Home > Documents > Michela Project Continuation

Michela Project Continuation

Date post: 05-Apr-2018
Category:
Author: kelly-o-nwoseh
View: 219 times
Download: 0 times
Share this document with a friend
Embed Size (px)

of 64

Transcript
  • 7/31/2019 Michela Project Continuation

    1/64

    i

    IMPACT OF FOREIGN DIRECT INVESTMENT ONUNEMPLOYMENT IN NIGERIA (1980-2007)

    BY

    OBU EWERE MICHAELSSC0503221

    DEPARTMENT OF ECONOMICS AND STATISTICS

    FACULTY OF SOCIAL SCIENCES

    UNIVERSITY OF BENIN

    EDO STATE

    MARCH, 2010.

  • 7/31/2019 Michela Project Continuation

    2/64

    ii

    IMPACT OF FOREIGN DIRECT INVESTMENT ONUNEMPLOYMENT IN NIGERIA (1980-2007)

    BY

    OBU EWERE MICHAELSSC0503221

    A RESEARCH WORK PRESENTED TO THEDEPARTMENT OF ECONOMICS AND STATISTICS,FACULTY OF SOCIAL SCIENCES, UNIVERSITY OF

    BENIN, EDO STATE; IN PARTIAL FULFILLMENT OF THEREQUIREMENTS FOR THE AWARD OF A BACHELOR OF

    SCIENCE DEGREE IN ECONOMICS AND STATISTICS

    UNIVERSITY OF BENIN,

    MARCH, 2010.

  • 7/31/2019 Michela Project Continuation

    3/64

    iii

    CERTIFICATION

    We the undersigned certify that this research work

    was carried out by OBU EWERE MICHAEL of the

    Department of Economics and Statistics, University of

    Benin, Edo State. And it is adjudged adequate in scope and

    quality for the purpose of a partial fulfillment for the award

    of a Bachelor of Science (B.Sc) Degree in Economics and

    Statistics.

    _______________________Dr. Anthony Monye-Emina

    Project Supervisor Date:__________________

    ________________________Dr. Mrs. E. I. OkojieProject Coordinator Date: ____________________

    _______________________Dr. O. T. EkanemHead of Department Date:___________________

  • 7/31/2019 Michela Project Continuation

    4/64

    iv

    DEDICATION

    This research work is dedicated to my late mother,

    Mrs. Christiana Onyero Obu, in memory of her motherly

    love, care and guidance while she was alive.

  • 7/31/2019 Michela Project Continuation

    5/64

    v

    ACKNOWLEDGEMENT

    I wish to seize this opportunity to thank my

    Supervisor Dr. Anthony Monye-Emina for his guidance and

    tutelage in the course of writing this project.

    Also, I express my warmest gratitude to my father Sir

    Michael Arinze Obu, for his prayers, moral and financial

    support.

    Further, my warmest appreciation goes to my brothers

    and sisters viz, Mrs. Vivian Egbudu, Collins, Onyeka and

    Mrs. Glory Airiavbere for their love, prayers and financial

    support.

    To be continually remembered are my friends

    Celestine Asumuga, Cornelius Chinedu, Kanabe Imhoesi,

    Kenneth, Frank, Shola, Kingsley, Fred, Tina, Abdu and all

    others too numerous to mention.

  • 7/31/2019 Michela Project Continuation

    6/64

    vi

    My profound appreciation also goes to my lecturers

    Prof. Obadan, Okoh and Okojie (Mrs.) as well as Drs. Edo,

    Hassan, Oriakhi, Mrs. Mogbolu and others for their

    tutelage.

    For their prayers, I am indebted to Rev. Father Mario-

    Debie, Rev. Dr. Oke Akokotu and others.

    Not left out are my Uncles Rev. Mr. Fidelis Nwadiani,

    Rev. Prof. Mon. Nwadiani, Egnr. Rapheal Obu and Mr.

    Ogbemudia as well as Engrs. Peter Egbudu and Atole

    Airiavbere, and Mr. & Mrs. Chris Idoye for their support

    and encouragement.

    Above all else, I thank God Almighty for his awesome

    goodness in granting me the strength, courage and

    determination not only in the course of writing this project

    but also, for leading me through out the period of my study.

  • 7/31/2019 Michela Project Continuation

    7/64

    vii

    TABLE OF CONTENT

    Title i

    Certification ii

    Dedication iii

    Acknowledgement iv

    Abstract viii

    Chapters

    CHAPTER ONE: INTRODUCTION

    1.1 Background to the Study 11.2 Statement of the Problem 41.3 Significance of the Study 51.4 Objectives of the Study 71.5 Hypotheses of the Study 71.6 Scope and Methodology 81.7 Limitation of the Study 9

    CHAPTER TWO: LITERATURE REVIEW

    2.1 Foreign Direct Investments: Conceptual Issues 10

    2.2 Determinants of Foreign Direct Investments Flows 13

    2.3 Trend in Foreign Direct Investment Flows in Nigeria 19

    2.4 Unemployments Conceptual Issues 22

    2.5 Determinants of Unemployment 26

    2.6 Trend in Unemployment in Nigeria 32

    2.7 Foreign Direct Investment and Unemployment:

  • 7/31/2019 Michela Project Continuation

    8/64

    viii

    Theory and Evidence. 34

    CHAPTER THREE: THEORETICAL FRAMEWORK

    3.1 Sources of Data and Method of Analyses 37

    3.2 Model Specification 37

    CHAPTER FOUR: EMPIRICAL ANALYSES

    4.1 Presentation of Empirical Results 41

    4.2 Discussion of Empirical Results 42

    CHAPTER FIVE: SUMMARY, RECOMMEDATION AND

    CONCLUSION5.1 Summary of Findings 46

    5.2 Recommendations 47

    5.3 Conclusions 49

    Bibliography 51

    Appendix

  • 7/31/2019 Michela Project Continuation

    9/64

    ix

    ABSTRACT

    This study investigated the Impact of foreign direct

    investment on unemployment in Nigeria from the period 1980

    to 2007.

    The study was carried out empirically using the Ordinary

    Least Squares method of regression analysis; alongside other

    statistical tests. Empirical results obtained revealed that

    government expenditure is a poor determinant of

    unemployment, while foreign direct investment inflow is the

    most germane determinant of unemployment in Nigeria.

    Hence to reduce the spat of unemployment in Nigeria, policy

    emphases should be centered on attracting greater inflows of

    foreign direct investment.

  • 7/31/2019 Michela Project Continuation

    10/64

    1

    CHAPTER ONE

    INTRODUCTION

    1.1 BACKGROUND TO THE STUDYThe world economy is growing on the strength of

    globalization. One of the most salient features of

    globalization drive is the conscious encouragement of cross-

    border investments, especially by trans-national

    corporations and firms. Thus many countries and

    continents (especially developing) now see the attraction of

    foreign direct investment as an important element in their

    strategy for economic development, essentially because it is

    seen as an amalgamation of capital, technology, marketing

    and management (Sjoholm, 1999).

    Foreign direct investment is an investment made to

    acquire a lasting management interest in a business

    enterprise operating in a country other than that of the

    investor, defined according to residency (World Bank, 1996).

  • 7/31/2019 Michela Project Continuation

    11/64

    2

    Such investments may take the form of either Greenfield

    investment (also called mortarand brick investments) or

    merger and acquisition which entails the acquisition of

    existing interest rather than new investment.

    In corporate governance, ownership of at least 10% of

    the ordinary shares or voting stock is the criterion for the

    existence of a direct investment relationship, while

    ownership of less than 10% is recorded as portfolio

    investment. Furthermore, foreign direct investment

    comprises not only mergers and acquisitions and new

    investments, but also reinvested earnings and loans and

    similar capital flows or transfers between parent companies

    and their affiliates. It has been posited that a countrys

    inward foreign direct investment position is made up of the

    hosted foreign direct investment projects, while outward

    foreign direct investment comprises those investment

    projects owned abroad.

  • 7/31/2019 Michela Project Continuation

    12/64

    3

    One of the strongest strengths of foreign direct

    investment arises from the positive externalities if generates

    from the positive externalities it generates from forward and

    backward linkages or through industrial acceleration as

    being currently experienced in the South and East Asia. This

    is evident because it is less volatile and resilient to

    perturbations in the economy.

    Africa is in dire need of foreign direct inflows owing to

    its acknowledged advantages. Hence one of the pillars on

    which the New partnership for Africas Development

    (NEPAD) was launched, was to increase the available capital

    inflows through a combination of reforms, resource

    mobilization and a conducive environment for foreign direct

    investment (funke and Nsouli, 2003).

    Finally, in Nigeria the level of foreign direct investment

    attracted overtime is mediocre (Asiedu, 2003),as compared

    with her resource base, potential need; especially in limiting

  • 7/31/2019 Michela Project Continuation

    13/64

    4

    unemployment growth rate, , and in relation to the policy

    framework initiated in the past.

    1.2 STATEMENT OF THE PROBLEMEssentially, since the aftermath of the oil glut in

    1982, there has been an enormous need for foreign

    direct investment in mitigating the constraints posed

    by shortages of foreign exchange earnings, dire need of

    necessary capital and intermediate goods with which to

    fast-track production, growth in employment and the

    attainment of the targeted growth rate.

    It has been a constant cause for worry that despite the

    myriad of investment incentives offered overtime in Nigeria,

    there has been a continual low inflow of foreign direct

    investment as well as poor outcomes in generating

    employment.

    One of the fundamental problems observed overtime is

    the high cost of running businesses owning to poor

  • 7/31/2019 Michela Project Continuation

    14/64

  • 7/31/2019 Michela Project Continuation

    15/64

    6

    forward and backward linkages in enhancing economic

    growth as well as reducing unemployment.

    The need to curtail the growing pace of unemployment

    in Nigeria via foreign direct investment has been paramount,

    as articulated in the Structural Adjustment Programme in

    1986.

    In examining, the trend and outcomes of foreign direct

    investment via -a- vis unemployment in Nigeria, this

    research work assesses the performance of past policy

    frameworks and the impact of foreign direct investment

    inflows on unemployment in Nigeria overtime.

    Finally, it emphasizes the spread of foreign direct

    investment into non-oil sectors, especially the agricultural

    sector. Thus it stresses the need to limit infrastructural

    barriers and variabilility in policy frameworks, as a means of

    revamping the declining inflows of foreign direct investment,

    hence generating employment in all sectors of the economy.

  • 7/31/2019 Michela Project Continuation

    16/64

    7

    1.4 OBJECTIVES OF THE STUDYThe general objective of this study is to determine the

    impact of foreign direct investment on unemployment in

    Nigeria.

    The specific objectives include to:

    i. examine the trend in foreign direct investmentflows to Nigeria.

    ii. determine trend in unemployment in Nigeria.iii. estimate the relationship between foreign direct

    investment and unemployment in Nigeria and

    iv. make recommendations on appropriate policy .1.5 HYPOTHESES OF THE STUDY

    The hypotheses that guided this study are:

    i. Null hypothesis: HO: Foreign directinvestment is not negatively associated with

    unemployment in Nigeria.

  • 7/31/2019 Michela Project Continuation

    17/64

    8

    ii. Alternative hypothesis:H1: Foreign directinvestment is negatively associated with

    unemployment in Nigeria.

    1.6 SCOPE AND METHODOLOGY

    This study covers the period 1980 to 2007. Essentially

    the earlier part of the period was marked by a resurgence in

    the need for foreign direct investment particularly for two

    reasons, viz:

    The oil glut of the 1980s which had precipitated a drop

    in revenue and massive loss of jobs in Nigeria and,

    The lifting of restrictive laws inhibiting foreign

    participation especially through the institution of Structural

    Adjustment Programme in 1986.

    In the latter period on the other hand, there had been

    an enormous need to spread foreign direct investment inflow

  • 7/31/2019 Michela Project Continuation

    18/64

    9

    into non-extractive sectors as a means of limiting the growth

    in unemployment.

    The sources of data for this study would be secondary

    sources, such as the Central Bank of Nigerias publications

    like the statistical bulletin.

    Finally the Ordinary Least Squares regression

    technique was used or adopted in the empirical analysis of

    this research work. This criterion was adopted because it

    has the best, linear, unbiased estimator property among the

    class of linear estimators.

    1.7 LIMITATION OF THE STUDY

    This study was greatly constrained by the short period

    of time required to carry out this research work. This is in

    addition to the requirements of other course work required

    by the programme.

  • 7/31/2019 Michela Project Continuation

    19/64

    10

    CHAPTER TWO

    LITERATURE REVIEW

    2.1 FOREIGN DIRECT INVESTMENT: CONCEPTUAL ISSUES:

    According to the International Monetary Fund (1977),

    foreign direct investment refers to investment that is made

    to acquire a lasting interest in an enterprise operating in an

    economy other than that of the investor. Further, the

    Organisation for Economic Corporation and Development

    (1983), posits that a direct investment enterprise refers to a

    situation in which a single foreign investor controls less

    than 10 percent or more of the ordinary shares or voting

    power of an incorporated or unincorporated enterprise with

    a view of having an effective voice in the management of the

    organization.

    International capital flows in the form of foreign direct

    investment is a major in indicator of financial globalization.

    Thus, Obadan (2004), posits that against the background of

  • 7/31/2019 Michela Project Continuation

    20/64

    11

    financial and capital account liberalization, the larger the

    share of a countrys capital flows in global capital flows, the

    more financially globalized it is taken to be. In this light

    according to Weitz and Lijane (1998), opening up a country

    requires investment for connecting the necessary

    infrastructure such as roads, telecommunication, power

    plants, financial system. The need to open up became very

    prominent in Nigeria at the aftermath of the economic

    crisis of the 1980s owing to the substantial drop in oil

    revenue. As observed by Akpokodje (1998), Nigerias

    domestic investment as a ratio of gross domestic product

    declined from an average of 24.4% during the 1973 to 1981

    period to 13.57% during 1982 to 1986 period, implying that

    its dwindling capital was barely replaced in the country. In

    the same vein, foreign direct investment rate depreciated

    from 8.6% in 1973 to 1981 period to 4.2 percent in the 1982

    to 1996 era. The economic crisis, further manifested in

    macroeconomic imbalances, widening saving-investment

  • 7/31/2019 Michela Project Continuation

    21/64

    12

    gap, high rates of domestic inflation, chronic balance of

    payment problems, massive unemployment and huge

    budget deficit (Akpokodje, 1998).

    Owing to the above, Obadan [2004], argues that in

    view of its clear benefits and advantages in relation to the

    other forms of capital inflows, foreign direct investment

    should be preferred and accorded priority in consideration

    of external finance. For not only does it bring money and

    machines but also technical know how; it helps in

    industrialization, in building up economic overhead capital

    and in creating larger employment opportunities. It is

    further heightened or esteemed for its less volatility and

    resilience to perturbations (Odusola, 2003).

    Overall, it is for these reasons that prominence is being

    attached to increasing the magnitude of foreign direct

    investment in Nigeria especially since 1982, as a means of

    augmenting revenue inflow, counteract the sluggish trend in

  • 7/31/2019 Michela Project Continuation

    22/64

    13

    official and private portfolio capital flows and further

    enhancement of employment (Uremadu, 2006).

    2.2 DETERMINANTS OF FOREIGN DIRECT INVESTMENT FLOWS

    Several range of factors could account for the

    disproportionality and skewness of foreign direct

    investment inflow into a few countries. A highlight of

    the determinants are as follows:

    i. Macroeconomic Environment:A good macroeconomic environment may be defined as

    one which guarantees an efficient allocation of resources

    (including foreign exchange) , provides appropriate signals to

    producers in the real sectors of the economy, and eliminates

    distortions in production, investment and consumption

    (Iyoha, 1997). In analyzing the importance of an appropriate

    macroeconomic environment, (Serven and Solimano, 1992);

    asserted that monetary, fiscal and exchange rate policies

  • 7/31/2019 Michela Project Continuation

    23/64

    14

    directed at correcting macroeconomic inbalances would have

    a salutary effect on foreign direct capital flows. Below are

    the analyses of various components or variants of

    macroeconomic policies.

    Firstly, foreign exchange rate management is a

    veritable tool for attracting foreign direct investment. Below

    are the analyses of various components or variants of

    macroeconomic policies. Exchange rate is identified as the

    most important determinant of foreign direct investment in

    Nigeria and should , therefore, be given due attention in

    order to maximize all the benefits that accrue from foreign

    direct investment in Nigeria (Uremadu, 2006). Further,

    Obadan (1994), traces the need for exchange rate in

    emphasizing that a sustained exchange rate misalignment in

    terms of over valuation or under-valuation, is a major source

    of macroeconomic disequilibrium in developing countries. In

    reporting on the relationship between real exchange rate and

  • 7/31/2019 Michela Project Continuation

    24/64

    15

    foreign direct investment in Nigeria, (Chete and Akpokedje,

    1997), posits that an over-valued exchange rate or highly

    distorted foreign exchange rate deters foreign inflows as well

    as discourages exports. Finally, Monye-Emina (2001),

    postulates that the attendant fluctuation in the rate of

    exchange creates the problem of uncertainty which leaves a

    negative impact on manufacturing output; hence, in the

    light of the demand and supply conditions for foreign

    exchange; an appropriate mechanism for determining not

    only a realistic but also a stable rate is desirous.

    Secondly, inflation in the economy signals the inability

    of government to manage the economy (Fisher, 1993). An

    accelerating inflation rates impinge adversely on foreign

    direct investment flow by raising the risk of longer-term

    investment projects, lowering the average maturity of

    commercial bank loans and distorting price signals in the

    economy (Uremadu, 2005).

  • 7/31/2019 Michela Project Continuation

    25/64

    16

    Finally, an appropriate fiscal, monetary and credit

    policy to ensure stable prices and interest rate, sound

    financial system; as well as a stable commercial and trade

    policy will contribute in no small measure to increase the

    confidence of foreign investors and raise the inflow of

    foreign direct investment (Iyoha, 2001).

    In summary, there is an emerging consensus that a

    conducive macroeconomic policy environment is, therefore,

    desirable for attracting substantial amounts of foreign

    direct investment inflow.

    ii Infrastructure Development:

    Good infrastructure facilitates production, reduces

    operating costs and thereby promotes foreign direct

    investment (Wheeler and Mody, 1992). In the literature, the

    number of telephone per 1,000 population and the index of

    energy consumption could be used to measure

    infrastructure. In this connection, (Pfeffermann and

  • 7/31/2019 Michela Project Continuation

    26/64

    17

    Madarassy, 1992) identify, among other macroeconomic

    factors, that, capacity utilization which relies much on

    efficiency of industrial or energy production, is a major

    determinant of foreign direct investment. They further

    discovered that the size of the domestic market and

    improved capacity utilization are positively related to foreign

    direct investment, while inflation and volatile exchange rates

    have negative effects on foreign investment. Finally, an

    efficient infrastructural development proxied by the index of

    energy consumption will create conducive environment for

    high foreign direct investment inflows and increased

    domestic investment (Uremadu, 2006).

    iii Openness of the host economy to trade:

    A good indicator of openness is the relative size of the

    export sector, and a range at surveys suggest a widespread

    perception that open economies encourage more foreign

    direct investment. Iyoha[1999], posits that one of the

  • 7/31/2019 Michela Project Continuation

    27/64

    18

    concrete gains from increased openness and integration into

    the global economy is increased investment. Moreso ,Singh

    and Jun[1995],indicates that exports ,particularly

    manufacturing exports, are a significant determinant of

    foreign inflows, and further, that there is a strong evidence

    that exports precede foreign direct investment flows.

    In conclusion, according to World Bank[1996], trade

    and investment will accelerate in countries that have opened

    up to the global economy.

    iv. Size of the market

    The size of the market could be proxied by the size of

    gross-domestic product. Other tools for measurement are

    income levels average, and growth rates. There is a

    consensus that the size ofChinas market explains, in large

    part, the massive foreign direct investment flows it has

    attracted since the early 1980s and provincial gross

    national product, reflecting economic development and

  • 7/31/2019 Michela Project Continuation

    28/64

    19

    potential demand, has also been indicated as a major

    determinant of this concentration (Broadman and sun,

    1977). For sub-Saharan Africa as a whole, Bhattacharya et

    al (1996), identify gross domestic product growth as a major

    factor; and for majority of low-income countries which fail to

    attract large foreign direct investment flows, their small

    domestic markets are often cited as the main deterrent.

    However, Asiedu (2003), observed that the level of foreign

    direct investment attracted by Nigeria is medio cre despite

    her market size, resource base and potential need.

    2.3 TREND IN FOREIGN DIRECT INVESTMENT FLOWS IN NIGERIA:

    Despite the myriad of incentives created by the

    government overtime, the inflow of foreign direct

    investments has been mediocre.

    Statistics shows that the nominal foreign direct

    investment inflows rose from #3,620 in 1980 to

    #5,382.8million and #6, 804million in 1982 and 1985

  • 7/31/2019 Michela Project Continuation

    29/64

    20

    respectively. Between 1986 and 1990, in which the

    Structural Adjustment Programme was initiated, there were

    several oscillations in the inflow of foreign direct investment.

    In 1986, there was an inflow of #4,313million which rose to

    a high of #10,339 million in 1990 and to a low of #5,610.2

    million in 1991. Starting from 1992 onwards, net foreign

    direct investment shows some degree of resilience, thereby

    raising subsequently from #14,463.1 million in 1992 to

    #110, 456.2 million in 1997; hence indicating a growth rate

    of 556.9% (Odusola, 2003). There was also a drop or

    oscillation between 1998 and 1999 which amounted to

    #92,795 million in that year and an upward sustained

    increase or trend in net foreign direct investment inflows

    between 2000 and 2007, in which #115,952.2 million was

    recorded in 2000; #249,157.7 million and #573,835.1

    million in 2004 and 2006 respectively. The current

    sustained upward trend in foreign direct investment inflow

  • 7/31/2019 Michela Project Continuation

    30/64

    21

    could be adduced to the privatization, commercialization

    and deregulation exercises of the government (Aremu, 2004).

    Further, an analysis of the net inflows shows that since

    1970 net foreign direct investment flows have been positive

    except in 1989 and 1990, in which there were negative

    outcomes.

    Also, sectoral analysis shows cumulative foreign direct

    investment been concentrated in the mining and quarrying,

    manufacturing and processing, and trading and business

    services sectors. In the period 1992-2006, Obadan (2007),

    observed that mining and quarrying sector accounted for an

    average of 36.5 percent of foreign direct investment flows

    while manufacturing and processing sector accounted for

    28.6 percent inflows. Also the finance and business services

    sector recorded 6 percent, and 10 and 1 per cent for

    transport and communication, and agricultural sectors

    respectively.

  • 7/31/2019 Michela Project Continuation

    31/64

    22

    Overall, inspite of a large market and government

    incentives, agriculture has continued to maintain the least

    shares in foreign direct investment, inflow.

    2.4 UNEMPLOYMENT: CONCEPTUAL ISSUES:

    There seems to be a consensus on the definition of

    unemployment. The International Labour Organization,

    defines the unemployed as numbers of the economically

    active population who are without work but available for

    and seeking work, including people who have lost their jobs

    and those who have voluntarily left work (World Bank,

    1998).

    Also, unemployment implies that actual output is less

    than potential output (Okun, 1962).The issue of

    underemployment is also important. It is a situation where

    peoples skills are not used or exploited to their fullest

    potentials and thus, represents waste of human resources

  • 7/31/2019 Michela Project Continuation

    32/64

    23

    who in some cases happened to have been expensively

    trained (Umo, 2007).

    Unemployment has been a major socio-economic

    problem in Nigeria. Thus unemployment has been

    categorized as one of the major impediments to social

    progress; hence, apart from representing a colossal waste of

    a countrys resources, it generates welfare loss in terms of

    lower output thereby leading to lower income and well-being

    (Akinboyo, 1987). Also,[Okojie ,2003]; posits that with a

    stagnant economy and low economic growth rate, demand

    for labour has been declining, thus resulting in high level of

    youth unemployment.

    The experience of Nigeria since independence in 1960,

    has been that of increasing rates of unemployment both in

    terms of quality and quantity. In this connection,

    Okedara(1984) and Awopegba(1995), attributed the upsurge

    in the quantity and quality of educated unemployment to

  • 7/31/2019 Michela Project Continuation

    33/64

    24

    discrepancies in the production of high-level manpower and

    level of employment. Among the factors attributed to the

    above include; inadequate job opportunities for graduates of

    tertiary institutions and inadequate practical skills, as well

    as high student-teacher ratio. In corroboration, Ojo (1998),

    observed that Nigerian unemployment problem emerged in

    the 1960s as it was virtually non-existent in the 1950s. he

    further posits that the low unemployment rate of 4.3 per

    cent in 1976 could be attributed to the oil boom of the

    decade; while unemployment rate blossomed in the 1980s

    with relatively high aggregates for urban and rural

    unemployment, following the impact of the oil glut of 1982.

    In view of the Structural Adjustment Programme initiated,

    Iyoha (2003), posits that the Nigerian government failed to

    solve the unemployment problem at least in the short and

    medium term, since it triggered retrenchments both in the

    public and private sectors. In this connection, although a

    modest growth rate of 5 percent was achieved in real gross

  • 7/31/2019 Michela Project Continuation

    34/64

  • 7/31/2019 Michela Project Continuation

    35/64

    26

    The National Poverty Alleviation Programme

    (NAPEP),etc.

    Finally, despite the efforts aimed at abating

    unemployment overtime, it remains a major problem in

    Nigeria and with the current global economic crisis, the

    problem may become dismal.

    2.5 DETERMINANTS OF UNEMPLOYMENT

    Several factors account for the causes of

    unemployment and such factors result from various events

    that impede the full utilization of human economic skills or

    potential (Umo, 2006). The unemployment crisis has been

    attributed, inter alia, to four major causes , viz; the labour

    force explosion arising from the population explosion, the

    massive rural-urban migration in less developed countries;

    the failure of industrialization to live to the expectations of

    many as an effective means of generating employment in the

    manufacturing sectors of less developed countries and over

  • 7/31/2019 Michela Project Continuation

    36/64

    27

    production of school leavers and graduates who are ill-

    equipped for the labour market (Diefomaoh and Orimalade,

    1971) and Iyoha, (1982). More recently, ILO (1995), posits

    that the causes of unemployment growth or crises can be

    grouped under six headings; the phenomenon of jobless

    growth, macroeconomic instability, poorly functioning

    labour markets, and lack of international competition

    In view of the above, a highlight of the determinants

    of unemployment are as follows;

    i Population Growth Rate

    Growth in population especially in developing

    economies impacts negatively on employment. (Diejomaoh

    and Oriemalade, 1971), argues that population growth is

    the major factor of unemployment since population growth

    exceeds labour demand at prevailing wage rates. Also, Iyoha

    (2004), states that the rapid population growth rate of the

    1980s translates into the rapid labour force growth of the

  • 7/31/2019 Michela Project Continuation

    37/64

    28

    late 1990s and early 21st century, hence the weak or

    declining employment growth juxtaposed against rapid

    labour force growth would spur rising unemployment and

    underemployment rates.

    ii Gross Domestic product growth rate

    This relates to the value of the goods and services

    produced in the economy. According to Sancho (1996),

    economic growth is the driving force which makes job

    creation possible. Further, low output is inevitably

    associated with low employment, thus Okun(1961), posits

    that for every three percentage points growth in real gross

    national product, unemployment rates decline by one

    percentage point every year. Hence Iyoha (2004), argues that

    employment prospects in Africa in the years ahead depend

    on many factors including especially the growth of gross

    domestic product, macro and sectoral capacities to create

    new jobs and output composition. Therefore, increasing

  • 7/31/2019 Michela Project Continuation

    38/64

    29

    output through expansion of national production would

    expand or broaden opportunities for employment creation in

    the economy.

    iii Defective Macroeconomic Policies

    The macroeconomic policies of a Nation through its

    allocative roles could impact on unemployment either

    positively or negatively.

    Iyoha (2004), reckons that the best results of fiscal and

    monetary policies should be targeted to activities with the

    greatest employment creating potential, but however,

    observed that acute economic crisis in the 1980s which was

    caused by a lost of factors including poor macrocosmic

    policy management, led to inflation, rising fiscal deficits,

    capital flight, scarcity of foreign exchange and massive

    unemployment subsequently.

  • 7/31/2019 Michela Project Continuation

    39/64

    30

    Below is a highlight of the components of

    macroeconomic policies and their effects towards

    unemployment:

    Firstly, inflation has deleterious impact on

    unemployment. There is indeed a tradeoff between inflation

    and unemployment and for this reason it has been observed

    that the goals of full employment and stable prices are

    largely incompatible. Hence Philips (1958), posits that an

    increase in the rate of change of nominal wages or prices

    (inflation) leads to decreases in unemployment rate. This is

    evident in the inflation-unemployment trade off that is

    implied by the Phillips curve.

    Secondly, the result of scarcities or volatilities in the

    foreign exchange rate and high interest rates impacts

    negatively on imported inputs and investment, and

    consequently limiting employment generation in the

    economy. Evidently, Monye-Emina (2001), argues that

  • 7/31/2019 Michela Project Continuation

    40/64

    31

    Fluctuation in exchange rate will cause instability in

    purchasing power and hence negatively impact on

    investment in import of manufacturing inputs in this

    connection, Iyoha (2004) posit that in the aftermath of the

    Structural Adjustment Programme of 1986, the result of

    scarcity of foreign exchange for imported inputs and high

    interest rates led to worker lay-offs in manufacturing firms,

    particularly.

    Overall, poor macroeconomic policies are constant

    drags inhibiting employment creation or opportunities

    through their deleterious effects on the economy.

    i. Ineffective DemandEffective demand refers to the total expenditure on the

    total output that is produced, at an equilibrium level of

    employment in the employment. Keynes (1936), stated that

    the level of effective demand determines the level of

    employment in the economy. Further, the extent of demand

  • 7/31/2019 Michela Project Continuation

    41/64

    32

    determines the amount of resources utilized (Bannock et al,

    1998).

    Therefore, deficiency in effective demand generates

    unemployment because it is tantamount to low production

    or output in the light of low amount of resources utilized.

    2.6 TREND IN UNEMPLOYMENT IN NIGERIA

    In recent times, the incidence of unemployment in

    Nigeria has been deep and widespread cutting across all age

    groups, educational strata and geographical entities, and a

    peculiar feature of the unemployment problem in Nigeria is

    that it was more endemic in the early 1980s than any other

    period (Obadan and Odusola, 2001).

    Notably, unemployment rates between 1981 and 1986

    were relatively higher than what obtained in the 1960s and

    1970s (Ojo, 1998).

  • 7/31/2019 Michela Project Continuation

    42/64

    33

    Unemployment rate rose from 4.3 percent in 1976 to

    6.4 percent in 1980. It oscillated between 6.4 and 6.1

    percent during the 1980-1985 period. Further,

    unemployment rate fell significantly from a high of 7.0

    percent to a low of 3.1 percent in 1991. And although it rose

    marginally to 3.4 percent in 1992, the unemployment rate,

    however, consistently declined to 2.7,2.0, and 1.8 percent

    points for 1993, 1994 and 1995 respectively; which then

    rose to 3.4 percent in 1996 and 45 percent in 1997.The rate

    of unemployment has always been highest within the 15-24

    age groups. Labour force survey between 1966 and1967

    indicated that the group accounted for as high as 72.6

    percent of total unemployment even though it represent only

    25% of potential labour force while in 1984 it accounted for

    almost three quarter of the unemployed, and recent data

    show the same pattern as the group represent 71.2 percent

    of all unemployed in 1994 (FOS, 1996: P. 220).

  • 7/31/2019 Michela Project Continuation

    43/64

    34

    In 1999, there was an increase in unemployment rate

    to 4.7 percent, which oscillated subsequently between 3.4

    and 3.1 percent points in 2001 and 2004 respectively. The

    unemployment rates for the years 2005-06 where stable

    with 2.9 percent for both years with an upsurge of 5.8

    percent for 2007 and 4.9% for 2008.

    Finally, the increase in the duration of unemployment

    represents the most serious labour market development;

    hence long term unemployment has become a chronic

    problem in Nigeria (Okigbo, 1986; Oladeji, 1994)

    2.7 FOREIGN DIRECT INVESTMENT ANDUNEMPLOYMENT: THEORY AND EVIDENCE:

    The expectant outcome in the relationship between

    foreign direct investment and unemployment is negative.

    This means that increase in foreign direct investments

    reduce unemployment rate.

  • 7/31/2019 Michela Project Continuation

    44/64

    35

    The Literature is replete with the employment impact of

    foreign investments in terms of empirical investigations.

    Aremu (1997), posits an inverse relationship between

    increase in foreign direct investment on unemployment in

    Nigeria for 1988 to 1990 period after the introduction of the

    Structural Adjustment Programme. Further, in an empirical

    study of Fiji Pacific Island, Jayaraman and Singh (2007),

    posits that the gains from foreign direct investment include

    not only creation of employment in those sectors which

    attracted overseas investors, but also of additional

    employment opportunities in ancillary sectors, which are

    supportive to all production oriented activities in the

    economy.

    Finally, in Nigeria, however, the result seems

    inconclusive as the expected inverse relationship between

    unemployment and inflow of foreign direct investment could

    only be established for the period 1986 to 1990 and 1995 to

  • 7/31/2019 Michela Project Continuation

    45/64

    36

    1997; but between 1991 and 1995, positive association

    seemed to be established (Odusola, 2003).

  • 7/31/2019 Michela Project Continuation

    46/64

    37

    CHAPTER THERE

    THEORETICAL FRAMEWORK

    3.1 SOURCES OF DATA AND METHOD OF ANALYSES

    Data for the study were sourced from secondary

    sources such as Annual Abstract of Statistics; of National

    Bureau of Statistics and the Central Bank of Nigerias

    Statistical Bulletins, for the period 1980 to 2007.

    The Ordinary Least Squares method as well as other

    statistical tests were used in the analyses of the data.

    3.2 MODEL SPECIFICATION

    The take-off point for the model used in this study is

    provided in Massoud (2008).

    The model in its functional form is given below as;

    UNR = F(POP, GDP, FDI, GOV)- - -(3.1)

  • 7/31/2019 Michela Project Continuation

    47/64

    38

    Transforming the functional model above into an

    empirical form yields;

    UNR = B0 + B1POP + B2GDP + B3FDI + B4GOV + Ui[3.2]

    where;

    UNR = Unemployment rate

    POP = Population growth rate

    GDP = Gross domestic product as proxy for economic growth

    FDI = Foreign direct investment inflow

    GOV = Government expenditure and

    Ui = Random error term

    The Bs: B0, B1, B2, B3, and B4 are the parameters to

    be estimated.

    The a priori expectations are given as;

    B1 > 0 : B2, B3, B4 < 0

  • 7/31/2019 Michela Project Continuation

    48/64

    39

    The parameter measuring population growth rate is

    positively signed because an increase in population leads to

    increase in labour force and consequently expanding the

    unemployment rate.

    The gross domestic product is expected to be negative

    since a rise in gross domestic product reduces

    unemployment; hence an increase in gross domestic product

    rate should reduce unemployment rate.

    Foreign direct investment is signed negatively being

    that foreign direct investment inflow eases or bridges

    domestic saving-investment gap and foreign exchange

    constraints for enhancing industrial acceleration and thus

    creating employment through forward and backward

    leakages of foreign inflows.

    Government expenditure that is directed forwards

    enhancing domestic production and consumption activities

  • 7/31/2019 Michela Project Continuation

    49/64

    40

    has a multiplier effect in enhancing employment generation,

    thus government expenditure is expected to be negative.

  • 7/31/2019 Michela Project Continuation

    50/64

    41

    CHAPTER FOUR

    EMPIRICAL ANALYSES

    4.1 PRESENTATION OF EMPIRICAL RESULTS

    The results of the empirical work are presented below:

    UNE = -5.27+.13POP6.92GDP2.70FDI1.25GOV ..[4.1]

    (-1.46) (2.78) (-1.37) (-1.86) (-2.08)

    R2 = 0.40 F = 3.72

    R2 = 0.30 D.W =1.97

    UNE = -3.67 +1.97InPOP -.14InGDP23InFDI+0.001InGOV (4.2)

    (-1.43) (2.96) (-.80) (-2.60) (.01)

    R2 = 0.53 F = 6.13

    R2 = 0.44 D.W =2.01

  • 7/31/2019 Michela Project Continuation

    51/64

    42

    4.1 DISCUSSION OF EMPIRICAL RESULTS.

    An observation of the Ordinary Least Squares results

    above, show that unemployment is associated positively with

    population but negatively with government expenditure,

    foreign direct investment and gross domestic product.

    The estimate of the intercept terms was -5.27,

    indicating that the expected level of unemployment when all

    the other parameters are zero is -5.27 units. The estimate of

    the population parameter was 0.13, meaning that a unit

    increase in population leads to an increase in

    unemployment by 0.13 units. Government expenditure and

    the foreign direct investment estimates were-1.25 and -2.70

    respectively, which means that a unit increase in

    government expenditure and foreign direct investment will

    reduce unemployment by -1.25 and -2.70 units accordingly.

    Finally, the coefficient for gross domestic product was -6.92,

    units. Further, the R2 and R2 were 0.40 and 0.30 percents

  • 7/31/2019 Michela Project Continuation

    52/64

    43

    respectively. Hence, the explanatory variables explained

    about 30 percent of the variations in the dependent variable

    using the Adjusted Sum of Squares (R2). The F- statistic

    though weak at 3.7,however, passed the test of significance,

    being above the critical value of 0.03.Lastly, the Durbin-

    Waston value of 1.97, clearly shows the absence of auto-

    correlation.

    The initial result appeared spurious and suggested the

    presence of heteroskedasticity. A satisfactory result was

    obtained with the Log-Linear method, which showed that

    unemployment is associated positively with population and

    government expenditure, but negatively on foreign direct

    investment and gross domestic product.

    The estimate of the intercept term was -3.67 percent,

    indicating that the expected level of unemployment when

    other explanatory variables are zero is -3.67 percent. The

    estimate of the population and government expenditure

  • 7/31/2019 Michela Project Continuation

    53/64

  • 7/31/2019 Michela Project Continuation

    54/64

    45

    The F-statistic increased to 6.13percent and

    statistically significant as well, being above the critical value

    of 0.002. Therefore, there exist a linear relationship between

    unemployment and the explanatory variables.

    Finally, the Durbin-Watson value of 2.001 is indicative

    of the absence of autocorrelation.

  • 7/31/2019 Michela Project Continuation

    55/64

    46

    CHAPTER FIVE

    SUMMARY, RECOMMENDATIONS AND CONCLUSION.

    5.1 SUMMARY OF FINDINGS.

    The results of the empirical findings showed that all

    the explanatory variables initially conformed to the a priori

    expectations and were statistically significant, with the

    population parameter positively signed, and the foreign

    direct investment, gross domestic expenditure, and

    government expenditure parameter negatively signed.

    However, with the correction for the presence of

    heteroskedasticity, the government expenditure parameter

    became positively signed and statistically insignificant in

    contrast to the a priori expectation.

    The study on the whole showed that foreign direct

    investment and government expenditure overtime have yet

    to meet the expectation of creating broadened employment

  • 7/31/2019 Michela Project Continuation

    56/64

    47

    opportunities across all sectors of the economy. Essentially,

    this could be adduced to the deleterious effects of continual

    population growth and financial management in the

    economy.

    5.2 RECOMMENDATIONS

    Based on the research findings, the following

    recommendations are proffered;

    (i) Efforts should be geared by government towardsencouraging the adoption of family planning

    strategies as a means of stemming the current

    growth in population.

    (ii) In a bid to attract greater foreign inflows,adequate efforts should be made to mobilize the

    desired gross national savings towards raising

    capital formation to a level needed for industrial

    growth.

  • 7/31/2019 Michela Project Continuation

    57/64

    48

    (iii) Greater government expenditure should beploughed into productive economic, consumption

    and capital infrastructure in promoting real sector

    investments and industrial acceleration in the

    economy.

    (iv) In order to enhance and maximize the impact ofgross domestic product growth, greater proportion

    of our annual national income should be invested

    in productive capital goods.

    (v) The monetary authorities and government shouldinitiate and sustain policies that are necessary or

    needed to fast track growth in foreign inflows,

    increase domestic savings and in the overall

    macroeconomic management of the economy.

  • 7/31/2019 Michela Project Continuation

    58/64

    49

    5.3 CONCLUSION

    In order to combat the growing spat or trend of

    unemployment in Nigeria, the following remarks are made

    from the overall observations above:

    (i) That government expenditure is a poordeterminant of unemployment in Nigeria, owing to

    corrupt financial practices and mismanagement

    (ii) Foreign direct investment inflow is the mostgermane or important determinant of

    unemployment in Nigeria.

    Overall, therefore greater and consistent

    foreign inflows should be sourced on the bases of

    the right policy framework and directed or piloted

    into industries and sectors that would bring

    about optimost growth in the economy and with

    high labour absorption capacity ,while also

    optimizing on the rightful use of governments

  • 7/31/2019 Michela Project Continuation

    59/64

    50

    revenue or expenditure in the provision of

    economic infrastructures in enhancing capital

    formation and growth in gross domestic product

    towards generating employment in Nigeria.

  • 7/31/2019 Michela Project Continuation

    60/64

    51

    BIBLIOGRAPHY

    Agarwal,J.P.[1980]; Determinants of foreign direct

    investment: A Survey, Weltwirtschaftliches

    Archives,Vol.117.

    Anyanwu,J.C.[1998];An econometric investigation of the

    determinants of foreign direct investment in

    Nigeria In B.E Aigbokhan[Ed].Rekinding

    Investment in for Economic Development in

    Nigeria. Selected papers for the 1998 Annual

    Conference of the Ibadan Nigeria Economic

    Society.

    Aremu,J.A[1997];Foreign private investment :Issues,

    determinants ,performance and promotion

    Central Bank of Nigeria, Research Department,

    Seminar Paper,No.4, July.

  • 7/31/2019 Michela Project Continuation

    61/64

    52

    Chete, L.N.(1998);Determinants of direct investment in

    Nigeria. The Nigerian Journal of Economic and

    Social Studies, Vol.40, No. 1, March.

    Diejomaoh, V.P and W.A.T. Orimalade (1971);

    Unemployment in Nigeria: An economic

    analysis of scope, trends and policy issues.

    The Nigerian Journal of Economic and Social

    Studies, Vol. 13, No.2, July.

    Ekpo, A.H.(1971) foreign direct investment in Nigeria:

    Evidence from time series data. Central Bank

    of Nigeria Economic and Financial Review, Vol.

    35, No.1.

    Englama, A. (2001); Unemployment: Concepts and

    Issues. Bullion, Bank of Nigeria. Vol.25 (4).

  • 7/31/2019 Michela Project Continuation

    62/64

    53

    Falae S.O.(1971); Unemployment in Nigeria. Nigerian

    journal of Economic and Social Studies, Vol.13,

    No. 1.

    Ige, C.S.(1986); Unemployment in Nigeria: Spatial and

    Sectoral Patterns and Trends,In

    Unemployment and Under unemployment in

    Nigeria. Annual Conference Proceedings of the

    Kaduna Nigerian economic society, May 13-17.

    Iyoha M.A.(1978); The relation between employment and

    growth in developing countries: An

    econometric analysis.Nigerian Journal on

    Economic and Social Studies, Vol.27, No.1,

    March.

    Iyoha M.A. (2001); An econometric study of the main

    determinants of foreign investment in

    Nigeria. The Nigerian Economic and Financial

    Review, Vol.6, No.2.

  • 7/31/2019 Michela Project Continuation

    63/64

    54

    Iyoha M.A.(2002); Macroeconomics: Theory and Policy.

    Benin City, Mindex Publishers.

    Money-Emina, A.I.(2001); Exchange Rate Variations,

    Implications for Manufacturing Output.

    Nigerian Economic and Financial Review, Vol.6,

    No.2.

    Obadan, M.I.(1994); Direct Investment in Nigeria: An

    empirical analysis. African Studies Review,

    Vol.xxv,No.1.

    Obadan, M.I. and A.F Odusola(2001); Productivity and

    Unemployment in Nigeria. Ibadan, National

    Centre for Economic Management and

    Administration.

    Odusola, A.F.(2003); Foreign Investment Policy and

    Development of the Nigerian Economy,In

    M.A Iyoha and Itsede[Ed] Nigeria Economy:

  • 7/31/2019 Michela Project Continuation

    64/64

    Structure, Growth and Development. Benin

    City,Mindex Publishing.

    Okojie, C.E.E. (2003); Employment creation for the

    youth. Africa International Journal of

    Adolescence and Youth, Vol.1, No. 131.

    Umo, J.U.(1996); Introductory overview towards full

    employment strategy in Nigeria.

    Lagos,National Manpower Board.

    Uremadu, S.O.(2006); The impact of private investment

    on capital formation in Nigeria. NISER

    MONOGRAPH SERIES,No.7.


Recommended