour provider, and host-country government.

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On the first two agents, FDI gives rise to a redistributive effect: FDI inflows reduce the marginal

product of capital, resulting in shifting gains from capital owners to the labour force of the host

country (MacDougall, 1960).On the government, FDI brings increased tax revenues.

2.2.1 THEORIES OF SPILLOVER EFFECTS

Theoretical literature concerning spillovers and their effect on productivity of domestic firms

emphasize a few channels through which FDI can have a lasting effect on the productivity of

domestic firms when there exists an interaction between foreign and domestic firms in the host

economy. Generally literature distinguishes between direct and indirect effects of FDI. These

indirect effects, as for instance Merlevede and Schoors (2005) state, are called spillovers. In the

literature the main focus is often on two significant features of spillovers – productivity

spillovers (in a broad sense so-called technological transfer that includes upgrading of

organizational and managerial practices as well as know-how) and market access spillovers (the

opportunity of domestic firms to gain access to new market through marketing and business

networks of MNC’s with which local firms come into interaction). It is obvious that the latter

spillover may enhance the former causing the domestic firms, which are provided with an

opportunity to compete on foreign markets but with increased market pressure, to adapt and thus

enhance their productivity.

In the literature, one may find two types of productivity spillovers. For instance, Jarovick (2004)

refers to horizontal and vertical spillovers- the former taking place when domestic firms benefits

within their sector and the latter when benefits arise in both upstream and downstream

production chain when domestic firms interact with foreign ones. The author distinguishes

between backward where spillovers benefit domestic suppliers (upstream within the production

chain) as well as forward linkages where they benefit domestic customers (downstream within

the production chain). Concerning the main channels through which horizontal spillovers may be

realized, authors such as Kokko (1992) suggest the following; demonstration channel, labour

market and competition channel. In the case of demonstration channel, domestic companies may

decide to imitate technology of the foreign firms. However, the imitation can be frequently

avoided as MNCs possesses means in preventing technological leakage towards domestic firms

P a g e | 15

or at least can significantly reduce it. Another important channel which is generally believed to

cause spillovers is the labour turnover through which either former employees of MNCs set up a

new domestic firm or join existing domestic firms and disseminate the knowledge they had

previously acquired (Fosfuri 2001, Glass and Saggi 1998).

The emergence of vertical spillovers can be attributed to the intentional assistance of foreign

producers to their local suppliers by providing a superior technology that result in more high-

quality inputs. The intentional assistance is based on two pre- requisitives in order to be applied:

firstly, to avoid foreign firms to choose their suppliers from their home country, the distance

between the host and home country must be rather high. Secondly, the domestic firms should be

preferred to other foreign firms arriving as new potential suppliers as these firms might create

“an isolated enclave of mutually linked foreign firms” where the interaction with domestic firms

would be rather scarce (Tobias, 2007). The fact that a domestic supplier of a foreign producer is

privileged with stable demand for its production, means that the domestic firms consequently

have more resources to invest into better physical, develop their worker’s skills, accumulate

knowledge, all necessary conditions needed to raise productivity via usage of advanced

technology (Merlevede and Schoors, 2005). However, if the domestic supplier is not able to meet

their demand as far as quality concerns as required by the foreign firms, the vertical spillovers

may likely be negative when the domestic firm is substituted with inputs coming from home

country suppliers, for backward linkages and as for forward linkages, it holds when prices of

these inputs are either rather expensive or too high-quality (not adapted to local conditions) and

thus potentially only used by more productive foreign producers with better equipment to deal

with these inputs. This would obviously result in increasing the productivity gap between the

domestic and foreign firms.

2.2.2 THEORIES OF ABSORPTIVE CAPACITY

FDI per se can bring important benefits such as capital, advanced technology and improved

managerial skills to a destination. However, those benefits do not automatically convert to be

host country’ spillovers. This process requires the host country has sufficient capacities referred

to absorption. Many developing countries try to attract more and more FDI but do not recognize

that they need to have initial conditions to absorb the benefits from FDI (Nguyen, Duysters,

Patterson and Sander, 2009). Researchers have defined two levels that the host country absorbs

P a g e | 16

the benefits of FDI. One is micro level proxies by domestic firms and one is macro level

indicates by human capital and technological level.

Doing direct investment abroad, investors can establish either economic organizations in the

form of one hundred percent capital of foreign investors or joint venture economic organizations

with domestic firms. Therefore, domestic firm is not only the main channel for transferring FDI

benefits, but also a bridge for connecting foreign investors and host country. In the co-operation

with international enterprises, if domestic firms have at least initial development in technology,

qualified of workers, and managerial skills, domestic firms can learn and easily absorb the

advanced technology and business skills from foreign companies. For these benefits to be

reaped, domestic companies are required to have initial technological level to assimilate or image

the advanced technology from FDI. Katolay (2002) states that the absorption process depends on

the skills and capabilities of local firms and on an affiliate’s commitment to the host country.

In another resect, FDI transfers its benefits to host country is through labour force. Labour is

another channel for transferring and receiving the FDI benefits. The transfer of benefits of FDI to

labor goes through training, learning by doing, accumulating experience. Then, labour is the

force to implement the know-how conveyed. Better educated and skilled labor is better know-

how received, and better performance achieved. Borensztein, De Gregorio, & Lee (1998) express

that FDI gives positive spillovers only in a country which has a minimum threshold stock of

human capital with a sufficiently qualified labour force.

Technology is another way in which a host country can benefit from FDI. However, the benefit

transfer much depends on the host country capacity of technology. The technology gap between

the home and host country determines the host country absorptive capacity. Borensztein et al.

(1998) find that FDI contributes to economic growth only when a sufficient absorptive capacity

of advanced technologies is available in the host economy. The higher efficiency of FDI would

result from a combination of advanced management skills and more modern technology. De

Mello (1997) states that the larger the technological gap between the host and the home country,

the smaller the expected impact of FDI on economic growth is. The aim of host country while

calling for FDI is to utilize the advanced technology of FDI to enhance the economy. This means

the host country has to have an initial development in technology to assimilate this benefit.

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2.2.3 THEORY OF THE ECLECTIC PARADIGM OF DUNNING

Traditional theories in International Business cite the presence of a set of factors consisting of

ownership advantages, location advantages, and internalisation advantages, widely known as

OLI-framework as developed by John Dunning (1993), as the explanation for why FDI is chosen

by MNCs. Ownership advantages refer to those assets of a firm that allow it to compete

successfully in overseas markets, despite – in comparison with local firms – a lack of knowledge

of the local market and the costs of setting up a foreign affiliate. Ownership advantages usually

comprise superior technology or management knowledge. Location advantages are those benefits

that a host country can offer a firm: large markets, low labour or production costs or both, and a

good infrastructure.

Internalisation advantages refer to transaction-costs, and occur when it is cheaper to exploit

ownership and location advantages through FDI rather than exporting. While ownership and

internalisation advantages are investor specific determinants, the location advantage is specific to

the host country. However, this latter advantage may have gained importance in the investors’

decision making process, judging by the recent competition by host countries for attracting FDI

(OECD, 2001).

There is a vast literature on the location advantages of FDI. UNCTAD (1998) presented the main

ideas that come forward in this literature in a systematic way by categorising the location

determinants of FDI into three main groups: economic determinants; the host country policy

framework for FDI; and business facilitation. Dunning further posits that FDI can also be

categorized based on the motive behind the investment from the perspective of the investment

firm. Following Dunning (1993), the economic determinants are broken down by UNCTAD into

three sub-groups: market seeking; efficiency seeking; and a combination of natural resources and

strategic asset seeking investments.

The market seeking or demand oriented investments aim at either penetrating new markets or

maintaining existing ones. FDI of this kind may also be employed as defensive strategy. It is

argued that businesses are more likely to be pushed towards this type of investment out of fear of

losing a market rather than discovering a new one (Dunning, 1993). The efficiency seeking or

rationalized investments are those which firms hope will increase their efficiency by exploiting

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the benefits of economies of scale and scope, and also those of common ownership. It is

suggested that this type of FDI comes after either resource or market seeking investments have

been realized, with the expectation that it further increases the profitability of the firm (Dunning,

1993) and finally, the natural resource seeking and (strategic) asset seeking, which is supply

oriented seek to acquire factors of production that are more efficient than those obtainable in the

home economy of the firm. In some cases, these resources may not be available in the home

economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing

countries while the strategic asset seeking FDI is designed to protect or expand the existing

specific advantages of the investing firms and/or to reduce those of their competitors.

Lee and Houde (2000) discuss the six main location advantages of countries, along with the

characteristics of the FDI flows they might attract. These main advantages consist of:

− Market size and growth prospects. Factors like market size, prospects for market growth, and

the degree of development and per capita incomes of host countries are important determinants

in the location decisions made by MNEs. Host countries with larger market size, faster economic

growth and a higher degree of economic development will provide better opportunities for

enterprises to exploit their ownership advantages and creates possibilities for economies of scale.

FDI attracted by these advantages is called market- oriented.

− Natural and human resource endowments – including the cost and productivity of labour.

Factor cost advantages and the availability of natural and human resource endowments are a

driving force behind FDI. Especially FDI oriented towards exports (either back to the home

country or to third countries) seeks to use those comparative advantages related to low labour

costs or the abundance of natural resources. Recently attention has shifted from the natural

endowments of resources and labour to acquired endowments of resources, such as the

availability of intermediate goods and skilled labour. The availability of strategic assets, such

technological and innovative assets e.g. brand names, has also become an important determinant

in the location decisions of MNCs.

− Physical, financial and technological infrastructure. Differences in infrastructure, such as

transportation, influence the FDI location decision not only among candidate countries but also

amongst different regions within a country. FDI is more likely to flow to those areas with good

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accessibility and consequently lower transportation costs. Besides highways, railways, ports and

airports, the level of telecommunication services has gained increasing importance with the

recent transformations in the information and telecommunications industries of the past decades.

High local technological capabilities are an important factor for attracting FDI flows in high-

value added activities.

− Openness to international trade and access to international markets. Economic reforms and

open door policies and other efforts to promote trade – inter alia by conducting bilateral trade

agreements and adopting unilateral actions (e.g. lowering tariff barriers) – can attract export-

oriented FDI. Attractive and strategic geographic positions, adjacent to potential importing

countries and providing access to regional and global markets, are also significant factors in

attracting FDI – especially FDI flows aimed at exports.

− The regulatory and policy framework and policy coherence. General economic, political and

social stability forms the background of a host country’s FDI policy. A transparent and well-

functioning legal framework and business environment is of the first order of importance since it

lowers the (political) risk of doing business in an unfamiliar environment. Rules and regulations

regarding the entry and operations of foreign firms, and standards of treatment of foreign firms,

are particularly relevant in this respect. Good corporate governance and fair business practices

are equally important. Bureaucratic and restrictive administrative practices, coupled with bribery,

incur additional costs. This not only adversely affects initial FDI decisions but also the

successive reinvestment of earnings. Also important are policies that impact upon the

functioning and structure of markets such as policies concerning trade, competition, mergers and

acquisitions (M&A), and privatisation, as well as the policy coherence.

− Investment promotion (and protection). Proper investment protection is usually a minimum

requirement for FDI. Without transparent dispute settlement procedures, or unreasonable

interpretation of existing measures, FDI might be deterred. On the other hand, many countries

offer investment promotion packages to attract FDI. These incentive packages may be part of the

location decision of FDI, and can include factors such as tax and other financial incentives that

affect net profit rates which seems to be primary concern of the investors.

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2.2.4 THEORY OF LABOUR DEMAND

Labour demand can be defined as a set of decisions that the employers must take in relation to

their workers in terms of hiring, wages, accents and training (Hamermesh, 1993). One of the

most important variables affecting the demand for labour according to economic theory is the

price of labour, or the average wage of the labour force. According to theory, the demand for

labour is assumed to be negatively related to real wages and positively related to output. The

dependent variable is usually total employment or hours worked while independent variables are

either real wages, or some other measure such as real unit labour costs, and real gross domestic

product. In practice however, most studies take employment to be equal to the demand for

labour. Thus, employment, measured in term of total employment or hours worked, is regressed

on a number of variables including real wages, output and time. The relation is referred to as an

employment equation and demand for labour.

Traditional microeconomic theory assumes perfect competition in all product market as well as

in the labour market. Under these circumstances, the demand for labour like the demand for any

other input, by each profit maximizing firm depends on (a) the price of the input, that is, the

wage rate that it must pay; (b) the marginal contribution on physical terms of each unit of input

to the firm’s total output; and (c) the price at which that output can be sold. The firm’s demand

for labour depends on the real wage it must pay, a function derived from the firm’s production

function. The more labour the firm employs, the more output it produces. This is called the

marginal product of labour (MPL). It is the extra amount of output the firm gets from one extra

unit of labour. In other words, if the firm hires an additional hour of labour, its production

increases by MPL units. Most production functions have the property of diminishing marginal

product; holding the amount of capital fixed, the marginal product of labour decreases as the

amount of labour increases.

The theory of labour demand is the theory that best suites this research study. According to the

theory, there are various exogenous factors that determine the demand for labour. Real wage,

which is the price of labour, is the most important variables affecting the demand for labour.

Other exogenous variables affecting the demand for labour includes real prices of other factors of

production, the capital stock, output, technical progress etc. This study seeks to access how

foreign direct investment affects the demand for labour in Nigeria.

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2.3 EMPIRICAL LIERATURE

Several empirical literatures have been carried out to examine the effects of FDI on employment

level as well as economic growth in several different countries. Also, other areas of studies such

as the effect of FDI on wages have been carried out.

In terms of the relationship between FDI and employment growth, a number of empirical studies

have been conducted. In Nigeria, Salami and Oyewale (2013) investigated the relationship

between FDI and employment for the period 1990- 2012. The study employed the Ordinary

Least Square (OLS) estimation technique. The variables used for this study includes total

employment growth rate, export rate, import rate, exchange rate, inflation rate and FDI. The

analysis found a significant link between FDI and employment in Nigeria.

Abor and Harvey (2008) treat the effect of foreign direct investment on employment creation in

Ghana. It provided an insight into the effect of FDI flow on employment from a host country

perspective. A simultaneous panel regression model was used in estimating the effect FDI has on

employment and wages. The result of this study indicated that FDI has a statistically significant

and positive effect on employment levels in Ghana, but has an insignificant effect on wages.

They opined that FDI can greatly augment domestic efforts by creating more jobs in the

economy. The result demonstrated that FDI flows affect employment quantitatively but not

necessarily qualitatively. The study identified other factors including; productivity, wages, sub-

sector and location were not as significant in affecting wages in Ghana.

Mpanju (2012) analyzed the impact of FDI inflows on employment generation/creation in

Tanzania for the period of 1990–2008. The study adopted a case study design with a quantitative

research approach, representing an econometric analysis using ordinary least squares (OLS). The

results indicated that a strong positive relationship exists between the variables, implying that

FDI has a significant impact on the pattern of employment opportunities.

Pinn et al (2011) carried out an empirical analysis on employment and foreign direct investment

in Malaysia for the period’s 1970 to 2007. The augmented Dickey-Fuller (ADF) and the Phillips-

Perron (PP) tests were carried out using the ARDL bounds testing approach using total

employment for Malaysia and inward foreign direct investment. The study found that the

relationship between FDI in Malaysia is not very substantial as a whole especially in the long-

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run. The reason owing to the fact that FDI increased mainly due to Mergers and Acquisition

(M&A) of existing multinational companies (MNCs).

Rizvi and Nishat (2009) carried out an empirical study on the creation of employment

opportunities by FDI during 1985 and 2008) in Pakistan, India and China. The study employed

the Im- Pesaran- Shin (IPN) test of unit root to find out the order of integration, the Pedroni

(1999) test of panel co-integration to investigate the long-run relationship and the Seemingly

Unrelated Regression (SUR) method to estimate the impact of FDI inflows on employment

levels in the three countries. The result suggests that there is a long-run relationship amongst the

variables and also that FDI does not have any impact upon the creation of employment in

Pakistan, India and China.

Another study on the effect of FDI on the employment in China carried out by Xiaoqing and

Dwyer (2008) investigated the impact of foreign direct investment inflow on China’s macro-

employment levels. It used annual data for the period 1993 to 2006 to estimate the a regression

model for FDI and China’s total employment, employment in primary industry, employment in

secondary industry and employment in tertiary industry. The analysis indicated that foreign

direct investment has a significant effect on the level of employment in China.

A study was carried out by Fu and Balasubramanyam (2005) on the role of FDI in employment

determination in China. This article found a strong linkage between FDI and employment as well

as FDI and exports. The authors estimated that a 1 per cent increase in FDI raises employment

growth by about 3 per cent and exports by almost 9 per cent and concluded that FDI tends to

provide an outlet for surplus productive capacity and labour in the receiving country.

Other study done by Li- Wei and He (2006) on the impact of FDI on the employment in China

found that FDI inflow promotes employment in both foreign investment enterprises (FIEs) and

the country as a whole in the long run. When FDI grows up by 1 percent, the growth rate of

employment in FIEs rises by 1.27 percent and the growth rate of total employment in China rises

by 0.04 percent.

Nunnenkamp and Bremont (2007) conducted an empirical research on whether FDI contributed

to employment generation in Mexico. The analysis drew on highly disaggregated FDI and

employment data covering almost 200 manufacturing industries. They estimated a dynamic

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labour demand function for blue and white collar workers including both FDI and its interaction

with major industry characteristics. The study employed the GMM estimator suggested by

Arellano and Bond to account for the short dimension of the study period, 1994 to 2006. The

result indicated that FDI has a significantly positive though quantitatively modest impact on

manufacturing employment in Mexico. The study however found no evidence that FDI adds to

white collar employment but found a positive effect on blue collar employment which over-

time, diminished with increasing skill intensity of manufacturing industries.

Jayaraman and Singn (2007) investigated the relationship between employment and foreign

direct investment for Fiji through a multivariate modeling strategy by including gross domestic

product (GDP) alongside foreign direct investment net inflows (FDI) and formal sector

employment. Using the ARDL estimator, it revealed that foreign direct investment did have

positive and statistically significant impact on Fiji’s employment. Granger causality test revealed

a unidirectional long run causality running from foreign direct investment to employment and a

unidirectional causality running from foreign direct investment to GDP in the short-run.

Jenkins (2006) in his study of the impact of FDI on employment in Vietnam found that direct

employment generated as the effects of FDI is not very significant. This is because most of the

labor force is still in the agricultural sector and other service sectors such as transport and retail

trades where FDI has been minimal. In addition, the study also showed that the indirect effects of

FDI on the employment in Vietnam have been minimal and depending on the balance between

the crowding-in effects of FDI of creating new markets for local investors, and the crowding-out

effects of FDI of foreign affiliates displacing the local competitors.

Craigwell (2006) examined the relationship between foreign direct investment on employment in

English Dutch- speaking Caribbean countries. This study used the correlation estimates and

Granger panel causality tests which revealed a positive causal relationship between FDI and

employment for the countries. The empirical results, derived using panel data methods,

suggested that an increase in FDI in the entire sample of Caribbean countries led to an

approximate one-to-one increase in employment, an outcome supported, despite considerable

gaps in the employment data, by an evaluation of the stylised facts on FDI flows over the past

three decades. Craigwell (2006) noted further that the impact of FDI on employment was

greatest in the first year and was enhanced when trade policies, absorption and financial

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development were considered. He said that the latter result suggested that FDI flows work better

in a stable and healthy macroeconomic environment.

Shaari, Huddsin and Halim (2012) examined the impact of foreign direct investment on the

unemployment rate and economic growth in Malaysia. The findings indicated that FDI helped to

reduce the unemployment rate and increased gross domestic products.

Drawing on FDI- economic growth literature, a vast number of researches has been carried out.

The examination of the causal relationship between FDI and economic growth in Malaysia by

Karimi and Zulkornain (2009) was based on the Toda-Yamamoto test for causality. This test

which is sometimes preferred to the standard Granger causality tests does not rely so heavily on

pre-testing evaluations. The assessment which is from 1970 to 2005 found no strong evidence of

bi-directional causality but a long run relationship suggesting that FDI has indirect effect on

Malaysia's economic growth.

Chakraborty and Nunnenkamp (2008) assessed the proposition that the FDI boom recorded in

post-reform India is widely believed to promote economic growth. The study used the industry-

specific FDI and output data to Granger causality tests within a panel co-integration framework.

The result showed that growth effects of FDI vary extensively across sectors. Although there is

no causal relationship in the primary sector and only transitory effects of FDI on output in the

services sector, FDI stocks and output were found to be mutually reinforced in the manufacturing

sector. In the services sector however, FDI appeared to have caused rapid growth in the

manufacturing sector through cross-sector spillovers and externalities.

De Gregorio, (2003) did a panel data analysis of 12 Latin American countries in the period 1950-

1985 and his results suggest a positive and significant impact of FDI on economic growth. In

addition, the study shows that the productivity of FDI is higher than the productivity of domestic

investment. Fry, (1992) examined the role of FDI in promoting growth by using the framework

of a macro-model for a pooled time series cross section data of 16 developing countries for 1966

to 1988 period. The countries included in the sample were Argentina, Brazil, Chile, Egypt, India,

Mexico, Nigeria, Pakistan, Sri Lanka, Turkey, Venezuela, and 5 Pacific basin countries, viz.,

Indonesia, Korea, Malaysia, Philippines and Thailand. For his sample as a whole, he did not find

FDI to exert a significantly different effect from domestically financed investment on the rate of

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economic growth, as the coefficient of FDI after controlling for gross investment rate, was not

significantly different from zero in statistical terms. FDI had a significant negative effect on

domestic investment suggesting that it crowds-out domestic investment. However, this effect

varies across countries, as in the Pacific basin countries, FDI seems to have crowded-in domestic

investment.

FDI inflows had a significant positive effect on the average growth rate of per capita income for

a sample of 78 developing and 23 developed countries as found by Blomstrom, Lipsey and

Zegan (1994). However, when the sample of developing countries was split between two groups

based on level of per capita income, the effect of FDI on growth of lower income developing

countries was not statistically significant although still with a positive sign. They argue that least

developed countries learn very little from Multinational Enterprises (MNEs) because domestic

enterprises are too far behind in their technological levels to be either imitators of or, suppliers to

MNEs.

In this regard, another study was conducted by Borensztein, De Gregorio and Lee (1998). They

included 69 developing countries in their sample. The study found that the effect of FDI on host

country growth is dependent on stock of human capital. They infer from it that flow of advanced

technology brought along by FDI can increase the growth rate only by interacting with a

country’s absorptive capability. They also find FDI to be stimulating total fixed investment more

than proportionately. In other words, FDI crowds-in domestic investment. However, the results

are not robust across specifications.

Krstevska and Petrovska (2012) researched on the economic impacts of foreign direct

investments on Macedonian economy. Using panel regression technique, the result of the

analysis revealed that FDI inflows were an important factor for GDP growth and export

performances of the Macedonian economy. On the other hand, the FDI impact over employment

was negative due to the low level of green field investments and non attractiveness of the labour

intensive industry for the foreign investors in Macedonia.

In a survey of African countries, Ugochukwu, Okorie and Unoh (2013) investigated the

empirical relationship between foreign direct investment and economic growth in Nigeria. The

work covered a period of 1981 to 2009. A linear regression model was formulated and the

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Granger causality Tests was employed to carry out this research. The empirical results showed

that there was a positive relationship between economic growth (GDP) and FDI though it was

insignificant. They said that the insignificant relationship could be as a result of insufficient FDI

fund invested into the Nigerian economy which has not been able to significantly impact on the

economic growth. The result of the study portrayed that domestic investment was responsible for

the growth witnessed in Nigeria’s economy over the period under review. And they further

concluded that domestic investment is a major factor that contributes to the growth of the

Nigerian economy.

Onakoye (2012) investigated the impact of foreign direct investment on economic growth in

Nigeria. The study developed a structural macroeconomic model consisting of four blocks made

up of supply, private demand, government and external sectors. The model deployed 18

simultaneous equations and 100 variables to capture the required proxies. The research adopted a

three-stage least squares (3SLS) technique and macroeconometric model of simultaneous

equations to capture the disaggregated impact of FDI on the different sectors of the economy and

the inter-linkages amongst the sectors in order to give better insight into the variations inherent

therein. The finding shows that FDI has a significant impact on output of the economy but that

the growth effects of FDI differ across sectors.

Also, Olusanya (2013), focused on the impact of foreign direct investment inflow on economic

growth in a pre and post deregulated Nigerian economy. A granger causality test was used to

estimate this within 1970- 2010. The findings of this study showed that there is causality

relationship between economic growth (GDP) and foreign direct investment inflow (FDI) implying

that economic growth drive foreign direct investment inflow into the country.

Ayadi (2009) explored the links between FDI and economic growth in Nigeria. He applied the

Rho’s rank correlation and causality test. The study concluded that the link between FDI and

economic growth in Nigeria is weak but found that FDI is related to export growth and found

that human capacity building is found to be related to FDI inflow.

Dupasquier, and Osakwe (2006) identified poor corporate governance, unstable political and

economic policies, weak infrastructure, unwelcoming regulatory environments and global

P a g e | 27

competition for FDI flows as impediments standing in the way of attracting significant FDI

flows. This corroborates the findings of Jerome and Ogunkola (2004) which assessed the

magnitude, direction and prospect of FDI in Nigeria. The authors ascribed the low level of FDI

in Nigeria to deficiency in the country's legal framework concerning corporate law, bankruptcy

and labour law, in addition to institutional uncertainty. The contributions of Ekpo (1995) which

made use of time series data is that the variability of FDI into Nigeria can be explained by the

political regime, real income per capita, rate of inflation, world interest rate, credit rating and

debt service.

In his study of the determinants of FDI in Nigeria, Anyanwu (2011) identified change in

domestic investment, change in domestic output or market size, indigenization policy and change

in openness of the economy as the major determinants of the FDI. He further noted that the

abrogation of the indigenization policy in 1995 encouraged FDI inflow into Nigerian and that

effort must be made to raise the nation's economic growth so as to be able to attract more FDI.

Oseghale and Amonkhienan (1987) and Brown and Obinna (2006), reports that FDI is positively

associated with economic growth in Nigeria. They recommend that the government should

encourage greater inflow of FDI into the country in order to enhance its economic performance.

Oyatoye, Arogundade, Adebisi, and Oluwakayode (2011) reviewed the effect and relationship

between FDI and economic growth in Nigeria for 20 years (1987 – 2006) using Ordinary Least

Square regression analysis and report a positive relationship between the two variables. The

result further showed that a N1 increase in the value of FDI will lead to N104.749 increase in

GDP.

Antwi, Mills, Mills and Zhao (2013) treats the relationship between FDI and economic growth in

Ghana. The analysis shows that there is a positive relationship between FDI and economic

growth in Ghana and that the relationship is significant.

2.4 LIMITATIONS OF PREVIOUS STUDIES

There is no doubt much literature exists on foreign direct investment. Most of the studies carried

out by various scholars in Nigeria have been devoted to foreign direct investment, its

determinants and/ or its impact on economic growth. Ugochukwu et al (2013) whose study

P a g e | 28

covered a period of 1981- 2009. The result of the OLS techniques indicated that FDI had a

positive and insignificant impact on the growth of Nigerian economy for the period under study.

Anyanwu (2011), Ayadi (2009), Oyatoye et al (2011), Ogunkola (2004), Ekpo (1995) etc.

Studies done in other countries outside Nigeria includes Karimi and Zulkornain (2009), De

Greorio (2003), Antiwi et al (2013) etc.

However, many studies have been carried out by various scholars in other countries, other than

Nigeria on how foreign direct investment affects employment such as Pinn et al (2011), Rizvi

and Nishat (2009), Abor and Harvey (2008), Fu and Balasubramanyam (2005), Li- Wei and He

(2006), Nunnenkamp and Bremont (2007), Jayaraman and Singn (2007), Jenkins (2006) etc.

Not much research attention has been given to the impact/ relationship of/ between foreign direct

investment and employment in Nigeria except the research carried out by Salami and Oyewale,

2013. The study did not take into consideration the possibility of non- stationarity in the

variables. This study will use the Augumented Dickey Fuller (ADF) test to account for non-

stationarity in the variables before proceeding with the econometric estimation. Also the time

span for the work is too short to capture the long- run relationship between the variables which

could produce a spurious result but this current study will cover a period of thirty years, that is

from 1980- 2012. This study employs the Error correction Models to know if a long- run

relationship exists amongst the variables and also Granger causality test is employed to know the

direction of causality between the variables. These are the points of departure for this study.

P a g e | 29

CHAPTER THREE

METHODOLOGY

3.1 THEORETICAL FRAMEWORK

There are various literatures on Foreign Direct Investment (FDI) and its effect on employment or

labour demand. These theories are used in the context that best suits the research work being

carried out.

The Theory of FDI spillovers being found in literature are of two types of productivity spillovers.

Javorcik (2004) refers them as horizontal and vertical spillovers; the former taking place when

domestic firms benefit from the presence of foreign firms within their sector and the latter when

benefits arise in both upstream and downstream production chain when domestic firms interact

with foreign ones. One of the most significant aspects of potentially positive spillovers is those

associated with and through human capital development. MNCs can influence human capital in

the host country in two ways. First, spillovers can occur through direct means, as MNCs

contribute to the generation of employment in the host country, which is to say they increase the

employment level quantitatively. At the same time, MNCs can also cause direct increases in the

quality of the domestic workforce, by providing formal and informal training, as well as through

the process of learning-by-doing to transfer their superior technological knowledge to their

domestic employees. Second, spillovers can occur through indirect means, also both

quantitatively and qualitatively. On a quantitative level because domestic suppliers and

customers are expected to increase their own employment and as a direct consequence of the

increased economic activity due to MNE participation in the economy.

Theory of Absorptive capacity with respect to technological transfer and direct and indirect

spillovers, economic theory focuses on so-called technological gap. This theory stresses

technological absorption capability as a key factor that explains differences in economic growth.

When domestic firms are able to form linkages with foreign-owned firms, it is assumed that

spillover effects occur gradually. In this case, inflow of FDI has multiplying effect; increasing of

output or employment (Tobias, 2007). Therefore, positive impact on the increase of output and

employment are based on forming of linkages between foreign and domestic firms.

P a g e | 30

Another theory describing the effect of FDI on employment is the eclectic theory by John

Dunning (1993). It comprises of the market, resource and efficiency seeking FDI. These different

strategies have different implications for employment. The locational advantage is very

important for market-seeking FDI, attracting investment flows even under difficult economic and

political conditions. This type of investor generally has a particularly strong interest in the

efficient functioning of the internal market, including the labour market. Growth of employment

and real wages is important in contributing to an increase in internal demand, which implies that

the foreign producer finds a growing number of domestic consumers of goods produced for the

host country market.

Yet another theory in this context is the labour demand theory. The aggregate demand for labour

is one of the most important relationships in macroeconomics. Most studies implicitly adopt a

neoclassical framework for the formulation of the demand for labour schedule, and hence,

according to theory, the aggregate demand for labour is assumed to be negatively related to real

wages and positively related to output.The dependent variable is usually total employment or

hours worked while independent variables are either real wages, or some other measure such as

real unit labour costs, and real gross domestic product.The demand for labour is affected by

several variables including wages, economic growth, domestic investment, technology and

government (Massoud, 2008). Demand for labour is a derived demand. If there will be a demand

for goods and services, there will be a demand for labour as well.

The theoretical model on which this study is based is the labour demand theory. The building of

the model showing the impact of FDI on employment is based on the assumption that FDI,

where it generates and expands businesses, it can help stimulate employment and raise wages

(Zeqiri, Likaj and Bytyqi, 2011).This research focuses on the labour demand theory because the

theory tries to analyze links between the demand for labour and a variety of economic factors.

This theory best suits this study because it intends to investigate whether FDI adds to the overall

employment generation in Nigeria which the labour demand theory captures.

3.2 ANALYTICAL FRAMEWORK

The theoretical model on which this empirical analysis is based on is the labour demand

function. The estimation of the effect of FDI on employment is done with a simple labour

P a g e | 31

specification. Most studies implicitly adopt a neoclassical framework for the formulation of the

demand for labour schedule, and hence, according to theory, the aggregate demand for labour is

assumed to be negatively related to real wages and positively related to output. To obtain an

empirical estimate of the impact of FDI on employment, the study starts by estimating a basic

labor demand function. Following Vacaflores et al (2012), Massoud (2008),the model can be

specified as:

EMPLt= f (WAGE, GDP, FDI) ……………….…………………………………………… (3.1)

Where

EMPL is employment

WAGE is the real wage rate

GDP is output, which at the economy level is real gross domestic product

FDI is foreign direct investment

t is the time trend

Assuming a linear relation among explanatory variable, the explicit form of equation 3.1

becomes:

EMPLt= θ0+ θ1W+θ2GDP + θ3FDI + ε……………………………………………………. (3. 2)

θ1 is expected to be negative, since firms would demand less labour if there is an increase in the

real wage. On the other hand, θ2 and θ3 are expected to be positive since firms would demand

more labour if output is rising.

3.3 MODEL SPECIFICATION

MODEL 1: Addressing objective 1 and 2, to capture the impact of FDI on employment level, the

error correction model using OLS technique would be employed. The functional form of the

model is therefore derived from equation (3.2) above

Nt= f( W, Q, FDI) ……………………………………………………………………………. (3.3)

P a g e | 32

Where Nt is proxied as the total employment, W is the real wage, Q is the GDP and FDI stands

as it is.

The linearized form of equation of equation (3.3) is gotten by taking logarithms which is then

specified as:

lnNt= θ0+ θ1lnW+θ2lnQ + θ3ln FDI + ε …………………………………………..…….. (3.4)

where ε is the error term, which is assumed to have normal properties. If there is an FDI-induced

expansion in labour the sign of the coefficient θ3 is expected to be positive.

The above equation can be expressed explicitly as

lnEMPLt = = Θ0+ θ1lnWG+θ2lnGDPt + θ4InFDIt + ε ……………………………..……..... (3.5)

In specifying the model for this study, the estimation equation includes other variables as

explanatory variable, real effective exchange rate and inflation rate, based on empirical

literatures, Kareem (2010) and Salami & Oyewale (2013). They posit that real exchange rate and

inflation rate are important factors that determine employment in Nigeria. The model can

therefore be extended to be

lnEMPLt = = Θ5+ θ1lnWG+θ2lnGDPt + θ4FDIt + REXt + INFt ε …………………..…… (3.6)

where:

EMPLt = Employment to population ratio of 15+ (total % in Nigeria) at time t

WG = Real take- home wages

GDP= Gross domestic product at current basic prices (N'million)

FDI = Foreign direct investment net inflows

REX = Real exchange rate

INF = Inflation rate, consumer prices (annual %)

P a g e | 33

3.3.1 Unit Root Tests

A co-integrating relationship exists between non-stationary series, if there is a stationary linear

combination between them. Therefore, one needs to test stationarity of the time series first.

Augmented-Dickey-Fuller (ADF) is used to determine whether or not the series are stationary.

The testing procedure for the ADF is as follows:

0 1 1 .. . . . .. . . . .. . . . .. . . . .. . . . .. . . . .. . . . .. .(3 .7 )t t t P tK F t K F K Fλ β γ µ− −∆ = + + ∂ ∆ +

Where:

0λ is a constant,

tβ is the coefficient on a time trend,

P is lag order of the autoregressive process, and

∆ is difference operator.

The unit root test is then carried out under the null hypothesis 0=γ against the alternative

hypothesis of γ < 0. Once a value for the test statistics

)(∧

∧

=

γ

γ

SE

ADFt ……………………………………………………………………………… (3.8)

is computed we shall compare it with the relevant critical value for the Dickey-Fuller Test. If the

test statistic is greater (in absolute value) than the critical value at 5% or 1% level of

significance, then the null hypothesis of 0=γ is rejected and no unit root is present.

3.3.2 Co-integrated Test

[

+−−+= −

−−

∑∑ tit

n

i

tm

p

i

tmitm vXKFZKF 2

12

1 loglog βηηααη …………………..…… (3.9)

P a g e | 34

Where

−∑

−−

1

logi

ittm XKF βη Is the linear combination of the non co integrated vectors,

X is a vector of the non co-integration variables.

Because equation II is true, individual influence of the co integrated variables cannot be

separated unless with an error correction mechanism through an error correction model as shown

below.

3.3.3 The error Correction Model

Equation

( )

+−+= ∑

−−

p

i

tittmitm vECMZKF1

41log ληααη …………………..………….……….. (3.10)

Where ecmλ− is the error correction mechanism, - λ is the magnitude of error corrected each

period specified in its a priori form so as to restore tm KFlogµ to equilibrium.

MODEL 2: Addressing objective 3, the granger causality test is done evaluate the causal

relationship between employment and FDI.

A variable x is said to Granger cause another variable y if past values of x help predict the

current level of y given all other appropriate information. This definition is based on the concept

of causal ordering. Two variables may be contemporaneously correlated by chance but it is

unlikely that the past values of x will be useful in predicting y, given all the past values of y,

unless x does actually cause y in a philosophical sense. Similarly, if y in fact causes x, then given

the past history of y it is unlikely that information on x will help predict y. The simplest test of

Granger causality requires estimating the following two regression equations:

P a g e | 35

1 , 0 1 , 1 1 , 1

1 1

...................................(3 .1 1)t i t p j t j t

p p

i j

y y xβ β β ε− + −

= =

= + + +∑ ∑

2 , 0 2 , 1 2 , 1

1 1

..................................(3 .12)t i t p j t j t

p p

i j

x y xβ β β ε− + −

= =

= + + +∑ ∑

where p is the number of lags that adequately models the dynamic structure so that the

coefficients of further lags of variables are not statistically significant and the error terms ε are

white noise. The error terms may, however, be correlated across equations. If the p parameters

β1,p+j are jointly significant then the null that x does not Granger cause y can be rejected.

Similarly, if the p parameters β2,i are jointly significant then the null that y does not Granger

cause x can be rejected.

3.4 ESTIMATION PROCEDURES

The time series properties of the data will be examined in order to avoid spurious results

emanating from the non-stationarity of the data series and to analyze the dynamic structure of the

relationship. The estimation begins with a unit root test to confirm the stationarity states of the

variables that entered the model. In order to test for stationarity of the data used in this study, the

Augmented-Dickey fuller (ADF) test will be used. The first step is to test for stationarity,

without constant and trend. If the variables are non- stationary, then the next step is to difference

and test for the stationarity of differenced variables. If the variables become stationary after first

difference then it is concluded that the variables are integrated of order one i.e 1(1).

After that, co-integrating regression will be obtained from the normalized coefficients of the

model generated from co-integrating vector. If co-integration exists, the Error Correction Model

(ECM) will be estimated by applying the ECM where the speed of adjustment to equilibrium will

be determined. Lastly, diagnostic tests of the stochastic properties of the models would be carried

out. The estimation techniques to be employed in the analysis are OLS as the basic technique and

the Instrumental Variables (IV) or 2SLS estimations for possible endogeneity problem. In the

presence of endogenous regressors, IV estimator is more precise and consistent than OLS

estimator because they are unbiased. The Wu-Hausman Test of endogeneity of the regressors

P a g e | 36

will be employed to ascertain whether or not IV regression will be appropriate and test for the

validity of the instruments used.

3.5 SOURCE OF DATA AND STATISTICAL SOFTWARE

The data for the study was obtained from CBN Statistical Bulletin, 2011, National Bureau of

Statistics, 2008, and World Bank indicators, 2012. Stata- 12 statistical package would be used for

the estimation.

P a g e | 37

CHAPTER FOUR

4.0 PRESENTATION OF RESULTS

4.1 STATIONARITY AND CO-INTEGRATION TEST

4.1.1 STATIONARITY TEST

The Augmented Dickey Fuller unit root test was conducted to ascertain whether the variables in

the model are stationary. The test became unavoidable to ensure the absence of spurious

regression results. The summary of the stationarity test results are stated below;

Table 4.1: Unit root on variables and residuals of all the regressions

Variable DF statistic Order of Integration No of lags Stationarity point

Employment -4.925 I(2) 1 Stationary at 1%

GDP -6.205 I(1) 0 Stationary at 1%

Wage -5.468 I(1) 0 Stationary at 1%

FDI -4.634 I(0) 1 Stationary at 1%

Exchange rate -5.044 I(0) 3 Stationary at 1%

Inflation rate -5.015 I(0) 0 Stationary at 1%

As clearly identified on the table above, Employment became stationary only after having

differentiated twice. While GDP and Wage are I(1) process at different critical values,

suggesting that they had to be differentiated once for them to become stationary. And then FDI,

exchange rate and inflation rate are significant at level hence I(0) process. The evidence of unit

root however is a necessary condition for co-integration.

4.1.2 CO-INTEGRATION TEST FOR OLS RESULTS

The presence for unit root precipitates the estimation of co-integration to find out if there exists a

long run relationship between them. To estimate the co-integration, the regression was estimated

taking into consideration the individual order of integration and then the residual was generated

and tested for unit root.

P a g e | 38

The co-integration result is shown below

Table 4.2: ADF Co-integration Results

ADF statistic of

residual

ADF residual

value

Critical value Order of integration

Residual for

employment

-2.787 1% = -3.716

5% = -2.986

10% = -2.624

Not stationary

The results therefore show that the unit root for the residual is stationary at 10%, but not

stationary at 5% and 1% with the Dickey Fuller unit root at level. Therefore unit root is not

stationary at the standard 5%, hence there exist no cointegration between the dependent variable

and its determinants.

This therefore means that though the necessary condition for error correction model (ECM) is

satisfied, the sufficient condition for the error correction mechanism has failed and therefore we

do not go further to estimate for ECM. This therefore means that the multiple regression will be

estimated ordinarily using the OLS estimation technique.

4.2 IMPACT OF FDI ON EMPLOYMENT.

The study employed a multiple regression with an OLS estimation technique to ascertain to what

extent foreign direct investment impacts on employment. However the study first of all tested for

some important assumptions of the classical linear theory, which are multiple collinearity,

heteroscedasticity and auto-correlation. The Variance inflation factor (VIF) was employed to

estimate the presence of multi-collinearity in the study.

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Table 4.3: Multiple Regression results results for the Impact of FDI on Employment

Variable VIF 1/VIF

Foreign Direct Investment 5.60 0.178680

Gross Domestic Product 3.52 0.284083

Wage 3.42 0.292728

Real Exchange Rate 2.63 0.380145

Inflation Rate 1.64 0.611324

Mean VIF 3.36

The result suggests that, the variance inflation factor for all the variables does not surpass 6 and

the mean variance inflation factor is 3.36. Therefore there exists no significant multi-collinearity

between the dependent variable and the independent variables. The heteroscedasticity tests

opines that the probability chi square is equal to 0.0151, hence there exist heteroscedasticity in

the model. This implies that the values of the dependent variable – employment are distributed

distantly from the mean and therefore questions the reliability of the correspondence between the

dependent and independent variables. However, the problem of Heteroscedasticity was corrected

with the ‘robust’ indicator of the STATA software that was used in the final regression, which

automatically corrects for heteroscedasticity. The Durbin Watson test was used to test for auto

correlation in the model, and the Durbin Watson statistic was given as 1.180515 as shown on

Table 4.3 below. Considering k equal to 5 and degree of freedom equal to 32, the Durbin Watson

statistic therefore falls in the zone of No autocorrelation; hence there exist no autocorrelation in

the estimation of this model. This model therefore satisfies the condition for Multi collinearity

and Auto correlation and the remedy for heteroscedasticity is applied to ensure that its necessary

condition is validated. Based on the validation of these assumptions the study therefore

proceeded with the estimation of the multiple regression model while employing the OLS

technique.

The results of the multiple regression, aimed at determining the impact of foreign direct

investment on employment is presented on the table below;

P a g e | 40

Table 4.4: Multiple Regression results for the Impact of FDI on Employment

Variables Coefficients t statistic P value

Wage -.000045*** -4.48 0.000

Gross Domestic Product .0006573** 2.64 0.014

Foreign Direct Investment -.3014263 *** -2.86 0.008

Real Exchange Rate -.0006971 -1.44 0.161

Inflation Rate .0022163 0.87 0.391

Constant 58.51273 27.17 0.000

R square 0.8510

Centered R square 0.9912

Prob > F of overall test 0.0000

Durbin Watson (5, 32) 1.180515

t statistics in parentheses

* p<0.01, ** p<0.05, *** p<0.001

Table 4.3 above opines that, there exists a very high R square from the estimation which implies

that the independent variables explain the dependent variable to a large extent, in fact up to about

85%. And the F probability of 0.000 implies that the overall estimation is significant at 1%.

Therefore, the model is robust and the interpretation will illustrate real life scenario to a great

extent.

The result suggests that wage has a negative and significant impact on employment, given a

probability value of 0.000 hence lower than 0.05 and so significant at the standard 5% significant

level. In fact, units increase in wage significantly reduces employment rate by 0.000045. The

negative relationship between wage and employment is expected a priori as it represents the

theoretical relationship that suggests that, as wage increases, cost of production increases and

therefore will lead to retrenchment of workers. On the other hand, with lower wages investors

and entrepreneurs can afford to increase employment. This theoretical underpinning is even more

visible in economies like that of Nigeria where unemployment is high and so the strength of

P a g e | 41

trade unionism or workers protection is weak since there exist available labour that could be

credible alternatives to the labour already employed.

The result also suggests that Gross Domestic product is significant at 5% given that its t-value is

2.64 (greater than 1.96), and the probability value is 0.014 (less than 0.05). This implies that

GDP is a significant and positive determinant of employment in Nigeria. Units increase in GDP

increases employment by 0.0006573, hence a higher coefficient than that of wage. This result is

equally expected a priori since employment should naturally increase as the economy progresses.

This could be explained by the fact that, GDP increase implies production increases as well as

the need for more labour to sustain the increase –economic growth.

Surprisingly, foreign direct investment has a significant but negative impact on employment. The

probability value of 0.008, and the absolute t-value of 2.86, shows that FDI is significant at 1%

and 5% significant level. One would expect that increase in FDI should stimulate economic

activities in the receiving country - Nigeria in this case, and therefore create more jobs thereby

increasing employment. The negative relationship however suggests the opposite implication and

this could only be explained by the fact that the FDI to Nigeria is exploitative as described by

some authors in the literature. That is, FDI that comes with its own man power and equipment

and therefore little or no need to employ local workers especially for technical posts.

The result shows that, real exchange rate is a negative and non-significant determinant of

employment in Nigeria. This implies that, the higher the exchange rate, the lower the

employment rate, though not significant. Exchange rate; the price of a currency with respect to

other currencies increasing means that, more Naira is given out to get other currencies which is a

restrain on the Nigerian economy and hence should reduce employment indirectly. However, it is

not significant in Nigeria. Just like exchange rate, inflation rate has a t-value that is less than 1.96

and a probability value that is greater than 0.05 hence not significant. Inflation rate is therefore a

positive but not a significant determinant of employment. This result is equally surprising as it

suggest that the higher the inflation the higher the employment. Nevertheless, this could be

explained by the faint relationship that often times exist between inflation and growth. As it is

assumed that growth often comes with some degree of inflation and therefore, inflation could be

increasing due to the growth increase and then lead to increase in employment. However the

study notes that it is not a significant determinant of employment.

P a g e | 42

4.3 LONG-RUN RELATIONSHIP BETWEEN FDI AND EMPLOYMENT IN NIGERIA

To ascertain the long run relationship between FDI and Employment the study employed the

Johansen Co-integration test. The results as shown in the appendix suggest that the number of

parameters is one, which is equal to the number of variables minus 1. This shows that there exist

a long run relationship between FDI and employment. To ascertain the significance of the long

run relationship, the study regressed a simple model of FDI on employment and estimated the

unit root of its residual. The result is as shown below;

Table 4.5: ADF Co-integration Results

ADF statistic of residual Critical value Order of integration

-4.634 1% = -4.325

5% = -3.576

10% = -3.226

Stationary at 1%

The augmented Dickey fuller confirmed the Johansen co-integration by showing that, the dickey

fuller of the residual is significant at 1% critical value hence there exist a significant long run

relationship.

4.4 CAUSALITY ANALYSIS BETWEEN FDI AND EMPLOYMENT IN NIGERIA

The causality result was gotten from estimating a granger causality analysis between FDI and

employment. The results are presented on Table 4.5 below;

Table 4.6: Granger Causality Results between FDI and Employment

Equation Excluded DF Prob > chi2 Direction of causality

Employment FDI 4 0.443 Employment ≠→ FDI

Employment ALL 4 0.443

FDI Employment 4 0.000* FDI → Employment

FDI ALL 4 0.000*

The results suggests a Uni-directional causality as FDI significantly causes employment but

employment does not significantly cause FDI, given that the probability chi square for FDI

P a g e | 43

causing employment is 0.000 and that for employment causing FDI is 0.443. FDI causing

employment could be explained by the fact that as the FDI stimulates economic activities in the

recipient countries that may create jobs hence employment.

4.5 EVALUATION OF WORKING HYPOTHESES

The study’s hypotheses stated in section 1.5 are evaluated thus:

4.5.1 TEST OF WORKING HYPOTHESIS 1

H0: There is no significant impact of FDI on employment growth in Nigeria.

H1: There exists a significant impact of FDI on employment growth in Nigeria.

DECISION:

The p-value of the slope of foreign direct investment variable is 0.008 which is less than 0.05 at

95% confidence interval. We reject the null hypothesis that there is no significant impact of FDI

on employment growth in Nigeria. Hence, we conclude that there is no significant impact of FDI

on employment growth in Nigeria.

4.5.2 TEST OF WORKING HYPOTHESIS 2

H0: There is no significant long- run relationship between FDI and employment in Nigeria

H1: There exist significant long- run relationship between FDI and employment in Nigeria

DECISION:

The critical statistic of the residual is -4.634 greater than the ADF at 10%, 5% and 1% hence we

reject the null hypothesis that there is no significant long- run relationship between FDI and

employment in Nigeria. And hence, conclude that there is a significant long- run relationship

between FDI and employment in Nigeria.

4.5.3 TEST OF WORKING HYPOTHESIS 3

H0: There exist no significant causality between FDI and employment in Nigeria.

H1: There exist significant causality between FDI and employment in Nigeria.

P a g e | 44

DECISION:

The probability chi square for FDI causing employment is 0.000 and that for employment

causing FDI is 0.443. We therefore reject the null hypothesis that FDI does not granger causes

employment and we do not reject the null hypothesis that employment does not granger cause

FDI. Hence we conclude that FDI granger causes employment while employment does not

granger cause FDI.

P a g e | 45

CHAPTER FIVE

SUMMARY, POLICY IMPLICATIONS AND CONCLUSION

5.1 SUMMARY

The rising unemployment rate and its persistence in developing countries and most especially in

Nigeria is alarming and demands urgent policy strengthening to lessen it. The ills of

unemployment are numerous and are principally characterized by high crime waves, and most

governments have as one of their macroeconomic objective to reduce unemployment to their

barest minimum. However, foreign direct investment has been a source of assistance in most

developing countries, as such empirical as well as theoretical literatures have established a

relationship between the two. It is on this premise that this study examined the impact, causality

and long run relationship between foreign direct investment and employment. The study

therefore employed multiple regression, Johansen co-integration and causality to ascertain the

specific objectives of the study.

The multiple regression was estimated with the OLS technique to ascertain the impact of FDI on

employment. The result of the multiple regression suggests that wage has a negative and

significant impact on employment, while Gross Domestic product is significant and positive as

well. The study further shows that foreign direct investment has a significant but negative impact

on employment given, it’s probability value of 0.008, and the absolute t-value of 2.86. Also, the

result shows that, real exchange rate is a negative and non-significant determinant of

employment in Nigeria while, inflation rate is a positive but not a significant determinant of

employment.

To ascertain the second objective which was to examine the long run relationship between FDI

and employment, the study employed the Johansen co-integration and ADF test to show that

there exist a long run relationship between FDI and employment. The ADF statistic confirms that

the long run relationship is significant at 1%. Meanwhile, the third objective which is to analyse

the direction of causality between FDI and employment was ascertained with the aid of the

granger causality and the results show that, FDI significantly causes employment but

employment does not significantly cause FDI.

P a g e | 46

5.2 POLICY IMPLICATIONS

The study’s findings are very inciting and therefore will inform policy in several ways. The

following are therefore formulated from the findings of the study;

i) The fact that FDI has a significant and positive impact on employment and there

exists a long run relationship implies that FDI has a way of creating jobs in Nigeria.

This therefore means that despite the several programs and policies that are on-going

to improve employment, FDI should be considered as a significant option. The

significance of FDI on employment therefore means that FDI could be encouraged by

reducing the level of insecurity in Nigeria especially with the recent terrorist attacks

and creates a safe environment to entice prospective investors.

ii) Also, the image of the nation could be salvaged from the negative picture it currently

possess, and then use the media and any other means to project the advantages of

investing in Nigeria that ranges from the large market due to its population to the

availability of land and its central role in the ECOWAS region as well as the African

continent at large.

iii) FDI could also be encouraged by reducing the overall cost of production especially in

providing adequate road infrastructure, electricity and water amongst others.

iv) The government can equally enforce the reduction of bureaucratic bottle necks and

restraining protocol to attract foreign direct investments, or give out some incentives

like some years of tax free operation depending on the level of your capital as well as

other enticing offers.

v) GDP is shown to have a significant and positive effect on employment. This means

that government at all tiers could further make sure that as the economy grows,

further capital investments and government expenditures should be made with a keen

interest to create more jobs. In fact, the option and possibility of creating jobs should

be its bases for the preference of projects to be carried out.

vi) The results show a negative and significant relationship between wage and

employment. This means that wages are not sticky and hence could be influence by

employers as they weigh the burden. The government could therefore set up firm

legal frameworks to encourage and empower trade unions such that, salaries have a

P a g e | 47

downward rigidity, therefore preventing entrepreneurs and co-operate bodies from

exploiting workers.

vii) On the other hand, they could provide social protection and job security for workers.

This will go a long way to maintain workers that already employed so that they focus

on creating jobs for those that have not yet had.

viii) Inflation rate has no significant impact on employment which means that inflation has

been contained to some admirable extent and should therefore be maintained in order

to reduce their effect on real wages that might in turn affect employment.

ix) The negative effect that exchange rate has on employment suggests that exchange rate

is stabilized to avoid its rise of fluctuations that might lead to a reduction in

employment, though exchange rate is not considered significant.

5.3 SUGGESTIONS FOR FURTHER RESEARCH

The literature on employment and/or FDI abound, however there is still need to exploit other

sectors and relationships in an effort to strengthen the economy. This study examined the

relationship between FDI and employment, in terms of the impact, causality and long run

relationship. Other studies could therefore examine the relationship between the other

international flows; remittances and official development assistance (foreign aid) and

employment. This is because some of these external influences might play a vital role in creating

jobs that will lessen the problem of unemployment. Also, other studies could examine the

relationship between FDI and employment in Nigeria using other methods, or in other countries

and economies to establish empirical evidence on this relationship. Cross country studies or

panel studies could also be made with the same intention.

5.4 CONCLUSION

The increasing unemployment rate and its vices in Nigeria questions the effort/policies that have

been made to combat it or the degree of its implementation. The statistics however motivated the

study to investigate other means of improving the employment rate by examining its relationship

with FDI. The findings of the study suggest that FDI has a significant and positive impact on

employment, and other significant determinants of employment include; GDP and wage. Also

P a g e | 48

the results show that there exist a significant long run relationship between FDI and employment.

Finally the results suggest that FDI granger causes employment but employment does not

granger cause FDI. This means that FDI has a significant role on employment in Nigeria and this

should not be minimized. The study therefore recommends that policies be formulated to exploit

the role of FDI on employment in Nigeria in an attempt to reduce unemployment rate.

P a g e | 49

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APPENDICES

APPENDIX I: PRE-ESTIMATION TEST RESULTS

Multi-Collinearity Variable | VIF 1/VIF

-------------+----------------------

lfdi | 5.60 0.178680

gdp | 3.52 0.284083

wage | 3.42 0.292728

realexchan~e | 2.63 0.380145

inflationr~e | 1.64 0.611324

-------------+----------------------

Mean VIF | 3.36

Heteroscedasticity Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance

Variables: fitted values of employment

chi2(1) = 5.91

Prob > chi2 = 0.0151

Durbin Watson Durbin-Watson d-statistic( 6, 32) = 1.180515

P a g e | 56

APPENDIX II: AUGMENTED DICKEY FULLER RESULTS . dfuller d.gdp, trend lag(0)

Dickey-Fuller test for unit root Number of obs = 30

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

-----------------------------------------------------------------------------

-

Z(t) -6.205 -4.334 -3.580 -3.228

-----------------------------------------------------------------------------

-

MacKinnon approximate p-value for Z(t) = 0.0000

. dfuller d.wage, trend lag(0)

Dickey-Fuller test for unit root Number of obs = 30

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

-----------------------------------------------------------------------------

-

Z(t) -5.468 -4.334 -3.580 -3.228

-----------------------------------------------------------------------------

-

MacKinnon approximate p-value for Z(t) = 0.0000

. dfuller dd.employment, trend lag(1)

Augmented Dickey-Fuller test for unit root Number of obs = 28

P a g e | 57

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

-----------------------------------------------------------------------------

-

Z(t) -4.925 -4.352 -3.588 -3.233

-----------------------------------------------------------------------------

-

MacKinnon approximate p-value for Z(t) = 0.0003

. dfuller d.inflationrate, trend lag(0)

Dickey-Fuller test for unit root Number of obs = 30

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

-----------------------------------------------------------------------------

-

Z(t) -5.015 -4.334 -3.580 -3.228

-----------------------------------------------------------------------------

-

MacKinnon approximate p-value for Z(t) = 0.0002

. dfuller realexchangerate, trend lag(3)

Augmented Dickey-Fuller test for unit root Number of obs = 28

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

P a g e | 58

Statistic Value Value Value

-----------------------------------------------------------------------------

-

Z(t) -5.044 -4.352 -3.588 -3.233

-----------------------------------------------------------------------------

-

MacKinnon approximate p-value for Z(t) = 0.0002

. dfuller lfdi, trend lag(0)

Dickey-Fuller test for unit root Number of obs = 31

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

-----------------------------------------------------------------------------

-

Z(t) -4.634 -4.325 -3.576 -3.226

-----------------------------------------------------------------------------

-

MacKinnon approximate p-value for Z(t) = 0.0009

APPENDIX III: CO-INTEGRATION RESULTS . predict red

(option xb assumed; fitted values)

(1 missing value generated)

. dfuller red

Dickey-Fuller test for unit root Number of obs = 30

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

P a g e | 59

Statistic Value Value Value

-----------------------------------------------------------------------------

-

Z(t) -2.787 -3.716 -2.986 -2.624

-----------------------------------------------------------------------------

-

MacKinnon approximate p-value for Z(t) = 0.0601

APPENDIX IV: MULTIPLE REGRESSION RESULTS . reg employment wage gdp lfdi realexchangerate inflationrate, robust

Linear regression Number of obs = 32

F( 5, 26) = 44.77

Prob > F = 0.0000

R-squared = 0.8510

Root MSE = .28959

-----------------------------------------------------------------------------

-----

| Robust

employment | Coef. Std. Err. t P>|t| [95% Conf. Interval]

-----------------+-----------------------------------------------------------

-----

wage | -.000045 .00001 -4.48 0.000 -.0000656 -.0000243

gdp | .0006573 .0002489 2.64 0.014 .0001458 .0011689

lfdi | -.3014263 .1053483 -2.86 0.008 -.5179728 -.0848797

realexchangerate | -.0006971 .0004832 -1.44 0.161 -.0016903 .0002962

inflationrate | .0022163 .0025413 0.87 0.391 -.0030075 .0074401

_cons | 58.51273 2.153585 27.17 0.000 54.08597 62.93949

-----------------------------------------------------------------------------

-----

P a g e | 60

APPENDIX V: JOHANSON CO-INTEGRATION RESULTS Vector error-correction model

Sample: 1983 - 2012 No. of obs = 30

AIC = .2694409

Log likelihood = 4.958387 HQIC = .4039174

Det(Sigma_ml) = .0024632 SBIC = .6898001

Equation Parms RMSE R-sq chi2 P>chi2

----------------------------------------------------------------

D_employment 4 .128827 0.3576 14.47076 0.0059

D_lfdi 4 .44577 0.4953 25.51508 0.0000

----------------------------------------------------------------

-----------------------------------------------------------------------------

-

| Coef. Std. Err. z P>|z| [95% Conf. Interval]

-------------+---------------------------------------------------------------

-

D_employment |

_ce1 |

L1. | -.0516528 .0613645 -0.84 0.400 -.171925 .0686195

|

employment |

LD. | .628841 .1823431 3.45 0.001 .2714552 .9862269

|

lfdi |

LD. | -.0223038 .0421375 -0.53 0.597 -.1048918 .0602842

|

_cons | -.0252784 .0311841 -0.81 0.418 -.086398 .0358413

-------------+---------------------------------------------------------------

-

D_lfdi |

_ce1 |

P a g e | 61

L1. | -.4244683 .2123351 -2.00 0.046 -.8406375 -.008299

|

employment |

LD. | .1909836 .6309482 0.30 0.762 -1.045652 1.427619

|

lfdi |

LD. | -.5430079 .1458053 -3.72 0.000 -.828781 -.2572348

|

_cons | .0030761 .1079039 0.03 0.977 -.2084116 .2145638

-----------------------------------------------------------------------------

-

Cointegrating equations

Equation Parms chi2 P>chi2

-------------------------------------------

_ce1 1 7.616048 0.0058

-------------------------------------------

Identification: beta is exactly identified

Johansen normalization restriction imposed

-----------------------------------------------------------------------------

-

beta | Coef. Std. Err. z P>|z| [95% Conf. Interval]

-------------+---------------------------------------------------------------

-

_ce1 |

employment | 1 . . . . .

lfdi | .5221525 .189205 2.76 0.006 .1513176 .8929875

_cons | -63.29145 . . . . .

-----------------------------------------------------------------------------

-

. reg employment lfdi

P a g e | 62

Source | SS df MS Number of obs = 32

-------------+------------------------------ F( 1, 30) = 40.66

Model | 8.41951326 1 8.41951326 Prob > F = 0.0000

Residual | 6.2125595 30 .207085317 R-squared = 0.5754

-------------+------------------------------ Adj R-squared = 0.5613

Total | 14.6320728 31 .472002347 Root MSE = .45507

-----------------------------------------------------------------------------

-

employment | Coef. Std. Err. t P>|t| [95% Conf. Interval]

-------------+---------------------------------------------------------------

-

lfdi | -.4752407 .0745323 -6.38 0.000 -.627456 -.3230253

_cons | 61.98414 1.572263 39.42 0.000 58.77315 65.19513

-----------------------------------------------------------------------------

-

. predict o

(option xb assumed; fitted values)

. defuller o

dfuller o, trend

Dickey-Fuller test for unit root Number of obs = 31

---------- Interpolated Dickey-Fuller ---------

Test 1% Critical 5% Critical 10% Critical

Statistic Value Value Value

-----------------------------------------------------------------------------

-

Z(t) -4.634 -4.325 -3.576 -3.226

-----------------------------------------------------------------------------

-

MacKinnon approximate p-value for Z(t) = 0.000

P a g e | 63

APPENDIX VI: GRANGER CAUSALITY RESULTS Granger causality Wald tests

+------------------------------------------------------------------+

| Equation Excluded | chi2 df Prob > chi2 |

|--------------------------------------+---------------------------|

| employment fdi | 3.7378 4 0.443 |

| employment ALL | 3.7378 4 0.443 |

|--------------------------------------+---------------------------|

| fdi employment | 27.475 4 0.000 |

| fdi ALL | 27.475 4 0.000 |

+------------------------------------------------------------------+

.