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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.


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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.


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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:___________________


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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.


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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.


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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.


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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:


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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


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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.


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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).


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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.


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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


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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


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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.


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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.


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


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


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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.


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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


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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


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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


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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


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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


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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).


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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


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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


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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


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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


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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


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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.


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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


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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


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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


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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


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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


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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


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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.


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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


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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


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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).


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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).


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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.


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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


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1997; but between 1991 and 1995, positive association

seemed to be established (Odusola, 2003).


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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)


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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


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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


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has a multiplier effect in enhancing employment generation,

thus government expenditure is expected to be negative.


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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


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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


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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


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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.


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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


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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.


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(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.


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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


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


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revenue or expenditure in the provision of

economic infrastructures in enhancing capital

formation and growth in gross domestic product

towards generating employment in Nigeria.


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