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Foreign Direct Investment And The Development Of Small And Medium Enterprises
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
While in theory the nexus between FDI and growth (in terms of output and productivity) is in general positive, the empirical literature is far less conclusive. Some studies find positive effects from outward FDI for the investing country (Van Pottelsberghe and Lichtenberg, 2001; Nachum et al., 2000), but suggest a potential negative impact from inward FDI on the host country. This results from a possible decrease in indigenous innovative capacity or crowding out of domestic firms or domestic investment. Thus, in their view and in line with the standard literature on the determinants of FDI (i.e. Dunning’s OLI paradigm, see Dunning 1988) inward FDI is intended to take advantage of host country (locational) characteristics instead of disseminating new technologies originating in the sending country. Other studies report more positive findings: Nadiri (1993) finds positive and significant effects from US sourced capital on productivity growth ofmanufacturing inductries in France, Germany, Japan and the UK. Also Borensztein et al. (1998) finds a positive influence of FDI flows from industrial countries on developing countries’ growth. However, they report also a minimum threshold level of human capital for the productivity enhancing impact of FDI, emphasizing the role of absorptive capacity. Absorptive capacity or minimum threshold levels in a country’s ability to profit from inward FDI is often mentioned in the literature (see also Blomström et al. 1996). Consequently the effect of FDI depends among other things to a large extent on the characteristics of the country that receives FDI.
Given the critical role of entrepreneurship in economic growth of any nation and considering the absence of adequate technology in developing countries, it is essential to seek for technology transfer. More so, market and access to expertise are crucial to the survival and growth of small and medium enterprises (SMEs) in developing countries. Access to expertise allows SMEs to undertake productive investments efficiently and to acquire the latest technologies, thus ensuring their competitiveness and that of the nation as a whole. As opined by Dutse (2008), these latest technologies can be attained through the spill-over effects of FDI. This is because FDI is one of the major channels for transferring new scientific knowledge and related technological innovations. From a priori FDI is therefore an essential impetus to small and medium scale entrepreneurship development in the country. In this regard, FDI facilitates access to markets, access to expertise and most of all access to technology. However the willingness of Multinational Corporations to open their global value chains to local firms has not really metamorphosed into meaningful SMEs development. This therefore raises the question of why the abysmal performance of the SMEs in Nigeria? Furthermore, the pattern of the FDI inflow is often skewed towards extractive industries, meaning that the monumental rate of FDI inflow into Nigeria has been adduced to natural resources, although the size of the local market may also be a consideration (Asiedu, 2001). Invariably there is very little hope of economic development and growth for the country due to problems of socio-economic, political and religious factors. Historically Nigeria is one of the economies in Africa with enormous demand for goods and services and has attracted some FDI over the years. The amount of FDI inflow into Nigeria has reached US$2.23 billion in 2003 and it rose to US$5.31 billion in 2004, this figure rose again to US$9.92 billion in 2005. The volume however turns down vaguely to US$9.44 billion in 2006 (CBN, 2009). The question that comes to mind is do these FDIs essentially contribute to small and medium scale business development in Nigeria? If FDI effectively contributes to growth, then the sustainability of FDI is a worthwhile action and a way of achieving its sustainability is by identifying those factors contributing to its growth with a view to ensuring its enhancement.
Again, most studies on FDI and growth are cross-country studies. However, FDI and growth debates are country specific. Earlier studies (for instance, Otepola, 2002; Oyejide, 2005; Akinlo, 2004) examine only the importance of FDI on growth and the channels through which it may be benefiting the economy. This study however examines the contributions of FDI to Small and Medium scale businesses with much emphasis on agriculture and transportation sector from 1981 to 2009.
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