The Three Conditions Of Electric Theory

Published Date: 02 Nov 2017

2.1 INTRODUCTION.

The purpose of this paper is to establish polices that attracts foreign direct in developing countries like Nigeria. Secondly, to weigh strategies the governments has put in place to achieve such objective. This depends on the implementation of important programs with regards to FDI and the possible influence these policies may have on the economies of Nigeria. Fiscal policy is a major instrument or policy that the governments’ uses to effect changes in their economies, and also how this instrument is planned, realized and having an impact in attracting foreign direct investors into their economy (Lipsey & Harbury, 1992).

From the previous chapter, fiscal policy was described as government revenue (taxes) and expenditure which is reflected in the nation’s budget; both variables (tax policy, expenditure and GDP) have growth effect on FDI (Widmalm, 2001) . The study measures these set of potential variables that may influence the flow of FDI and its Impact on the growth of the economy will also be discussed in due course. The revenue is derived from the taxes collected, while expenditure is the government spending to achieve economic welfare. The profits of foreign owned companies and taxes on other business e.g. property tax and taxes on wages serve as income for the government. However, tax polices reinforces FDI abroad as it may provide efficient access to foreign markets and production of economies of scales, resulting to an increase in domestic income (OECD, 2002). Also, the government presents an aggressive tax environment for FDI, to ensure that the domestic tax is obtained from multinationals (OECD, 2002). Regardless of the fact that tax is an essential element in making decisions on where to invest, they are other important elements in making investments decisions. FDI can be attracted to countries where the development of infrastructure, non-discretionary legal and regulatory structure, macroeconomic stability, skilled and responsive labor force, good access to markets and profitable opportunities exist (OECD, 2008).

Fiscal policy deals with government measures in spending money and levying taxes with a view to influencing macro-economic variables in a desired direction. This includes sustainable economic growth, high employment creation and low inflation (Abata, et al., 2012). Thus, the aim of fiscal policy is to stabilize the economy where by Increasing government spending or reducing the taxes which will result in pulling the economy out of recession (Dornbusch & Fisher, 2005). [1] The Government’s involvement in different economic activities can be traced to selected sectors of the economy. Policies need to be designed to coordinate fiscal policies, regulations and other economic tools. Within this framework presented in this work, policy makers’ needs to design programs based on flexibility and the needs of the country (Delaney & Whittington, 2011). The government set some regulations in order to achieve some objectives which also tend to depend on the specific needs or purpose the government desires to achieve. (Samuelson & Nordhaus, 1998)Distinguished between two forms of regulation, namely: Economic regulation: this involves the control of prices of goods and services, market entry and exit conditions, regulation of public utilities, such as transportation and media organizations, regulation of the financial sector operations. (II) Social regulation which is intends to safeguard the welfare of workers at work place, and protection of consumer rights. Interdependence of less developed countries and their economies has emerged as a result of globalization in the past three decades (UNCTAD World Investment report, 1997). Practically, it is the interest of government in less developed countries to attract foreign direct investment (OECD, 2002). Its benefit is that it can create job employment, innovative new technologies and promote growth (Hartungi, 2006). In pursuit of this investment, the government ought to enhance policies that will attract more foreign direct investors (OECD, 2008). The role of fiscal policy to attract FDI in the developing countries has brought about a debate among many scholars and researchers’ (Schoeman, et al., 2000). The results of these studies vary due to data gathered, availability of data, the methodology used (interviews or mailing questionnaires), the economies studied (developed or developing countries), and the analytical tools employed. Many literatures have evolved around fiscal policy, economic growth and FDI (Dunning & Dilyard, 1999). Following the existing literature, the focus will be on tax policy, tax rates, government spending and its impacts in attracting foreign investors.

2.1 AN OVERVIEW OF FDI

According to Moosa (2002,P.1) ‘defines FDI as a process whereby residents of one country(source country) acquires ownership of assets for the purpose of controlling the production ,distribution and other activities of a firm in another country(host country)’. UNCTAD(1999) Defines FDI as an investment involving a long term relationship and reflecting a lasting interest and control of a resident entity in one economy in an enterprise resident in an economy other than that of the foreign investor (Moosa, 2002,p.1). Graham and krugman (1991) provides an overview of FDI and explains three theories that explain the timing of FDI: valuation effect, tax changes and trade barriers. Funds generated internally, are cheaper than those raised externally, resulting in fluctuations in internal funds and FDI. They also examined that the behavior of exchange rate and stock price over the 1980s seems to explain the US inflow of investment (Froot, 1994). Moosa (2002,P.1) Also pictures FDI from the control perspective, he qualifies FDI as the transfer of capital from a source country, for the purpose of investing abroad and a form of control that modifies the company’s assets, production or sales to the host country. Though controlled through substantial equity shareholding (Moosa, 2002).

2.2 THEORIES OF FDI

Lizondo (1991) cited in Agarwal (1980, p.740) classified FDI under the following headings:(i) theories assuming perfect market; ( ii) theories assuming imperfect markets; ( iii) other theories and theories based on other variables (Moosa, 2002,p.23). However, there are other theories of FDI .they can be classified according to the micro and macro strategic factors that determine FDI (Moosa, 2002,p.36).

2.2.1 ECLECTIC THEORY OF FDI 

This refers to the Eclectic or Ownership, Location and Internalization (OLI) Theory of FDI. In (Moosa, 2002,p.36) the eclectic theory was developed by Dunning (1977, 1979, and 1988) the theory integrated the industrial organization hypothesis, the internalization hypothesis and the location hypothesis without being too detailed about its interrelationship. The aim of the eclectic theory is to find out if there is demand for commodity and who produces it. Secondly, it examines suitable channels of a firm in areas of expansion of productions. According to this theory, some conditions must be satisfied if a firm is to engage in FDI. First, it must have a comparative advantage over other firms arising from the ownership of some intangible assets (Dunning & Acher, 2011). In this manner,for a company to effectively enter a foreign market, it must have an advantage over other competitors which results to a higher marginal profitability or lower marginal cost (Dunning, 1979,1988,1999). The eclectic theory states that a firm will directly invest in a foreign country with some advantages (Jones & Wren, 2006). The three(3) types of advantages includes (I) monopoly advantage-A company must have limited natural resources, patents, trade-mark in order to gain access to foreign market which gives an advantage over other firms which are exclusive to the firms (Jones & Wren, 2006). (II) Technology- knowledge which contain all forms of innovation activities (III) Economies of large size such as economies of learning, economies of scale and scope, greater access to financial capital (Denisia, 2010). There must be an advantage in setting up products in a particular foreign country rather than relying on exports (Jones & Wren, 2006).

2.2.2 THE THREE CONDITIONS OF ECLECTIC THEORY

The ownership-specific advantage (Internal to enterprises of one nationality) includes; Size of the firm, Technology and trademarks, Management and organizational system, Access to spare capacity, Economies of joint supply, Greater access to markets and knowledge, International opportunities such as diversifying risk. The Location-Specific advantage, which determines the location of production includes; Distribution of inputs and markets, Cost of labor, materials and transport cost between countries, Government intervention and policies, Commercial and legal infrastructure, Language, culture and customs. The internalization-specific advantage involves overcoming market imperfections. It includes; Reduction in search, negotiation and monitoring costs, Avoidance of property right enforcement cost, Engagement in price discrimination, Avoidance of tariffs. (Dunning, 1979) Cited in Jones & Wren( 2006,p.37).

Secondly it must be able to provide beneficial advantages to the firm such as - The economic benefits which consist of quantitative and qualitative factors of production, costs of transport, telecommunications, and market size. Political advantages include common government policies that affect FDI flows. Social advantages: includes distance between the home and home countries, cultural diversity, attitude towards strangers etc. Thirdly it must be more profitable to use these advantages in combination with at least some factors inputs located abroad (Moosa, 2002). This deals with assessing different ways in which the company will exploit its powers from the sale of goods and services to various agreements that might be signed between the companies (Denisia, 2010).

However, a critic of the eclectic theory is centers on the internationalization theory of FDI which states that the Dunning’s ownership advantages are theoretically redundant; as they originate from internationalization process (Itaki, 1991) cited in (Jones & Wren, 2006,p.42). Another criticism is that the eclectic theory is modified overtime to incorporate new ideas and reflect constemporary trends in FDI (Jones & Wren, 2006,p.42).

2.3 PRODUCTION CYCLE THEORY OF VERNON (PCTV)

Production cycle theory developed by Vernon in 1966 was used to explain certain types of foreign direct investment made by U.S. companies in Western Europe after the Second World War in the manufacturing industry (Denisia, 2010,p.55). PCTV relates to the life cycle of a typical "new product" and its impact on international trade. Vernon developed the theory in response to the failure of the United States. Vernon believes that there are four stages of production cycle: innovation, growth, maturity and decline (Aswathappa, 2010) and (Denisia, 2010). According to Vernon, in the first stage which characterized by innovations, a firm introduces an innovative product in response to a need in the domestic market. The production of the product is in limited quantity because the tendency of selling it is not known; it is sold mainly in the domestic market (Aswathappa, 2010).

Growth Stage: This stage involves the use of an aggressive marketing, advertising and promotional approach. Here if, the customer accepts the product, the demand will increase and the product will move to the maturity stage (Aswathappa, 2010). The nature of the products that the firm is making is not standardized (Jones & Wren, 2006,p.30) which means that the products has some features of uncertainty and for these products to gain access, communication between the producers, the suppliers and a customer is extremely vital. Maturity Stage: The product is gradually accepted and demanded, it moves through the product cycle to a greater level of standardization. It rises in both the domestic and the foreign markets. The firms set up a manufacturing company abroad to expand its production in order to meet the growing demand from domestic and foreign consumers. Hence a foreign and domestic competitor emerges. Finally, attempts are made to produce the product in developing countries (Aswathappa, 2010). Standardized Product Stage: This is the last stage and it depicts stabilization. The market for the product stabilizes. The product accepted and the market becomes price sensitive, the manufacturer is driven to search for low cost producing countries in order to bring down the cost of production. The lower cost of labor in less developed countries may provide an incentive for firms to reduce cost and set-up in these areas (Jones & Wren, 2006) If this happens, the market gradually weakens in the developed countries and strengthens in the developing countries. One benefit of the Vernon theory is that it explains why international trade takes place and why FDI replaces trade (Aswathappa, 2010).

2.4 KOJIMA HYPOTHESIS THEORY

In Aliber and Click (1999) Kojima(1973; 1975; 1985) explained the different patterns of the US and Japanese FDI in developing countries and the consequences of those differences for the expansion of international trade and global welfare.kojima classified FDI into two(i) trade-orientated, which generates an excess demand for imports and an excess supply of exports at the original terms of trade. In essence, th FDI will improve the welfare and also promote trade and a beneficial industrial restructuring in both countries. (ii) Anti-trade-orientated FDI, is the opposite of the trade-orientated FDI,thus it has adverse effects on trade and, it also promotes unfavourable restructuring in both countries (Moosa, 2002,p.49). kojima suggested that the US has transferred abroad those industries in which it had a comparative advantage (Aliber & Click, 1999). kojima’s theory was criticized by Petrochilos (1989,p.21), who argued that kojima’s hypothses is not a theory but, a mere criteria for establishing foreign trade(Imad, 2002,p.49).

According to Dunning (1988), Kojima approach can neither explain nor evaluate the welfare implication of FDI. It ignores the essential characteristic of FDI (internationalization of intermediate product market (Aliber & Click, 1999). Lee(1984) also critized kojima theory and was of the view that kojima did not establish a credible microeconomic basis for the theory (Aliber & Click, 1999,p.101). There is no doubt that all these theories has been able to point out one or two critical ideas to be considered in establishing a foreign trade. The literature on FDI is vast, and care should be taken in selection and application of theories. Nevertheless ,this section has presented an investigation on the theroy of FDI and empircal evidences therein.

2.5 FISCAL POLICY THEORY

The term fiscal comes from the Latin word fiscalis which comes from fiscus, i.e. a basket used for collecting money. In Italian "il fisco" refers to the agency that collects taxes. Thus "fiscal policy" means policy related to taxes (Tanzi, 2006). According to Tanzi (2006, p.11),’ The theory of fiscal policy can be ascribed to originate from European economist such as Jan Tinbergen, Bent Hansen, Leif Johansen and other who developed it some decades ago but their theory were contrained to only the stabiliization role of fiscal policy because these roles was considered the most vital during that period’. Delaney and Whittington (2011, p.1180) defined ‘Fiscal policy as a government action designed to achieve economic goals ,such as taxes,subsides and government spending’. The keynesian theories focuses on the use of fiscal policy which is the reduction in taxes and government spending to stimulate the economy (Delaney & Whittington, 2011). The Keynesians refers to fiscal policy as the manipulation of taxes and public spending to influence aggregate demand (Tanzi, 2006). In (Gwartney, et al.,2008,p.243) the view of the keynesians was that the federal budget should be used to promote a level of aggregate demand that is consistent with the full employment rate of output. This can be achieved by an increase in government spending on goods and services which will directly increase aggregate demand.secondly,changes in tax policy will also influence aggregate demand. A reduction in business taxes increases the after tax profit resulting to an increase in investment and aggregate demand vice versa (Gwartney, et al., 2008). The keynesians viewed the economy from two perspective: An economy with a recessionary gap and another with an inflationary gap. The keynesians are of the view that an economy is not self regulating, so in a recession(where the economy is operating below its potential capacity Gwartney,et al.,2008,p.244), aggregate demand is low to move the economy to equilibrium at the real GDP level. In such circumstances, they suggest that an expansionary fiscal policy measure be established whereby there is an increase in government purchases or a decrease in taxes in order to increase aggregate demand and real GDP respectively (Arnold, 2008). However some economist believed that changes in the size of the budget deficit could affect aggregate demand and output; here the government borrows more funds to finance the excesses leading to a ‘crowding out effect’ (Gwartney, et al., 2008). This is depicts a decrease in private expenditure, consumption, investment etc. as a consequence of increased government or the financing needs of a budget deficit (Arnold, 2008). They concluded that "crowding out"could have a direct or indirect effect on the economy (Arnold, 2008). The crowd out implies that an expansionary fiscal policy will have little or no effect on demand, output and employment (Blinder and Solow, 1972).

Unfortunately,the keynesian theory criticized this concept, saying no" crowding out" during a recession: such that government spending does not reduce private expenditure with complete crowding out, stating that an increase in government spending causes private expenditure to decrease. (Arnold, 2008). Hansen(2003,p.20) showed that an increase in the tax rate leads to a reduction in tax payment and an increased budget deficit, while national income reduces.

On a second thought, the keynesian view that a contractionary fiscal policy can be used to eliminante an inflationary gap resulting to a reduction in government spending, increase in taxes, which will also increase aggregate demand and real GDP (Arnold, 2008). The keynesians believed that a reduction in governmnet spending will diminish aggregate demand and a higher taxes on household and business could be used to reduce consumption and private investment. They further suggested that fiscal policy should be restrictive , whereby the budget should be shifted towards a smaller deficit of larger surplus in response to the threat of inflation. They argued that although crowding out may occur when an economy is experiencing an expansionary gap but not majorly seroius during a recession. They believed that an increase in government spending that is financed by a defict will have a strong multiplier effect on output,employment and real income (Gwartney, et al., 2008). The keynesian’s also presented the theory of fiscal policy in a case which assumes a closed economy and suggested the absence of a government sector. Given the model as Y=C+I ; C=α+ ; I=Ỉ where they represent the following [2] . They opined that within this framework the absence of a governmental or external trade sector,that savings are identical to investment spending(Peacock and Shaw, 1977,p.25). The keynesian aslo extended the theory by including the Government sector but still maintained the closed economy. The basic national income denotes Y=C+I +G where the G symbol stands for Government spending. keynesian considered consumption as a linear function of income after the payment of taxes and the receipt of transfer. Thus C=α+ where indicates disposable income,disposable income is given by the equation =—ῃ +(1—Y+R, where equals the rate of income tax, R represents transfer payments and its assumes non taxable,and ῃ represents that portion of taxation which continues even when income is zero. The keynesian also considered when there is an autonomous change in government spending and concluded that the increase in the level of national income is equal to the change in Government spending (Peacock and Shaw, 1971,pp.1-192). They considered an open econmy when dealing with external factors and using two countries entering into international trade. This is where this study seems to consider (Peacock & Shaw, 1971).

We are of the opinion that the implications of the crowding out analyses are symmetrical which implies that a reduction in government spending to pay off the national debt would be expansionary (Blinder & Solow, 1972). A restrictive fiscal policy will then crowd in private spending while an expansionary fiscal policy will crowd out private spending and will be largely ineffective as a weapon against inflation (Gwartney, et al., 2008).

Tanzi (2006,pp.11-15) Made emphasizes on the elements of the theory of fiscal policy, stating that the objective of policy makers is to promote social welfare or protect the public interest of the citizens. social welfare depends on several indicators such as economic and social nature. Examples of economic indictators are economic growth,employment opportunity,increased productivity, rate of inflation , income distribution and unemployment on the assumption that the existence of a Nerve Center where all the economic decisions are made and intergovernmental differences are resolved (Tanzi, 2006,p.14), the government has the public interest in mind and only promotes the social welfare of the citizens and that the government bases its policy decisions on the best economic analysis possible (Tanzi, 2006). A number of authors including (Harrod, 1948; Hicks,1981; James & David,2009) described the IS-LM model as an instrument of fiscal policy which comprise of government expenditure and tax. They were of the opinion that if, government spending increases or taxes declines, the LS curve will shift rightward and vice versa, without causing any change in the LM curve. They concluded by saying that an increase in government expenditure given all things being equal will cause a rise in interest rate resulting to a crowd out effect. They presented papers describing mathematical models attempting to summarize John Maynard Keynes General theory of employment, interest and money. (James & David, 2009). IS [3] represents the investment savings model, while the LM represents the liquidity Preference money supply model. However, these theories have been able to explain the principle and rationale behind the fiscal policy and some policy development that have led to the theory of fiscal policy. Many other empirical studies centered on Government expenditure, fiscal deficit and fiscal policy playing a stabilization role on the development of the economy (Blanchard, et al., 2010,pp.199-215) and (Roth & Shapley, 2003,pp.1419-1447). One important point to note is that, the fiscal policy appropriate for a country will depend on the stage of its development and its social goals.

2.6 WHAT IS THE IMPACT OF FISCAL POLICY ON FDI (IF ANY?)

One of the objectives of this study is to review the existing literature on Fiscal policy and FDI and explore possibilities for future research.

Schoeman et.al (2000) studied the impact of fiscal policy on FDI in South Africa and came to a conclusion that FDI flows are affected by Fiscal discipline and tax burden on foreign investors. A study by Iyoha (2001) on the effect of macroeconomic instability and uncertainty, market size and external debt on FDI inflow shows that Market size attracts FDI in Nigeria, whereas inflation discouraged FDI. He concluded that unsuitable macroeconomic policy will discourage FDI inflow to Nigeria. Odozi(1995) made emphasized on factors affecting FDI inflow into Nigeria in both the pre and post structural adjustment programs (SAP) eras findings reveal that the macro policies in place before the SAP discouraged foreign investors.

Rena and Kefela (2011) showed that restructuring of a fiscal policy discourages economic growth using selected African countries as a case study. They emphasized on the need for strong fiscal governance and its potential effects on economy activity. The study focused on the methodology of fiscal policy and assessed the impacts of alternative tax policies and debt management requirement. They concluded that an efficient tax administration will increase the level of resources endowment; hence an increase in FDI flows. A recent study on  Fast-tracking sustainable economic growth and development in Nigeria through international migration and remittance (Raimi & Ogunjirin, 2012) found out that there exists a negative relationship between the gross domestic product (GDP) and inflation rate (IR); and also the existence of a negative relationship between GDP and net inflow (NI); there exists a positive relationship between the GDP and foreign private investment (FPI); and there exists a positive relationship between the GDP and external reserve (ER). The objective of this paper is to examine the possibility of fast-tracking sustainable economic growth and development in Nigeria through mainstreaming of the benefits of international migration and inflow of remittances from abroad (Raimi & Ogunjirin, 2012).

Mengistua and Adhikaryb (2011,p.219) examined the effects of the six components of good governance on foreign direct investment (FDI) inflows in 15 Asian economies for the period 1996–2007 using a fixed effect model for panel data with heteroskedasticity and corrected standard errors. The empirical results revealed that of the six components of good governance, political stability and absence of violence, government effectiveness, rule of law, and control of corruption are the key determinants of FDI inflows, as they exhibit consistent results under different models. However, the study finds no significant evidence with voice and accountability and regulatory quality in FDI inflows. The study reveals that human capital, infrastructure, lending rate, and GDP growth rate also have a significant influence on FDI inflows. We conclude that a country that coordinates its business environment is likely to attract more foreign direct investment despite offsetting deficiencies in other dimensions of good governance such as voice and accountability and regulatory quality (Mengistua and Adhikaryb, 2011).

Botric & Škuflic (2006,p.360) show the significant role of infrastructure development in attracting the inflow of FDI. Cleeve ( 2008,p.140) employed a data on 16 SSA countries and finds that tax holidays are important in addition to traditional variables and government policies to attract foreign investment to Africa. Pantelidis and Nikopoulos ( 2008,p.95) carried out a study to investigate why FDI is attracted to Greece compared to the rest of the EU countries and findings reveal that the crucial factors responsible for the low FDI attractiveness includes; inefficient public governance, high taxation, inefficient infrastructure, and general macroeconomic conditions. Asiedu and Esfahani (2006,p.648) Examined the ownership structure in foreign direct investment (FDI) projects. They showed that in choosing an ownership structure, foreign investors, local entrepreneurs, and government consider the specific, market assets that the participants and the country bring to the project. At a balance, the foreign equity share increases in relation to the assets contributed by foreign investors and decreases when local assets contribute towards the surplus generated in the project. A Government policy and the institutional structure of the country also affect ownership structure (Asiedu & Esfahani, 2006). Market decentralization may significantly improve the investment environment and attract foreign investment while government interference in economic activities could discourage foreign investment (Canfei, 2006). In addition, an increase in a state legal expenditure is associated with a smaller FDI inflow. This further reveals that, a state with more authority in economic matters and rigidity in its fiscal budget constraints tends to have a larger FDI inflow.

A study on the impact of public expenditure and foreign direct investment (FDI) on economic growth was studied (Manh & Suruga, 2005). They took into account the interaction between FDI and public expenditure in determining the economic growth rate. A sample of 105 developing and developed countries were employed for the period 1970–2001, the main findings were (I) The role of FDI, public capital, and private investment  in promoting economic growth, (ii) public non-capital expenditure has a negative impact on economic growth, and (iii) excessive spending in public capital expenditure can hinder the beneficial effects of FDI. (Nkoro, 2012,p.211) examined the impact of tax revenue on the economic growth of Nigeria, and its Impact on infrastructural development from 1980 to 2007. The study revealed that tax revenue has no independent effect on growth through infrastructural development and foreign direct investment, but the infrastructural development and foreign direct investment responds positively to an increase in output. However, when fiscal laws, legislation and existing laws are strengthen with macro-economic objectives, tax revenues emerges its full capacity on the economy, which will regulate tax offenders in order to minimize corruption, evasion and tax avoidance. These will bring about improvement on the tax administration and accountability and transparency of government officials in the management of tax revenue. Above all, the tax revenue base increases with a resultant increase in growth (Nkoro, 2012). The results show that tax revenue stimulates economic growth through infrastructural development. That is, it highlights the channels through which tax revenue impacts on economic growth in Nigeria.

An empirical paper investigated the contribution of Value Added Tax (VAT) to the GDP. The study revealed that a positive and significant correlation between VAT Revenue and GDP exist (Adereti, et al., 2011,p.457). They showed that both economic variables fluctuated significantly over the period although VAT Revenue was more stable. No causality exists between the GDP and VAT Revenue, but a delay for two years exists. This paper therefore recommended that all administrative loopholes should be involved for VAT Revenue to continue to contribute more significantly to economic growth of the country. This should be done on the realization that any action taken on either VAT Revenue or the GDP will take two years to become effective (Adereti, et al., 2011). Klemm & Parys (2012, p.393) Showed that a tax incentive is employed as a tool for tax competition and effective in attracting investment. They found no robust evidence, however, competition over investment allowances and tax credits are important. Secondly, they found evidence that lower company income tax rates and longer tax holidays are effective in attracting FDI in Latin America and the Caribbean but not in Africa. The empirical results from this studies show that a lot will have to be done to transform the economy into an investor friendly environment.

2.7 FDI AND ITS IMPACT ON ECONOMIC GROWTH (REAL GDP)

The theoretical literature recognizes several ways through which FDI contributes to Economic growth [4] . Economic growth represents the expansion of a country’s potential GDP or output. It has provided insight into why the growth of the state are at different rates and this has an influence in the choice of the government in setting of tax rates and expenditure levels that will influence the growth rates. There have so many studies and empirical works on FDI and Economic growth in different regions worldwide including Nigeria with different results obtained. Todaro & Stephen( 2008, P.7) cited in Kuznets (1971) defined a country’s ‘economic growth as a long-term rise in capacity to supply increasingly diverse economic goods to its population; this growth capacity is based on advanced technology and the institutional and ideological adjustment that it demands’. (Kuznets, 2012).

Gyapong and Karikari (1999) examined the casual relationship between FDI and economic performance in two African countries, and found out that the impact of economic performance of FDI depends on the strategy of the investment. Martin & Ottaviano (1999) studied the locational factors and found out that high growth rates and transaction cost are associated with FDI. Zukowska-gagelmann (2000) examined the effect of FDI on productivity and growth and concluded that FDI has a negative impact on the performance of the most productive local firms. Kearns and Taylor (2000) studied the relationship between FDI and growth in Ireland and came to a conclusion that Ireland is a beneficiary of FDI and international firms provide greater benefits. Fan and Dickie ( 2000) argue that FDI contributes to the growth and stability in Asian countries .It accounts for 4-20% of GDP. Asafu-Adejaye (2000) in his study of the effect of FDI on Indonesian economic growth found out that FDI has a significant positive effect on growth. Zhang (1999a) studied the relationship between FDI growths in China and concluded that FDI enhances growth in the long run.

Oscar(2003) Examined the importance of FDI in the development of emerging countries applied it to Columbia and Philippines stating the relationship between GDP growth and the increase of relationship between FDI and GDP. He established that a country could design passive and active policies as strategies to attracting FDI. He recommended that transnational corporations are influenced by comparative factors, economic stability and strong institution and for this reasons, countries have to implement active policies that can bring economic stability and that can also build an appropriate investment environment for the country. A report showed some positive linkages between FDI and economic growth in Nigeria (Obinna, 1983). Ariyo (1998) in (Akinlabi, et al., 2011) studied investment trends and its impact on Nigeria economic growth over the years. He came to a conclusion that, private domestic investment consistently contributed to a rising GDP growth rate during the period he considered (1970-1995). He suggested the interest of major partners on the development of the economy to be protected, hence the need for an institutional rearrangement that recognizes it.

Akinlabi, et al. (2011,p.281) Studied corruption and economy growth in Nigeria. His objective examined if, there was any relationship between FDI, corruption and economic growth in Nigeria. He employed the granger casualty test and ordinary least square method as his research methodology. He came to a conclusion that there is a significant relationship between the level of corruption and the inflow of foreign direct investment into nigeria within the period of 1990-2010. The policy implication was that Nigeria can only attract a large volume of FDI inflow if the corruption levels of governance is drastically reduced and checkmated and also exchange rate volatility and the rising cost of goods and services due to economic distortion must be controlled (Akinlabi, et al., 2011). McCulloch (1988) considered exchange rate and trade barriers as an economic influence on FDI. Exchange rate movement has an effect on production cost: low production cost do not guarantee in ward flow of FDI. When exchange rates fluctuates at a higher degree and is unpredictable, multinational corporations may have an advantage over domestic firms, reason been that the shift in marginal production and sales in response to exchange rate changes are flexible (McCulloch, 1993)and (Froot, 1994,p.6).

McCulloch (1988) also argued that having much emphasis on the location of where to invest is not very primarily necessary as all production locations are perfect, and a firm with a good idea will expand despite location. McCulloch (1988) further notes that FDI occurs in emerging markets, where an imperfect competition exists. For instance, a government can exploit imperfections to the advantage of its domestic resident. This will encourage profitable companies to locate within, gaining more of taxable profits (Froot, 1994,p.7). Adegbite & Ayadi (2010,pp.133-147) examined the relationship between foreign direct investment flows and economic growth in Nigeria. The study confirmed the beneficial role of FDI in growth. The study further revealed that FDI promotes economic growth, and hence the need for more infrastructural development, ensuring a healthy macroeconomic environment as well as ensuring human capital development is essential to boosting FDI flow and productivity into the country (Adegbite & Ayadi, 2010). In a study Nurudeen, et al., (2011, pp.50-67) examined the determinants of FDI,taking Nigeria as a case study. The study recommended that government should employ policies to expand the economy in a manner that the economy will encourage the flow of more FDI. Secondly, government should increase its expenditure (spending) in the development of the nation’s infrastructure (power supply, roads, telecommunication, etc.) in order to reduce the cost of doing business thereby attracting more FDI. Thirdly, government should encourage production activity through production incentives and/or subsidies in order to increase the economy’s GDP.

In a study of Oyatoye, et al. (2011,pp.66-86) ,It examined the impact and relationship between Foreign Direct Investment, and Economic Growth in Nigeria. The study concluded that there is a positive relationship between direct foreign investment and gross domestic product (GDP). Udoka, et al. (2012,pp.42-53) Showed the relationship between foreign direct investment and some macro-economic variable in the Nigeria from 1986 – 2011. They suggested that an enabling environment, the effective policies and strategies must be in place to attract, absorb and sustain substantial inflow of FDI into the Nigerian economy. Multinational corporations look for countries or regions that have the best location and the right mix of determinants for their investments (UNCTD, 2007). It is ideal for host countries to have the natural and human resources that investors need and also look out for. Hence, understanding the nature of the investment they intend to attract to their economies that add value to the economy at large. This means that host countries must be dynamic in their policies considering the fact that the investors in agreement to blend with the rapidly changing technology. Anyone seeking for investment in a country, must source for a firm with the following criteria; market size, structure, and growth, access to regional and global markets, and finally consumer buying power and preferences (Ngowi, 2012).

Several authors (Aregbeyen, 2007; Devarajan and Shaikhl,1995; Bose, et al., 2005) established a positive relationship between fiscal policy and economic growth. Bose, et al. (2005) and Aregbeyen( 2007) opine that the share of government capital expenditures in the gross domestic product is significantly correlated with economic growth, while the growth effect of current expenditure is insignificant. Aregbeyen ( 2007) also argued that although government expenditures are necessary for economic growth, but the impact of such expenditures on the economy is extremely crucial. He concluded that the strategy to attain rapid economic growth comprises of capital and public investment expenditure and that increased government budget deficits do not automatically guarantee rapid economic growth. Landau, (1983) Showed that there is a negative and partial correlation between real GDP growth and government consumption expenditure. Barro, J (2008) also examined the impact of fiscal policy on growth. The evidence on the relationship between public investment and growth is also vague. William and Sergio (1999) showed that, in general terms the government investments are positively correlated with growth.

Most growth models predict that taxes on investment and income have a negative effect on growth (Carlo & Jaramillo, 2012). These taxes affect the rate of growth through a clear and direct channel. The macroeconomic effects of fiscal policy on growth are correlated to the macroeconomic balances (deficit and debt). The tax pressure, how tax revenue are levied and the manner in which spending takes place all affect economic incentives and hence investment, employment, economic efficiency and effectiveness. It is vital that the tools used to implement fiscal policy should be selected taking into cognizance of the potential growth effect. (Carlo & Jaramillo, 2012). Alm & Rogers (2011) showed that fiscal policy can be measured in relation with per capita income and growth. The impact of tax on the state economy is quite variable: expenditure impacts are more consistent across different specifications (Alm & Rogers, 2011). The empirical evidences of (Ram Sharan, 2012) suggest that fiscal policy has a positive impact on economic growth, supporting the view of endogenous growth models and that fiscal policy promotes economic growth but there exist a tradeoff between maintaining fiscal stability and accelerating economic growth in Nepal. A recent survey (Safdari, et al., 2011,pp.88-92) has found out that taxes are essential tools in economic policy and forms part of key variables that the government uses to affect macroeconomic activities such as economic growth, inflation and unemployment. In general terms, taxes have a negative effect on growth as they distort the allocation of resources (Eken, 1997). In models with endogenous growth, such taxes reduce the constant steady rate of return of privately supplied factor of production and thus the steady rate of growth (Eken, 1997). Tariff could increase the price of capital and reduce the marginal rate of return of these inputs (Crowe, 1944). Eken(1997) opined that misrepresentation of taxes should be kept to a minimum in fiscal adjustment strategies through shifting the burden of taxation from investment or international trade to domestic consumption. The way in which the government finances its economy is also vital to growth (Barro J, 2008). Taxes that distort incentives for productive investment or employment can slow down growth (Hansen, 2003).

From the above, empirical studies found evidence of an inverse relationship between taxes and economic growth, but the results could still be further analyzed. Engen and Skinner (2004 ) obtained a result showing that changes in the average tax rate have a significant negative effect on the average rate of GDP in a sample of 107 countries. There is an adverse impact on the tax rate of growth and a number [5] of variable are correlated with growth (Levine & Renelt, 1992) cited in (Barro & sala-i-Martin 2004,p.543). [6] From the related literature on fiscal policy in relation to growth cited above, we can say that there exist an inverse relationship between fiscal policy and growth in an economy.

So far, Empirical literatures reviewed have examined the impact of fiscal policy variables on FDI individually, but none has collectively examined its relationship to FDI, this is the gap this study intends to fill. We are of the opinion that foreign investors are likely to invests in countries with better governance which are generally able to collect taxes and spend public funds more efficiently and effectively. Thus a higher expenditure in productive areas can lead to a higher growth in countries with strong governance. Fiscal legislations and tax administration are prerequisite to enhance growth. It has the potential of reducing a country’s dependency on foreign aid and facilitates sustainable economic growth (UNCTD, 2007, 2009).

2.8 THE BENEFITS OF FDI ON THE ECONOMY

The benefits of FDI are numerous and in some cases offset the negative impact. FDI inflows can result in technology transfers, human capital formation, international trade integration, an increase in a competitive business environments, enterprise development, economic growth, and improved environmental and social conditions (Herman, et al., 2005). Most empirical studies say that the benefits derived from FDI are limited by a partial "Crowding out" of domestic investment (Guoxin, et al., 2012,pp119-133); (Oriakhi and Osemwengie,2012,p.88-92). While some researchers concluded that, FDI actually increases domestic investment. FDI contributes to growth in host countries beyond what domestic investment would do (OECD, 2002). In developing countries, FDI seems to have a less significant effect on growth, which is as a result of some level of externalities over time (OECD, 2008). Nevertheless there are still some benefits to be derived from FDI.

Growth and employment opportunities-The introduction of FDI into an economy brings about a stable capital inflow (Herman, et al., 2005). FDI inflows provide economic benefits such as increased competition, technological spillovers and innovations, and increased employment. However, the impact of foreign investment extends far beyond economic growth (Michelle, et al., 2005,p.15). Direct investment can have a significant trade and employment effect at the industry or economy. At this point, it is reasonable to say that a favorable trade impact will decipher into an increase in industry job and affect growth.

FDI provides access to new technologies, access to marketing expertise and skills. FDI provides more access to new technology and specialized knowledge (Asafu-Adejaye, 2000). This introduces new skills and production to the host countries. More access to marketing expertise provides an operational link between enterprise and a foreign partner (Dale, et al., 1997). FDI increases global competition. FDI has been the least volatile source of international investment for host countries with notable exceptions of the USA (Lipsey, 2000). FDI allows for easy channeling of resources to developing countries. Lipsey (1999) argues that the most reliable source of foreign investment to developing countries is the MNC’s. FDI complements domestic savings and contributes to total investment in host economy. Examples of MNC in Nigeria are Toyota, Nestle foods, shell, Coca-Cola, Sony etc.

At this point we can say that FDI can grow geometrically and can be seen as a major form of international capital transfer. Kenneth (1994,p.1) recently showed that, Direct investment has grown within Africa. Changes in corporate borrowing capacity and availability of internal funds may explain why some firms invest or buy cheap asset. Tax changes may also have a relative effect on the profitability of asset control (Dale, et al., 1997).