Research Porposal

Research Proposal

Example 1

The influence of exchange rate volatility on Foreign Direct Investment (FDI) in Nigeria

Word Count: 3253

Date: March 2012

Table of Contents

Introduction ........................................................................................................................... 1

Aim and Objectives ............................................................................................................... 2

Significance and scope of the study ................................................................................... 3

Key Literature Review ........................................................................................................... 3

Key Words ......................................................................................................................... 3

Literature ........................................................................................................................... 3

Research Design ................................................................................................................... 5

Data Collection methods .................................................................................................... 6

Ethical Issues .................................................................................................................... 6

Research Plan ....................................................................................................................... 7

Organization of the study ................................................................................................... 7

Project Plan ....................................................................................................................... 7

References and Bibliography................................................................................................. 9

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Introduction The importance of Foreign Direct Investments (FDI) inflows in a country cannot be over emphasized, many research work have been carried out from the 1970’s when Multinational Enterprises (MNE) began to explore business opportunities in other developed countries and then to emerging or developing economies (Morrison 2006). For most developing countries as seen in the case of Nigeria, there has been a direct correlation of FDI inflows to the GDP of the county (Udoh & Egwaikhide, 2008). The Government of many developing countries have in a bid to attract investors and encourage FDI inflow introduced several economic policies on taxes, inflation and exchange rates (Basu and Srinivasan, 2002). Furthermore, many governments have worked on infrastructural development to facilitate MNE’s to invest in their countries (Kalu, 2010).

Several researches have buttressed the key factors influencing MNE’s decision to invest in a country as; Exchange Rate Effects or Exchange rate fluctuations which can complicate the investment decisions of international firms, the Tax regimes in potential host country, the quality of institutions available in the host country that guarantee long-term security of property rights, Trade protection and trade effects (Blonigen, 2005; Abbott, et al., 2012).

In the case Nigeria, the history and evolution of FDI began in the 1970s where the policy push of government was to reduce foreign investment in the country through the Nigerian Enterprises Promotion Decree (NEPD) promulgated in 1972 (amended in 1977). The NEPD, which was locally known as indigenisation policy, regulated FDI inflows in the country. The government at the time implemented a cap to a maximum of 60% of foreign participation in firms doing business in the country. This obviously resulted in a decline in foreign investment and reduced the pace of economic activities in all sectors of the economy. The global recession of the early 1980s set off periods of macroeconomic instability with implications of further drop in foreign direct investment inflows in the country (Mimiko, 1995; Udoh & Egwaikhide, 2008).

In an attempt to turn things around and create a suitable climate for investment and growth in the economy, the Nigerian Government introduced the Structural Adjustment Programme (SAP) in July 1986. The programme incorporated trade and exchange reforms and was further reinforced by the implementation of stringent monetary and fiscal measures. The implementation of SAP was expected to bring about some improvements in the economy. For instance, the sharp exchange rate depreciation was expected to discourage importation, make export-oriented multinationals gain on their investment and make Nigeria a potential investors haven (Udoh & Egwaikhide, 2008).

The exchange rates in the country have had a very high degree of fluctuation since the introduction of SAP. Some studies have drawn conclusions that the devaluation of Nigeria’s currency during the SAP implementation and the consequent exchange rate fluctuations has had significant impact on FDI inflows in Nigeria (Udoh & Egwaikhide, 2008). Despite the arguments made in previous studies it is difficult to ascertain the direct impact exchange rates fluctuation alone has had on FDI inflows in the country going by the fact that exchange rate effects are just one of the determinant factors influencing MNE’s decision to invest.

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This research work will aim at examining the various factors affecting FDI inflows to the country while emphasizing of exchange rate as a major determinant factor. This research will give a clear understanding of the relationship exchange rate fluctuations has on FDI inflows in the country. Finally this research work will ascertain whether the exchange rate regime in the last 25years (1985 – 2010). The research analyses data from 1985 which is the year before SAP was introduced and will end at 2010 when the last audited reports were released by the Central Bank of Nigeria (CBN). The outcome of the hypothesis will give an understanding on whether exchange rate fluctuation has had a discernible effect on Nigeria’s FDI inflow and will ascertain the degree of impact it has had on FDI inflow.

Aim and Objectives The aim of this research is to examine the main influences of Foreign Direct Investment (FDI) inflow in Nigeria and to understand whether or not the exchange rate regime which started in 1985 and the subsequent fluctuations on the exchange rate pattern from 1985 to 2010 has had a noticeable impact on Foreign Direct Investment (FDI) inflow in Nigeria.

This study reveals the effects of exchange rates which rank high on the various macroeconomic factors that Multi-National Enterprise (MNE) consider when making Foreign Direct Investments decision and connects it to the general impact FDI inflows have had so far on the economy of Nigeria.

The research questions underpinning the studies in this subject area which includes:

• Do FDI inflows impact on the Nigeria’s economy? • What are the topmost sways that have affected the influx of FDI in Nigeria apart from

exchange rate fluctuations? • Have there been direct impacts on the FDI inflow pattern that can be attributed to the

exchange rate regime and fluctuations in the country? • To what level have exchange rate fluctuations impacted on FDI inflows in the country? • What policies can the Government use to cushion the effects of exchange rate volatility

to boost FDI inflow in the country?

Re-framed as research objectives, the required outcomes of the study are to:

• Establish the major influences affecting FDI inflows in Nigeria • Unravel the empirical relationship between the exchange rate volatility and FDI nexus on

Nigeria • Ascertain whether the exchange rate regime in the last 25years from when SAP was

introduced in Nigeria have had a discernible effect on the country’s FDI inflow. • Offer recommendations based on findings on how the Government can achieve

economic growth by maintaining high levels of FDI through a stable exchange rate system.

The achievement of these objectives will give answers to the research questions.

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Key Literature Review

Significance and scope of the study Although several studies have been made on FDI inflows to Nigeria and exchange rate fluctuation in the Nigerian economy, only 3 studies have been done to ascertain the direct impact of exchange rate volatility on FDI inflows in Nigeria; the first study by Alaba (2003) who researched on the impact of FDI in just two sectors (manufacturing and agriculture), concluded that there was no significant impact of exchange rate fluctuation on FDI inflows in the country. The study by Alaba (2003)was ground breaking but the conclusions made were a bit general considering the fact that it was just two sectors that was researched. Another study carried out by Osinubi & Amaghionyeodiwe (2009) analysed currency exchange information from 1970 to 2004 and concluded that there exchange rate fluctuation did not impact on FDI inflows in Nigeria. The last study carried out by Udoh & Egwaikhide (2008) rounded up with a conclusion that there was a direct impact on exchange rate fluctuation to FDI inflows in Nigeria. The study carried out by Udoh & Egwaikhide (2008) included the effects of inflation and hence did not give an exact analysis on exchange rate fluctuations alone. This study will test previous assumptions and studies. This study will also focus on the impact of exchange rate fluctuation from after the SAP era. Findings will demonstrate an analysis on an area that has not been researched and will be a suitable guide for policy makers in implementing exchange rate regimes that will increase inflows on Foreign Direct Investments in Nigeria.

Key Words Foreign Direct Investment (FDI), Multi National Enterprise (MNE), Macro Economy, Exchange Rate Fluctuations, Structural Adjustment Programme (SAP), GARCH model

Literature Foreign Direct Investment (FDI) can be described as an investment that involves a long-term relationship between a foreign investor or parent enterprise and an affiliate enterprise or foreign affiliate. Individuals as well as business entities may undertake FDI for several reasons which include high returns on their capital investments, high market share and to seek efficiency depending on the kind of investment involved. The concept of FDI has been studied by academics and is unanimously established that FDI investments are made to achieve the objectives in MNE’s strategies and setting up a FDI will give investors a high degree of influence on the management of the investor’s enterprise resident in another economy (Alfaro et al, 2006; Nwillima, 2008; Kyereboah-Coleman & Agyire-Tettey, 2003; Morrison, 2006).

Many policy makers, academics and management consultants are of the view that foreign direct investment (FDI) creates important and positive effects on a host country’s and it drives development effort (Morrison, 2006; Markusen, et al., 1995). FDI is assumed to benefit developing countries or emerging economies like Nigeria, not only by supplementing domestic enterprise investments, but also in terms of employment creation, transfer of

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technology, increased domestic competition and many other positive externalities ( Ayanwale, 2007).

FDI adds to investment resources and supplies direct capital to the host country’s economy. It can serve as an engine of technological development creating benefits like transfers of production technology, skills, innovative capacity, and organizational and managerial practices (Osinubi and Amaghionyeodiwe, 2009). These benefits can boost, facilitate or jumpstart an economy. Based on these arguments; industrialized and developing countries now offer incentives to encourage Foreign Direct Investments (FDI) in their economies (Alfaro, 2003).

There are several determinant facilitating MNE’s decisions to invest in a foreign country. These factors which have been explained earlier in the introduction can be broadly categorized into ‘push’ and ‘pull’ factors. The ‘push’ factors refer to what triggers MNE’s to diversify and expand business from their country of origin; popular factors include increasing tax burdens and decline in interest rates in their home countries (Calvo et al, 1993; Fernandez-Arias, 1994). The ’pull’ factors refer to the macro economic performance, investment environment, infrastructure and resources and quality of institutions in the potential country to invest in (Calvo et al, 1993; Udoh & Egwaikhide, 2008).

Exchange rate which is the domestic currency prices of foreign currencies is of high importance to an investor or MNE who view it in terms of its volatility. It is perhaps the most important determinant MNE’s look out for before investing in a country. Many Governments of host countries of FDI and countries seeking FDI inflows especially emerging economies and developing economies are aware of the significant impact fluctuations of exchange rates have in FDI inflows and tend to make exchange rate regimes as stable as possible. They believe that managing exchange rate is critical to attract foreign investors.

Exchange rate management is expected to achieve the goals of price stability, sustainable economic development, reduction of unemployment and balance of payment viability most especially when applied in collaboration with other macroeconomic policies. Governance should encourage exchange rate stability in achievement of macroeconomic goals thereby enhancing efficient and effective economic management (Akpan, 2009). The history of governmental and international attempts to stabilize exchange rates dates back as early as 1880 when the ‘Gold standard’ was established and was used in business transactions (Bennett, 1997)

There are two key constituents to exchange rate movements or fluctuation in a country; economic performance in relation to other currencies over a long term and short-term political and other transient factors which largely account for the volatility and long term trend (Bennett, 1997). According to the risk aversion theory, FDI decreases as exchange rate volatility increases. This is because higher volatility in the exchange rate lowers the certainty equivalent expected exchange rate (Menezes & Hanson, 1970; Hong, et al., 1985).

The best exchange rate regime is one that stabilizes macroeconomic performance in terms of reducing fluctuations and or instability in output, consumption, domestic price level and some other key macroeconomic variables.

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This research bothers on the interest in exchange rate fluctuations on FDI inflow in emerging countries. It will focus on the impact of exchange rate fluctuations on FDI and analysis will be made from the inception of the Nigerian Government introduced Structural Adjustment Programme (SAP) which was started in July 1986 with an attempt to turn things around the once ‘hostile’ and ‘investor unfriendly’ environment created by the indigenisation policies of The NEPD, which regulated FDI inflow in the country (Udoh & Egwaikhide, 2008).

Previous study carried out on inward FDI to Nigeria confirms the lingering controversy in the literature on the effects of exchange rate volatility (Alaba, 2003). Alaba’s analysis focuses on inward FDI to two main sectors in Nigerian economy – the agricultural sector and the manufacturing sector and his finding reveals that exchange rate movement in the official market is significant at 1% for FDI to agricultural sector while the same is insignificant for the manufacturing sector. Why this study may have broken significant grounds the research focussed on two key sectors that were a focus on the SAP program in 1986 but does not cover many sectors like mining that have wider impact on Nigeria’s economy.

Further studies indicate that up until 2003, there has not been a significant impact on exchange rate fluctuations to FDI inflows in Nigeria (Osinubi and Amaghionyeodiwe, 2009). Udoh & Egwaikhide (2008) have indicated that there is a significant impact on exchange rates fluctuation on FDI inflows in Nigeria.

This thesis will analysis previous studies made and analyse most recent data available to ascertain whether the exchange rate fluctuations has had a discernible effect on Nigeria’s FDI inflow.

Research Design This research will be carried out by adopting a deductive approach by hypothesis (Saunders et al., 2009: 124-125), I intend using qualitative methods by collating secondary data that will form my hypothesis. The secondary data refers to journal articles, reports and bulleting from authorized and authentic government sources (Central Bank of Nigeria), articles from credible newspapers and international sources like the World Bank and WTO. My research design will be done from an explanatory or casual approach (Saunders et al., 2009). I will explain how the variables which are the exchange rate fluctuation and FDI percentage to the GDP is inter-related.

The data that will be compared and analysed includes average exchange rates for 1986 – 2010, the GDP reports, FDI percentile of the GDP for the years of study. Furthermore, for clarity purposes, I will group my data FDI data to the 6 main sectors in the country to give further reliability to my research.

In addressing data quality issues, I will address data reliability issues by ensuring a framework that avoids any form of bias and errors in my hypothesis (Bryman and Bell, 2011: 41; Saunders et al., 2009: 156). I will ensure that my data source is visible; referencing all sources to make sure that another researcher can conduct a similar research design and produce comparable findings based on my findings. This will affirm the quality of the research work.

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On the data analysis phase of my research work, a longitudinal study which will examine patterns, trends and behaviours of exchange rates over a period of time will be done. The design will focus on changes over time and could apply to FDI inflow performance over 25 years, grouping EDI data into relevant industry sectors.

The Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model will be used in estimating Exchange rate volatility for the25 year (1985 – 2010) period. GARCH models are very useful for filtering, forecasting, and parameter estimation in stochastic volatility settings (FLEMING & KIRBY, 2003). GARCH models provide a wonderful tool in exchange rate series comparison and forecast.

In summary my research will be conducted in the following steps:

Step 1 This will involve gathering analysis, literature and data from previous studies. This will be done with the view of reading and analysing to understand the hypothesis made in the previous research.

Step 2 this step will entail data gathering or data collation from the various sources as described in the data collection methods section below. All ethical and reliability concerns will be addressed during this stage. The Study will be based on Times Series Data collected from period 1985 to 2010

Step 3 the exchange rate data will be analysed using a GARCH model to allow for clear comparison of the exchange rates and FDI inflows historic data. Proper regression and correlation test will be carried out as appropriate.

Step 4 Based on the results of the data analysis, inference will be deduced to facilitate possible recommendation.

Data Collection methods Data for this study will be sourced secondarily from the publications of the Central bank of Nigeria (CBN). This publications include; Statistical Bulletin, Occasional Papers, Economic and Financial Review, Annual Report and Statistics. Data for this study will also be sorted from the IMF database and reports from World Trade Organization and statistical data from United Nations Conference on Trade and Development (UNCTD).

Ethical Issues The word “ethics” in the research context refers to rules, principles and standard of conduct that apply to the analysis (McMillan and Weyers, 2007). Being a research that involves gathering data and analysing it all forms of confidentiality and accuracy will be adhered to.

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I do not foresee any ethical issue as data that will be analysed are from secondary sources and from released audited reports from respectable sources but I will make sure I adhere to any form of confidentiality I encounter in this research.

Furthermore, another important issue is plagiarism. Any previous work that will help in the development of the research will be mentioned in the text and also in the references.

Research Plan

Organisation of the study The main dissertation will be organized as follows; Chapter 1 will give an introduction and background study of the two subject areas (FDI and Exchange Rate Fluctuation). Chapter 2 will present a theoretical and empirical literature on the determinants of foreign direct investment and the Implication Exchange Rate Fluctuation has in influencing MNE’s decision to invest. The econometric model, hypotheses, definition of variables and data descriptions will be presented in Chapter 3 and Chapter 4 will present estimation results, analysis, discussion, and policy recommendations.

Project Plan Planning and preparing the project from the most essential tasks to the most complex tasks is of utmost importance. A Gantt chart provides a brilliant way of planning and tracking a project. The Gantt chart will also identify clearly which jobs have to be carried out first and ensuring it is achieved within a tight schedule. (Sanders, Lewis and Thornhill, 2009)

The literature and review of the subject areas, as well as collating and interpretation of all the data, will be carried out between the months of March and April, Data collation, analysis and writing my observations and argument will be done between May and early July. A period of three weeks will be set aside to submit an initial draft and get appropriate feedback to make amendments in possible areas that might have been omitted or where corrections need to be made.

Although part of the key literature research has already been carried out, the majority of the investigation is yet to be completed and for that reason the Gantt chart below which indicates the proposed level of work to be done will start from the month of March.

*Please note on the Gantt chart that week refers to the first working day (Monday) of the week.

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Months March April May June July August

Week* Activities 5 12 19 26 2 9 16 23 30 4 14 21 28 4 11 18 25 2 9 16 23 30 6 13

Literature Review ✔ ✔ ✔ ✔ ✔ ✔

Submit Project

Proposal ✔

Holiday ✔ ✔

Exams ✔ ✔

Data collation ✔ ✔ ✔ ✔ ✔

Analyse Data ✔ ✔ ✔ ✔

Create Arguments based on analysis

✔ ✔ ✔ ✔

Submit draft ✔

Receive feedback ✔ ✔ ✔

Submit final report ✔ ✔

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References and Bibliography ABBOTT, A., CUSHMAN, D. O., & DE VITA, G. (2012). Exchange Rate Regimes and Foreign Direct Investment Flows to Developing Countries. Review of International Economics. 20.

Akinlo, A.E. (2004); “Foreign direct investment and growth in Nigeria: A empirical investigation” Journal of Policy Modelling, vol. 26 No. 3 pp. 627- 39

AKPAN, P.L., 2009. Governance and Gross Domestic Investment in Developing Economies: Issues in Exchange Rate Instability in Nigeria. Rochester, Rochester: .

Alaba, O.B. (2003) “Exchange Rate Uncertainty and Foreign Direct Investment in Nigeria”, Trade Policy Research and Training Programme (TPRTP), University of Ibadan, Nigeria.

ALFARO, L. (2003). FDI spillovers, financial markets, and economic development. Washington, D.C., International Monetary Fund.

AYANWALE., A. B. (2007). FDI and economic growth evidence from Nigeria. Nairobi, African economic research consortium (AERC).

Basu, A. and Srinivasan, K. (2002), “Foreign Direct Investment in Africa: Some Case Studies”, IMF Working Paper 02/61, IMF, Washington, DC.

BENNETT, D. (1997). Managing foreign exchange risk how to identify and manage foreign currency exposure. Londres, Pearson education limited. Bryman, A. and Bell, E. (2011) Business Research Methods (3rd edition), Chapter 1, 24 and 25

BLONIGEN, B. A. (2005). A review of the empirical literature on FDI determinants. Cambridge, MA, National Bureau of Economic Research. http://papers.nber.org/papers/w11299

Bryne, J. and P. Davis (2003) “Panel Estimation of the Impact of Exchange Rate Uncertainty on Investment in the Major Industrialized Countries”, NISER Discussion Paper, No. 208.

Calvo, G. A., L. Leiderman and C.M. Reinhart (1993) “Inflows of Capital to Developing Countries in the 1990s”, The Journal of Economic Perspectives, vol. 10, No. 2 (Spring)

Central Bank of Nigeria (2001) Annual report and Statement of Accounts. Abuja, Nigeria. www.cenbank.org

Fernandez-Arias, E. (1994) “The New Wave of Private Inflows: Push or Pull?”, The Journal of Development Economics, vol. 48, 383-418

FLEMING, J. and KIRBY, C., 2003. A Closer Look at the Relation between GARCH and Stochastic Autoregressive Volatility. Journal of Financial Econometrics, 1(3), pp. 365-365.

HONG, C. S., KARNI, E., & SAFRA, Z. (1985). Risk aversion in the theory of expected utility with rank-dependent probabilities. Tel Aviv, Foerder Institute for Economic Research, Faculty of Social Sciences, Tel Aviv University.

KALU, K.A., 2010. Nigeria: Learning from the Past to Meet the Challenges of the 21st Century. Social Research, 77(4), pp. 1367-0_3.

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KYEREBOAH-COLEMAN, A., & AGYIRE-TETTEY, K. F. (2008). Effect of exchange-rate volatility on foreign direct investment in Sub-Saharan Africa: The case of Ghana. The Journal of Risk Finance. 9, 52-70.

Markusen, J. R., J. R. Melvin, W. H. Kaempfer and K. E. Maskus (1995) International Trade: Theory and Evidence (Boston: McGraw-Hill).

MCMILLAN, K., & WEYERS, J. D. B. (2007). How to write dissertations & project reports. Harlow, Pearson Prentice Hall.

MENEZES, C. F., & HANSON, D. L. (1970). On the Theory of Risk Aversion. International Economic Review. 11, 481-487.

MORRISON, J. (2006). The international business environment: Global and local marketplaces in a changing world. Basingstoke, Palgrave Macmillan

NYARKO, P.A., NKETIAH-AMPONSAH, E. and BARNOR, C., 2011. Effects of Exchange Rate Regimes on FDI Inflows in Ghana. International Journal of Economics and Finance, 3(3), pp. 277-286.

Nwillima N. (2008); “Characteristics, Extent and Impact of Foreign Direct Investment on African Local Economic Development”. Social Science Research Network Electronic Paper Collection. http://ssrn.com.

Mimiko, N.O., (1995), From Reform to Neo-Regulation: An Assessment of Recent Political/Economic Developments in Nigeria. 1995. The International Executive (1986-1998), 37(5), pp. 513-513.

OSINUBI T.S., & AMAGHIONYEODIWE L.A. (2010). Foreign private investment and economic growth in Nigeria. Applied Econometrics and International Development. 10, 189- 204

OSINUBI T.S., & AMAGHIONYEODIWE L.A. (2009). FOREIGN DIRECT INVESTMENT AND EXCHANGE RATE VOLATILITY IN NIGERIA. International Journal of Applied Econometrics and Quantitative Studies V6-2

Saunders, M., Lewis, P. and Thornhill, A. (2009) Reseach Methods for Business Students. Pearson Education Ltd. Essex.

UDOH, E., & EGWAIKHIDE, F.O., (2010). Exchange Rate Volatility, Inflation Uncertainty and Foreign Direct Investment in Nigeria. Botswana Journal of Economics; Vol 5, No 7 (2008); 14-31. The Botswana Economics Association. http://ajol.info/index.php/boje/article/view/60304.

XIONG, R.S., 2005. Impact of exchange rates uncertainty on foreign direct investment, The University of Wisconsin - Milwaukee.