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Chapter One


1.1. Background of the study

 Foreign Direct Investment (FDI) has persistently grown from strength to strength in the world’s inter-border trade. As such, FDI has become the most important source of development finance. Of all the three major foreign private flows (FDI, Portfolio, and Equity), FDI has been tipped as the most important in economic growth and development, attracting the concerns of many scholars. Foreign Direct Investment as put forward by Artige and Nicolini (2005), is the capital transaction that a “direct investor” carries out in a foreign “direct investment enterprise” (affiliate) to obtain a lasting interest in this foreign firm and a significant degree of influence on its management. Foreign Direct Investment (FDI) according to World Bank (1996) is an investment made to acquire a 10% lasting management interest in a business enterprise operating in a country other than that of the investor and as defined according to residency. Such investments may take the form of either “Greenfield” investment or Merger and Acquisition (M&A), which entails the acquiring of existing business entity rather than new investment (Ayanwale, 2007). The threshold of 10% or more ownership of a firm’s capital is in general, required to be accounted for as a direct investment. Development economists therefore, have over the decades developed theories, as well as emphasized the importance of FDI in breaking the vicious circle of poverty. Though most of the theories do not have direct bearing on macro-economic volatility, their aggregate transmission effects certainly have some explanation for the behaviour of macroeconomic variables. As contained in the work of Fan (2005), the classical Recardian theory finds that world production becomes more efficient if factors move from countries with low productivity and that trade is just a poor substitute for factor migration. Heeksher-Ohlin-Samuelson model argues that trade and FDI should be stimulated by cross-country differences in factor endowments. To this end, if commodity trade and factor movements are substitutes, then trade and FDI are negatively correlated. In a recent study however, Desai, et al (2001) opine that higher levels of capital expenditures by a firm’s foreign affiliates are associated with greater level of domestic investment; suggesting that foreign and domestic investments are complements rather that substitutes to such a degree that substitutes for output produced by horizontal investments have been made complementarily between foreign investment and domestic investment. This may emerge as foreign operations make use of functions performed by headquarters. The increase in global FDI flows is a result of firms deciding to invest in foreign markets rather than export to those markets (Mapetta, 2002). Close examination shows that there are more to it as certain pull factors have been widely established to direct the flow of FDI which include market size, transport costs, production factor cost, agglomeration effects, fiscal incentives, business/business climate, and trade barriers (Artige and Nicolini, 2005, Krugell and Naude, 2002). Investors are often interested in the performance of specific sectors and characteristics of the economy they wish to invest in. They are in many instances interested in historical trend and likely impact of changes in specific macro-economic trends on competitiveness and expected profitability of investing in the sectors (Alaba, 2003). Hanson, et al (2003) in Juijarak (2007) conclude: “for developing countries, consumer potentials, abundant natural resources and labour cost advantages, are all attractive for FDI.

Review project detailsComments
Number of Pages42 pages
Chapter one (1)Yes  Introduction
Chapter two (2)Yes  Literature review
Chapter three (3) Yes methodology
Chapter  four (4) Yes  Data analysis
Chapter  five (5) Yes Summary,discussion & recommendations
ReferenceYes Reference
QuestionnaireYes Questionnaire
Appendixyes Appendix
Chapter summaryyes 1 to 5 chapters
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