This study adopts time series data sourced through secondary sourced from institutions like the Central Bank of Nigeria (CBN), Federal Office of Statistics (FOS), World Bank Statistical Information, World Debt Tables, IMF International Financial Statistics and other sources of already processed data that are relevant to the study.
The summary of short-run relationship among the variables in each model using ordinary least square (OLS) technique of multiple regression analysis is presented below. From the above OLS results, it could be seen that Model 1 has its constant parameter (B0) negatively related to financial sector contribution to Gross Domestic Product (GDPfin) while FDI is positive. The constant parameter (B0) and the explanatory variable (MRKCAP) are positively related to inflow of FDI to financial sector (FDIfin) in Model 2. In model 3, MRKCAP, and EXTR are positively related to FDIfin while GDP, EXDEBT, INF, ECHR and DOP are negatively related to FDIfin.
As previously mentioned, macroeconomic and general financial conditions haven been hardly analyzed in the theoretical literature of financial FDI. This is why we focus on theories explaining general FDI. These may be classified in two broad groups.
First, general equilibrium models compare trade and FDI on the basis of the relative factor endowments, transport costs and opportunities for knowledge transfer [Markusen and Makus [2001, and Helpman 1987]. Secondly, financial conditions-related theories are based on hypothesis of imperfect capital markets. In this vein, the relative wealth hypothesis of Froot and Stein focuses on the effects of exchange rates movements in general FDI flows. A depreciation of the local currency increases the relative wealth of foreign investors, allowing them to outbid local rivals for profitable projects.
This research paper is empirical in nature based on the subject matter. Therefore, it is designed to bring out concrete and determinable empirical evidence relating to the effect of FDI on Nigeria Financial Sector. Four models will be built to test the relationship between FDI and other explanatory variables while One model will be built to test the causal link between FDI and the growth of Nigeria financial sector. Therefore, we will measure the financial determinant by Market Capitalization of the Nigeria stock Exchange (NSE) while the macroeconomic variables are Gross Domestic Product (GDP), External Debt (EXDEBT), Inflation rate (INF), Exchange rate (ECHR). The institutional determinant is represented with Degree of Openness (DOP) which measures the rate at which an economy is open to foriegn trade. It is the ratio of the summation of export and import values to GDP.
Regarding comparative advantages, innovative products, better intermediation technologies or superior management quality are among the frequently cited both by the eclectic theory of the multinational corporations (see Dunning 1979 and Gray and Gray 1981) for an early application to multinational banking and the internalization theory [Buckley and Casson. Some authors argue that these factors, however, are not very relevant in the case of financial FDI, or at least not permanently, because of the need to assume that financial firms have intangible assets which cannot be imitated, in a generally highly competitive sector, such as the banking system (Dufey and Giddy 1981) or because management quality can easily be transferred. Nonetheless, the case against the persistence of these competitive advantages is considerably weaker for emerging market economies, where the dominance of government-owned banks has generally resulted in low competition in the banking sector (Marichal 1997).
As concerns efficiency, the main factors mentioned in the literature are the size of the bank, its degree of internationalization and product and distribution channels. First, a large size enables banks to translate their scale efficiencies to foreign markets at a relatively low cost and to compete with local institutions even after taking into account the extra costs faced by foreign competitors (Terrell 1979; Tschoegl 1983; and Sabi 1988). The importance of size depends heavily on the kind of activity developed by the foreign firm in the host market. If the business model implies a duplication of costs, scale efficiencies will be difficult to attain. This is why some authors (for example, Casson 1990) argue that a model based on subsidiaries with a retail focus is unlikely to benefit from large gains in efficiency, while a branch model would if directed to wholesale or investment banking markets.
The recent economic challenges and failure of some countries that have experienced both increases in FDI and stock market activities have made scholars to raise issues with respect to the relation between FDI and stock market development. On one hand, there is the view that FDI tends to be larger in countries that are riskier, financially underdeveloped and institutionally weak, (Haussmann and Fernandez-Arias, 2000). Under this view, FDI is a substitute for stock market development-FDI takes place to overcome the difficulties of investing through capital market. According to this view, FDI should be negatively correlated with the development of stock market. In contract to this view, evidence from some countries showed that FDI flows into countries with good institutions and fundamentals and fuels the development of stock market through different channels.
This invariably implies that FDI and stock market may be complementary and not substitute; this was confirmed by the study of (Adam and Tweneboar in 2009) in a study of Foreign Direct Investment and Stock Market Development in Ghana. Also, the study on the role of Foreign Direct Investment and Stock Market Development in Pakistan by Ali Raza et.al in 2012 disclosed a positive impact of foreign direct investment along with other explanatory variables in developing stock markets of Pakistan. FDI can be positively related to the participation of firm in capital markets, since foreign investors might want to finance part of their investment with external capital or might want to recover their investment by selling equity in capital markets.
Foreign Direct Investment (FDI) usually consists of external resources, including technological, managerial and marketing expertise, in addition to capital. These may generate considerable impact on Nigerian real sector in general and production capabilities in particular, since they are directly linked to productive investment. Foreign Direct Investment also facilitates transfer of technology and managerial and marketing skills, which are indispensable in the quest for viable solution to the problems of industrial inputs and diversification as well as expansion of export. Thus, the ability of Nigeria to sustain growth and development as well as meet her external obligations, millennium development goals (MDG) and to realize her dream of joining the league of highly industrialize nation by the year 2020 depends on adequate inflow of foreign investment resources. Unfortunately, the country has been experiencing difficulties in her effort to meet these goals. At the current level of foreign exchange earnings and high external debt servicing obligation, little or nothing is available for new investments.
Consequently, given the low level of per capital real income characterizing underdeveloped economies, traditional model of economies assumes that average and marginal consumption propensities are high, that savings are low and that the formation of new productive capital is restricted. Some reasons for the slow economic growth in Nigeria include mono-cultural economy, high population growth, import dependency, misguided deregulation/re-regulation, lack of incentives for investment in terms of infrastructure globalization and political instability.
The study test his effect of the volatility of national debt and national debt volatility on the gross domestic product ( GDP ) between 1987-2008.To ensure this stability of his variable the unit out rest using the Augmented Dickey-Fuller (ADF) test was carried out on the variable. The result is shown as follow (Dickey and Fuller 1981). The result in table 3 show the least square regression model, expressing GDP as the function of National Debt, National debt volatility and GDP. The result of the regression reveals an R2 of 0.935 or 94%. This means that the determinant variables have effect on GDP to a 94% extent. There exist a high positive relationship between the dependent variable and the explanatory variables. Also, the coefficient of determination stand at 0.927 or 93% which means that 93% changes in the dependent variables (GDP) is caused by the explanatory variables.
The effect of each variable on the explained variable (GDP) revealed that National Debt and National debt volatility are not significant at 0.05 and 0.01 level. However, GDP is significant at 0.05. Thus, a change in GDP is strongly influenced by the lag of the GDP. Hence, the previous GDP value influences the current GDP. However, the change in the National Debt does not bring about any effective change in GDP.
There is no any meaningful shock in National Debt neither do the square of the residual of National Debt constituting any significant effect on the GDP. Thus, other exogenous variables aside National debt provoke change in the GDP in Nigeria within the period covered. However, the probability of F- Statistics is significant at 5%, which suggest that the explanatory variables are significant measure of the dependent variable.
Osagie defines external debt as “one incurred when government borrows from foreign international financial institutions”. In other words, external debt comprises of any debt, incurred or contracted by the government of a particular country from sources outside the geographical boundaries of the indebted country. The debt ballooned of Nigeria was the fact that the more she pays part of her debt, the more the increase in the debt owed. Ordu summed up the frustration of a nation entangled in protracted debt crisis when he said “Our debts seem to be perpetually on the increase. It is a sore that has refused to heal. The more we pay, the more we seem to owe. And our debt has been paid many times over.”
The Nigerian Debt Build-Up: A Foreign Author’s Brief Account
Quite a number of views have been expressed in relation to the build-up to the nation’s debt crisis. One of such views is that by Rieffel that stated among other things, that “Nigeria’s debt servicing problem began around 1985. At this point, the Nigerian government’s total external debts to all creditors amounted to $19 billion. However, today its outstanding external debt at the end of 2004 grew to almost $36 billion.”. The ballooning of Nigeria’s debt is related directly and exclusively to this policy choice by the creditors. Over the past twenty years, Nigeria has met its debt-service obligations to multilateral creditors without any restructuring, to commercial creditors after negotiating a debt exchange at 60% discount, Nigeria has been a performing debtor.
The above view becomes very necessary in that over the past few years, it is commonplace to find different authors adduced Nigeria’s external debt crisis to a case of a nonperforming debtor, thus making the country the only visible culprit for its worsening debt debacle. However, as it is combination of so many factors and not just a case of nonperforming creditor or debtor.
Ellis disagrees to some extend with the assumption made by most economists that a low National Debt as a percentage of GDP is a sign of economic health. While it can be a sign of economic health, it is increasingly a sign of economic disparity amongst the citizens. Some of the countries with the lowest debt to GDP ratios have the highest income inequality (GINI Coefficient) and a large percentage of their population living in below the poverty line. The perfect example she gave would be South Africa. The country has one of the highest GINI coefficients in the world, half of its population, however, lives under the poverty line, yet it has a national debt to GDP ratio that is only half that of the United States. This is nowhere near being economically healthy. This only means that a select few, likely large companies and multinationals, are economically healthy within the country.
Ellis stated that It is important to note that the relationship between public debt and GDP is abstract. Nations do not actually pay off public debt per year according to the ratio of debt and GDP. Since most public debt is paid off over many years and even altered or added to as time goes by, the relationship between public debt and GDP is merely used to illustrate and illuminate the financial state of a nation. Despite the limited real meaning of public debt and GDP ratios, the comparison is taken very seriously, as it indicates how able a nation will be to pay off debts. When the Eurozone was created in 1999, member nations had to prove a debt to GDP ratio of under 60% to be allowed to join the currency. This was to ensure that the euro would remain relatively stable despite becoming the backbone of many widely different economies throughout Europe.
Several studies have examined factors that accounts for growth in the gross domestic product of a nation (Misztal,2010). Most developed economy are investment driven and the investment are finance by debt either domestic or foreign debt,.Audu, study the effect of investment on GDP,concluding that the GDP is mostly influence by the volume of investment which are mostly finance by debt either locally or foreign. However, only little study has examined the effect of debt (Loan stock) on economic growth as measured by the GDP. There is the need to examine the direct effect of debt on economic growth in developing nation like Nigeria this is what this study attempt to do.
Also there is the need to examine the volatility of debt on the economic growth. Loan stock plays a major role in the budget and economic policy of developing nation. The extent of influence and volatility of debt remain largely undetermined over time. The basic objectives of this study are to examine the effect of debt volatility and debt volume on the GDP of Nigeria and to determine the effect of the shock on GDP.
One factor in determining the economic position of a country is through a comparison of public debt to the gross domestic product (GDP) of the country. This comparison is often listed as a percentage of how much of the GDP it would take to pay off the public debt. A low public debt and GDP percentage is usually an indication of economic health, while a high public debt and GDP percentage can indicate financial trouble for a country (Ellis, 2011).