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Project Topic:

THE EFFECT OF INTEREST RATE ON FOREIGN DIRECT INVESTMENT IN NIGERIA

Project Information:

 Format: MS WORD ::   Chapters: 1 - 5 ::   Pages: 51 ::   Attributes: Secondary data, Data Analysis,Abstract  ::   357 people found this useful

Project Department:

ECONOMICS UNDERGRADUATE PROJECT TOPICS, RESEARCH WORKS AND MATERIALS

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CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

In foreign direct capital investment appraisal, a discount rate was used for discounting the future cash flows on any investment project of any foreign company investing in Nigeria economy with a view to determining its net present value (NPV). Under the internal rate of return, (IRR) method a “Cut-off rate” was assumed or given for comparison with the internal rate of return of the project. Both approaches were aimed at determining the acceptability of investment on capital project by foreign investors and its eventual effect on the firms value and, therefore on the wealth of the foreign investors.

There is a link between the direct foreign investment opportunities undertaken by a foreign company and the funds that support those opportunities. The funds are obtained via financial assets issued to foreign investors that purchase these assets. These foreign investors require certain minimum rate of returns on their investment. Interest rate is an opportunity cost concept. It is viewed as the return which the providers of the capital could earn on best alternative investments interest rate is the minimum desired (required) rate of return. (2003) defines it as the rate of return on the will leave unchanged the market price of the There are, however, differences of opinion on rate should be measured.

According to John Marck Freeman, interest rate affects the way economy should function. in short, the higher the interest rate the fewer planned investments will occur because it require more money to pay the loan off over time. However, investments with higher interest rate pay off more, encouraging investment in high arenas. This paradox encourages a careful balancing act between low interest rate to encourage immediate spending and high interest rates to cause long term gains.

According to the Federal Reserved Band of New York, lower interest rate makes it easier for people to borrow in order to make large purchases. These large purchase stimulate other part of the economy by necessitate the purchase of auto care and gasoline. Lower interest rate may block this. Further high interest rate will prevent many people from receiving loan or make it more expensive to get a loan, their next known as Van Home project that firm’s stock. How interest overall, the lower the interest rate, the easy money flows through the economy.

On the foreign exchange rates, all things have been equal, the higher the interest rate, the higher the value of nature currency. Because higher interest rate encourages investment from foreign traders, the nature markets that contain this product feature increased in demand for the currency of that area. Thus, the higher the interest rate and the larger the strength of native currency.

On investment, the lower the interest rates available in the market, the more likely individual are to invest in stock and other types of investments stocks prices rise under low interest rates condition. This causes further investment and spurs individual to spend more money as the value of investment rises.

The role of investment, especially foreign direct investment (FDI), in driving economic growth and development has been a contested one ever since the un-development decade of the 1960s. There have always been views in favour of foreign direct investment (FDI) and against it. Some argue that foreign direct investment leads to economic growth and productivity increase in the economy as a whole and hence contributes to differences in economic growth and development performances across countries, but others stress the risk of foreign direct investment destroying local capabilities and extracting natural resources without adequately compensating poor countries.

1.2 STATEMENT OF PROBLEMS

The trend nowadays is that, foreign direct investment is very low in Nigeria and this is resulting in low levels of economic growth and standards of living and has hindered effort to promote economic prosperity and sustainable development for the Country.

Nigeria is currently ranked low on Foreign Direct Investment (FDI) performance among its regional competitors in the World Economic Forum (WEF) global competitiveness report, (2009 – 2010). Interest rate is reported to be high enough to attract foreign direct investment but their effect is not clear Tapfuma, (2011).    Again, much challenge is posed from the determination of the most suitable interest rate that will in fact positively on foreign direct investment in Nigeria.

The benefit of foreign direct investment seen not to equate the compensation that accrued to the host country Nigeria, resulting in exploitation and dominance of the foreign investors in Nigeria economy.

1.3 OBJECTIVE OF THE STUDY

The objective of the study is to discover the effect of interest rate on foreign direct investment in Nigeria economy. Specifically, the study attempted to. Ascertain the interest rate level that will attract foreign direct investment.

  1. To determine, how adequacy, the interest rate act as a catalyst to a nation economic.
  2. To determine the curse of low foreign direct investment in Nigeria.
  3. To determine how the country will improve economic growth and development through interest rate and foreign direct investment.
  4. To better the standard of living through a better interest rate and the operation of foreign direct investment.

1.4 RESEARCH QUESTION

The following research questions guided the study.

  1. To what extent do high interest rate determined the level of foreign direct investment in Nigeria?
  2. To what extent do low interest rates determine the level of foreign direct investment in Nigeria?
  3. What are the effects of Ragging interest rate too high on foreign direct investment?
  4. What are the effects of Ragging interest rate too low on foreign direct investment?
  5. What is the impact of other determinants of FDI namely Gross domestic product (GDP), corporate taxes, inflation rate, risk factors, labour cost and exchanging rate in Nigeria.

1.5 RESEARCH HYPOTHESIS

In this study, the null hypothesis (HO) is formulated and to be tested since the alternative is always available when the null must have being rejected.

Hoi: There is no significant relationship between interest rate and  foreign direct investment.

Hoii: There is a significant relationship between Rigging interest  rate too high on foreign direct investment.

Hoiii: Higher interest rate will not affect FDI negatively.

1.6 SIGNIFICANT OF THE STUDY

The study is to proffered lasting solution to the forces that result in low foreign direct investment in Nigeria boosting economic growth and standard of living of the Nigeria people. The study is to celebrate, promote and to achieve economic prosperity and sustainable development in Nigeria.

Again, the finding of the study would yield data that will help determine the best interest rate that will attract foreign direct investment in the country.

The study will widen the concept of foreign direct investment in Nigeria, its effect on the Nigeria economy and to guide the country when foreign investors wants to gain unmerited advantage in the name of investment. This is because, if there is no check in the activities of the foreign investors, it may result in exploitation and dominance in resources control.

1.7 SCOPE/LIMITATION OF THE STUDY

The study is restricted to multinational company, corporation, and selected financial institution in Rivers State. The area under consideration was on the current interest rate on foreign direct investment and how interest rate work as a catalyst in the economy of Nigeria was the area of focus by the researcher.

1.8 DEFINITION OF TERMS

Foreign direct investment: Refer to an investment made to acquire lasting or long term interest in enterprises operating out the economy of the investors.

Interest Rate: Is the cost of borrowing money or confessedly, the income earned from lending money. it is expressed as percentage of the principal per period.

Inflation: This is general increase in prices and fall in the purchasing value of money.

Gross domestic product: This is the total value of a country goods and services, during one fiscal year of market price, excluding net income from abroad.

Labour cost: means all amounts which direct or indirect is given to labourer or employee for his work production.

Exchange rate risk: This is the price of a nation currency in terms of another currency.

Interest rate risk: This is the uncertainty that envelops the expected return which is attributed to the changes in financial instruction.

1.9 ORGANIZATION OF THE STUDY

The researcher encountered the constraint of time. This is because the period for the research was too short resulting inadequacy of exploiting relevant data. Again, in carrying out the study, some of the selected Multinational Corporation and foreign companies operating in Nigeria were no all reach for the time been, hence result in drop in sample size. Another constraint is the reluctance of some respondents to volunteer information because they do not believe the assurance given them that the data collected were purely for academic purpose.

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