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HUAZHONG AGRICULTURAL UNIVERSITY

MASTERS DEGREE DISSERTATION




AN EMPIRICAL ANALYSIS OF THE RELATIONSHIP
BETWEEN FOREIGN DIRECT INVESTMENT AND THE
AGRICULTURAL SECTOR OF NIGERIA

:
CANDIDATE: IDOWU AYODEJI ADETUNJI
:
SUPERVISOR: PROFESSOR LIUYING
:
MAJOR INTERNATIONAL TRADE
:
FIELD



WUHANCHINA

JUNE2013







An Empirical Analysis of the Relationship between Foreign
Direct Investment and the Agricultural Sector of Nigeria



:


20102060004

:


:







2013 6






An Empirical Analysis of the Relationship between
Foreign Direct Investment and the Agricultural Sector of
Nigeria


A THESIS SUBMITTED TO THE COLLEGE OF ECONOMICS AND
MANAGEMENT
HUAZHONG AGRICULTURAL UNIVERSITY
WUHAN
CHINA

IN PARTIAL FUFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF SCIENCE IN INTERNATIONAL TRADE



BY
IDOWU AYODEJI ADETUNJI


HUAZHONG AGRICULTURAL UNIVERSITY
JUNE, 2013

DEDICATION
My dedication goes to my primary source-the Almighty God who has made it
possible for me to undertake this study.




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TABLE OF CONTENTS
................................................................................................................................. I
ABSTRACT ...................................................................................................................... II
LIST OF ACRONYMS ................................................................................................... IV
1 INTRODUCTION ...................................................................................................... 1
1.1 Research Background ........................................................................................... 1
1.2 Problem Statement ................................................................................................ 1
1.3 Objective of the Study .......................................................................................... 3
1.4 Hypothesis Generation .......................................................................................... 3
1.5 Justification of the Study ...................................................................................... 3
1.6 Innovative Idea ..................................................................................................... 3
1.7 Thesis Structure .................................................................................................... 4
1.8 Limitation of the Study ......................................................................................... 4
2 LITERATURE REVIEW .......................................................................................... 5
3 NIGERIA AND ITS AGRICULTURAL SITUATION ......................................... 10
3.1 Geographical Location ........................................................................................ 10
3.2 Climatic and Agro Ecological Zones .................................................................. 11
3.3 Sectorial Classification of Nigerias Economy ................................................... 12
3.4 Importance of Agriculture to Nigerias Economy .............................................. 15
3.5 Overview of Nigerias Agricultural Sub-sectors ................................................. 18
3.5.1 Crop Sub-Sector .......................................................................................... 18
3.5.2 Livestock Sub-Sector .................................................................................. 19
3.5.3 Fisheries Sub-Sector .................................................................................... 20
3.5.4 Forest Sub-Sector ........................................................................................ 21
3.6 Factors Affecting Development of Agriculture in Nigeria ................................. 22
3.6.1 Absence of Political Will ............................................................................. 22
3.6.2 Inefficient Financing System ....................................................................... 22
3.6.3 Infrastructural Challenge ............................................................................. 23
3.6.4 Poor Farming Techniques and High Risk Aversion ..................................... 23
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3.6.5 Underdeveloped Input and output markets.................................................. 24
3.7 Government Funding of the Agricultural Sector ................................................ 24
4 FOREIGN DIRECT INVESTMENT IN NIGERIA ............................................. 25
4.1 Determinants of FDI in Nigerias Economy ....................................................... 25
4.1.1 Market Size .................................................................................................. 25
4.1.2 Openness of the Economy ........................................................................... 26
4.1.3 Exchange Rate ............................................................................................. 26
4.1.4 Political Environment .................................................................................. 27
4.1.5 Human Capital ............................................................................................. 27
4.2 Sectorial Analysis of FDI in Nigerias Economy ............................................... 28
4.3 Effect of FDI on overall Economic Growth ....................................................... 29
4.3.1 Augmentation of domestic savings ............................................................. 29
4.3.2 Job creation .................................................................................................. 29
4.3.3 Enhancing efficiency ................................................................................... 30
4.4 Effort of Government at Attracting FDI ............................................................. 30
5 EMPIRICAL ANALYSIS OF ECONOMIC EFFECTS OF FDI IN THE
AGRICULTURAL SECTOR OF NIGERIA ................................................................ 32
5.1 Model Specification ............................................................................................ 32
5.2 Methodology ....................................................................................................... 33
5.2.1 Unit Root Test .............................................................................................. 33
5.2.2 Co-Integration Test ...................................................................................... 33
5.2.3 Lag length Selection .................................................................................... 34
5.2.4 Impulse Response Analysis ......................................................................... 34
5.2.5 Variance Decomposition .............................................................................. 35
5.3 Result Presentation and Analysis ........................................................................ 35
5.3.1 Descriptive statistics .................................................................................... 35
5.3.2 Stationary and Unit Root Tests Results ....................................................... 37
5.3.3 Co-integration Test Results ......................................................................... 38
5.3.4 Model Stability Diagnostic Check ............................................................... 39
5.3.5 Residual Test................................................................................................ 40
5.3.6 VAR Model Estimation Results................................................................... 40
5.3.7 Wald Test results .......................................................................................... 41


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5.3.8 Impulse response Function Results ............................................................. 41
5.3.9 Variance Decomposition .............................................................................. 43
6 SUMMARY AND CONCLUSION ......................................................................... 46
6.1 Conclusion of Research ...................................................................................... 46
6.2 Policy Recommendations ................................................................................... 47
6.3 Recommendations for Further Study .................................................................. 47
REFERENCES ................................................................................................................ 48
ACKNOWLEDGEMENT .............................................................................................. 54
APPENDIX A: VECTOR AUTO REGRESSION ESTIMATES ................................ 55
APPENDIX B: P-VALUES OF COEFFICIENTS IN VECTOR AUTO
REGRESSION MODEL ................................................................................................. 57
APPENDIX C: LAG LENGTH SELECTION CRITERIA ........................................ 60

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LIST OF FIGURES
Figure 3.1 Map of Nigeria ...................................................................................................11
Figure 3.2 Agro ecological Zones in Nigeria ..................................................................... 12
Figure 3.3 Map of Nigerias Economic Activity ................................................................ 14
Figure 3.4 Agricultural Products Import Quantity Indices ................................................. 16
Figure 3.5 Africa's Largest Agricultural producers 2010 ................................................... 18
Figure 3.6 Quantity of Fish Capture Prodcution in Metric Tonnes .................................... 20
Figure 3.7 Aquaculture Production in Nigeria ................................................................... 21
Figure 3.8 Top 10 Plantations in Nigeria ............................................................................ 22
Figure 3.9 Government expenditure on capital stock ......................................................... 23
Figure 3.10 Trend of Budgetary allocation to agriculture and output of agricultural
production ..................................................................................................... 24
Figure 4.1 Factors affecting exchange rate volatility in Nigeria ....................................... 27
Figure 4.2 Sectorial Analysis of Cumulative Foreign Direct Investment in Nigeria ......... 28
Figure 5.1 AR roots of characteristic polynomial .............................................................. 40
Figure 5.2 Response of log (FDI) to log (FDI) .................................................................. 42
Figure 5.3 Response of log (LABOR) to log (FDI) ........................................................... 42
Figure 5.4 Response of log (OUTPUT) to log (FDI) ......................................................... 43
Figure 5.5 percent log (FDI) variance due to log (FDI) ..................................................... 44
Figure 5.6 percent log (LABOR) variance due to log (FDI) ............................................. 44
Figure 5.7 percent log (OUTPUT) variance due to log (FDI) ........................................... 45




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LIST OF TABLES
Table 3.1 Summary of Key Economic Facts ...................................................................... 15
Table 3.2 Agricultural Sector and sub-sectors contribution to real GDP in percentage ..... 16
Table 3.3 Top 20 crop commodities produced in Nigeria- Year 2011 (tonnes) .................. 19
Table 3.4 Stocks of live animals (Head) in Nigeria (2008-2011) ....................................... 20
Table 4.1 Nigerias GDP per Capita (2002-2011) .............................................................. 26
Table 5.1 Descriptive Statistics ......................................................................................... 36
Table 5.2 Unit root test of agricultural output for stationarity at first difference ............... 37
Table 5.3 Unit Root Test of Labor for Stationarity at First Difference .............................. 38
Table 5.4 Unit Root Test of FDI for Stationarity at First Difference.................................. 38
Table 5.5 Unrestricted Cointegration Rank Test (Trace) .................................................... 39
Table 5.6 Unrestricted Cointegration Rank Test (Maximum Eigenvalue) ......................... 39
Table 5.7 Residual Test Results .......................................................................................... 40
Table 5.8 Wald Test Results ............................................................................................... 41



I

2020

70

FDI
FDI FDI
FDI FDI

FDI
1980-2007 FDI
CBN2009 1980-2007
FDI
FDI
FDI
FDI
FDIVAR
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II
Abstract
Ongoing efforts of the current government of the Federal Republic of Nigeria to,
through its transformation agenda, diversify the economy and significantly reduce
Nigerias overreliance on oil and ultimately become one of the top twenty economies of
the world by the year 2020 places agriculture as the main driver to achieve this
transformation. The agenda proposes to return the agricultural sector, which prior to the
discovery of oil in the 70s was the stronghold of Nigerias economy, to its place of
dominance as the leading sector in Nigeria by encouraging investments and increased
private sector participation.
Successive governments have seemingly failed in their attempts to revive the sector,
not only because of their lack of political will or inability to set the right policies and
machineries in motion nor the lack of implementation of the few existing right policies but
also, largely due to the low level of involvement of the private sector.
A large proportion of foreign direct investment (FDI) that Nigeria attracts goes into
the extractive (oil and gas) and services sectors (e.g. telecommunications) as against the
agricultural sector which is the bastion of its economy. This might suggest the reason why
many FDI studies in Nigeria have evaluated its impact on oil sector or the entire economy
as a whole. Only a few FDI studies that assessed the impact of FDI on the agricultural
sector of Nigeria exist, these studies however, also suffer a flaw; they examined FDI-
Agricultural sector relationship with FDI that flowed into the entire economy and not FDI
that was specifically obtained in the agricultural sector.
This study sought to investigate this prevalent gap in empirical analysis of FDI-
Agricultural sector relationship in Nigeria by using one of the most recent and advanced
econometric technique known as vector auto regression. This was achieved by evaluating
and forecasting the impact of FDI in the agricultural sector from 1980-2007, specifically
its impact on agricultural output and labor in a Vector Auto Regression (VAR)
environment.
Data used in this study was obtained from Central Bank of Nigeria (CBN)
statistical bulletin (2009). Results from the analysis revealed that FDI in the period
under review had no significant impact on agricultural output while it had a
significant positive influence on labor force (employment generation). In addition,
results of the forecast estimates show that the current volume of FDI would not
significantly affect agricultural output but will have significant positive impact on


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labor. Recommendation from the conclusion of this research is for an increase in the
volume of FDI. Furthermore, the government and other stakeholders are implored to
seek FDI that will introduce improved technology into the agricultural sector even if
the opportunity cost of a reduction in labor may have to be paid.
Keywords: Agriculture; FDI; Nigeria; VAR
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LIST OF ACRONYMS
ARDL: Auto-Regressive Distributed Lag
BIF: Business Investment Forum
CACS: Commercial Agriculture Credit Scheme
CBN: Central Bank of Nigeria
ECA: Excess Crude Account
ERV: Exchange Rate Volatility
FAO: Food and Agricultural Organization
FDI: Foreign Direct Investment
FMEN: Federal Ministry of Environment
FRN: Federal Republic of Nigeria
GLS: Generalized Least Squares
ITD: Inter-Tropical Discontinuity
MNE: Multi-National Enterprises
NAGPER: Nigerian Agriculture Public Expenditure Review
NEPAD: New Partnership for Africas Development
NEPD: Nigerian Enterprise Promotion Decree
NIPC: Nigerian Investment Promotion Commission
OSIC: One-stop Investment Centre
R & D: Research and Development
UNCTAD: United Nations Conference on Trade and Investment
USD: United States Dollar
VAR: Vector Auto-Regression
VECM: Vector Error Correction Model


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1 INTRODUCTION
1.1 Research Background
The most spectacular manifestation of globalization, which occurred since 1990, is
the increase in foreign direct investment (FDI) (Furtan and Holzman, 2004). In the last
two decades, FDI flows have grown rapidly all over the world. This is because many
countries and especially developing countries see FDI as an important element in their
strategy for economic development (Ayanwale, 2007).
Nigeria has attracted huge volumes of foreign direct investment over the years with
the extractive industry getting the lion share. It is surprising to note that the agricultural
sector which has been the main stay of Nigerias economy receives the lowest volume of
foreign direct investment. The agricultural sector is a branch of Nigerias economy that
employs about 70 percent of the population. In 1960s, agriculture contributed up to 64
percent to the total GDP but gradually declined in the 70s to 48 percent, further declining
in 1980 to 20 percent and 19 percent in 1985, due to the oil glut of the 1980s (Ukeje,
2003).
A host of research has been carried out to investigate the significance of foreign
direct investment on the economy of Nigeria; however, most of these researches are
concentrated on the sector where the large chunk of these investments goes to--the oil and
gas sector. The low level of foreign direct investment in the agricultural sector might be
one major reason why not much work has been done to analyze the impact of FDI in
Nigerias agricultural sector. The major gap this study points out and intends to address is
that, studies that have even attempted to empirically study the impact of FDI in the
agricultural sector of Nigeria use the FDI that is obtained in the entire economy rather than
use the FDI that flows specifically to the agricultural sector. The question that then comes
to mind is; what is the impact of foreign direct investment that flows specifically into the
agricultural sector on the output and productivity of the sector? This study, with the aid of
empirical models, intends to bridge this gap and examine the agriculture FDI, and
agricultural product output relationship in Nigeria.
1.2 Problem Statement
Nigerias economy of today is not one comprising of numerous activities, it can be
summarized as basically involved in exporting crude oil and importing almost every other
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commodity, the rest of the economys pie consists of the services sector which entail the
banking and insurance services, telecommunications and the capital market.
It is sad to note that Nigeria which, during the 60s and 70s, was a global
powerhouse in a sector like agriculture is today now, a major importer of agricultural
products. The country has experienced a humiliating decline in productivity in virtually all
sectors of the economy.
The oil and gas sector which the country hangs on to as its lifeline is also highly
susceptible to external shocks that emanate from the roller-coaster ride of world crude oil
prices. Though, the oil sector is performing well especially with the upsurge in crude oil
prices in recent years. But, it is evident the sector alone cannot address the numerous
economic challenges that the country is facing. Nigerias oil wealth and a rich natural-
resource base have not been converted into improved living standards and over 54.7
percent (2004) of the population continues to live below the national poverty line (World
Bank, 2012).
The resultant effect of external and internal imbalances consequently manifest in the
countrys weak balance of payment position, astronomical level of unemployment, high
levels of insecurity, high rate of risk aversion, low capacity utilization and waning
purchasing power of the ever increasing populace. Little wonder why breaking new
grounds and diversifying the economy is now the buzz concept across all strata of
Nigerias economy.
The contribution of agriculture to economic growth of Nigeria in present times is
very low as against what was obtainable in the past. Nigerias agriculture to a large extent
still possesses the characteristics of a peasant economy that was prominent in the pre-
independence era (Adewunmi and Omotesho, 2002). In spite of the presence of abundant
primary resources required to enhance growth in the sector, it is bedeviled by a host of
problems and challenges thereby making breakthroughs and successes almost
unachievable in the sector. Potentials of agriculture in Nigeria are enormous and can only
be harnessed if the problems and challenges it faces are promptly and adequately
addressed.
If the target of the current government of the Federal Republic of Nigeria is to make
Nigeria one of the top twenty economies by the year 2020, then a holistic overhaul of the
agricultural sector that will help address major problems of the sector like low level of
capital inflows and investment is a necessary step that will go a long way in achieving that
target.

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1.3 Objective of the Study
The purpose of this study is to empirically investigate the relationship between the
levels of productivity in the agricultural sector relative to the amount of foreign direct
investment that has been obtained in the sector. We use FDI as well as other economic
variables such as labor force in the agricultural sector to explain productivity in the
agricultural sector of Nigeria.
1.4 Hypothesis Generation
In this study, the following hypotheses are to be tested;
1. The level of agricultural sector output is significantly related to the level of FDI in the
agricultural sector.
2. The level of labor generation by the agricultural sector is significantly related to FDI in
the agricultural sector.
3. FDI into the agricultural sector and output of the agricultural sector have a
complementary long-run relationship
4. Foreign investment inflows to the agricultural sector have a complementary long run
relationship with the labor generation in the agricultural sector.
1.5 J ustification of the Study
This study is important because understanding the linkage between FDI flows to the
agricultural sector and the levels of productivity in the sector may be key to uncovering
channels through which FDI stimulates the growth and development of Nigerias
agricultural sector and consequently, to identify the policy levers that may be engineered
to maximize both inflows and gains of FDI into the agricultural sector.
1.6 I nnovative I dea
This study flashes the beam light to an ignored method of examining the level of
productivity in the agricultural sector with the foreign investment that directly accrues to
the sector.
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1.7 Thesis Structure
The structure of this thesis is organized as follows; chapter one contains the
introduction of this study while chapter two consists of the literature review. Chapter three
presents an overview of Nigeria and its agricultural situation while chapter four describes
foreign direct investment in Nigeria. Chapter five contains the empirical analysis of the
economic effects of foreign direct investment in the agricultural sector of Nigeria and
chapter six consists of summary and conclusion, and policy recommendations.
1.8 Limitation of the Study
This study unlike many other FDI studies in Nigeria is sector specific. It is limited to
modeling the relationship between foreign direct investment and the agricultural sector
rather than the FDI and entire economy relationship.

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2 LITERATURE REVIEW
Theory and evidence shows that an agricultural economy is strategic to national
development, particularly for developing countries (Okorie and Eboh, 1990). A flourishing
agricultural economy is a sign of a healthy and wealthy economy. The agricultural sector
is an important stimulus market for industrial products and agricultural commodities are
sources of raw materials for manufacturing industries.
Nigerias agriculture enjoyed a boisterous era between the sixties and the seventies.
In 1960s, agriculture contributed up to 64 percent to the total GDP but gradually declined
in the 70s to 48 percent, further declining in 1980 to 20 percent and 19 percent in 1985,
due to the oil glut of the 1980s (Ukeje, 2003). Most literatures support (Ukeje, 2003)
assertion that oil or the oil boom period of 1971-1977 is the reason for negligence and
failure of the agricultural sector in Nigeria. Nevertheless, the decline in the growth and
development of agriculture in Nigeria cannot be placed at the doorsteps of oil alone.
A few other studies have shown that the lack of political will for development of the
sector; policy somersaults of successive governments, unavailability of the right policies,
and poor implementation of good ones also aggregate as large contributors to the decline.
Among them is (Fasminrin and Braga, 2009), they established that the main reason for the
slow agricultural development in Nigeria despite the torrent of scientific information to
engender improvement is due to poor government involvement at the level of policy
formulation and implementation. This notion is also supported by (Ugwu and Kanu, 2011)
as they claim that agriculture contributed minimally, (in terms of output, foreign exchange
derivation, and capital formation), during the period of economic reforms in Nigeria due
to policy instability, poor coordination of policies, poor implementation and
mismanagement of policy instruments, and lack of transparency.
The capital investment, productivity and income recorded in todays agricultural
sector of Nigeria are very low. Production is still dominated by small-scale farms
characterized by small, uneconomic and often fragmented holdings, use of simple
implements (hoes and cutlasses) and unimproved planting and storage materials. Okuneye
(1995) explained that agricultural production landscape in Nigeria which is dominated by
small-scale farmers who produce about 85 per cent of the total production still employ
rudimentary techniques.
The quantity and quality of government spending in the agricultural sector leaves
much to cheer. A review to assesses the quantity and quality of public spending in
agriculture and evaluate its degree of alignment with government policy goals conducted
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by Nigeria Agriculture Public Expenditure Review (NAGPER) released the following
outcomes; (a) Low level of public spending, (b) discrepancies in the manner agricultural
funds are been spent, (c) pattern of public spending in agriculture raises doubts about the
quality of spending, (d) difficulty in analyzing public spending in agriculture due to the
preponderance of off-budget funds, (e) poor budget execution, (f) Poor data quality and
availability hinder policy analysis, program planning, and impact assessment (Mogues et
al, 2008).
Several studies have been conducted to show the significance of public financing and
investments in the agricultural sector in Nigeria. For example, (Lawal, 2011) employed
trend analysis and simple linear regression to examine the level of government spending in
the agricultural sector and the consequential effect on GDP; the result of the study shows
that public spending does not follow a regular pattern and the contribution of agricultural
sector to GDP is in direct consonance with government funding to the sector. The
conclusion of (Lawal, 2011) is interesting as it explains that the government cannot expect
high productivity from the agricultural sector when its investments in the sector are of low
quantity and poor quality. Similarly, (Udoh, 2012) employed bounds test and
Autoregressive distributed lag (ARDL) modeling approach to analyze both short- and
long-run impacts of public expenditure and foreign direct investment on agricultural
output growth in Nigeria. Their results indicate that an increase in public expenditure has a
positive influence on the growth of the agricultural output and that government spending
has a relatively higher elasticity than foreign direct investment.
The inability of government to adequately fund the agricultural sector shows the need
for alternative sources of funding from the private sector in the form of investments. These
investments could come through domestic or foreign sources. The foreign sources of
investment are of two major forms known as foreign direct investment and foreign
portfolio investment; others include credits, aids, and grants. Foreign direct Investment
(FDI) is a type of investment where a foreign investor or firm has an active and lasting
control in an enterprise of the host economy while foreign portfolio investment (FPI) is an
investment in which the investor has passive holdings in securities such as stocks and
bonds of the foreign nation.
Between the two, FDI is considered as a crucial component especially for developing
countries (Albuquerque, 2003). In addition, (Razin, 2002) opines that FDIs contribution
to domestic investment and output growth dominates over the contributions of FPI flows.
Further research proves that there are two major reasons for the preference for FDI; first is
the job creation potentials, transfer of foreign technology and managerial expertise, and
larger increases in per capita GDP that FDI offers (Strazicich et al. 2001) and second is its

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stability when compared to other forms of foreign investment (Bekaert and Harvey, 1998).
Foreign investors through their investments can help to reduce what (Romer, 1993)
referred to as idea gaps and object gaps between developed and developing countries
because they could offer new knowledge and investments in physical infrastructure like
roads and factories.
This makes FDI to be one of the major adoptions to bolster funds, investment, and
development into an economy especially the agricultural sector. From the nature of the
two forms of investment, especially based on investment stability, FDI is most adaptable
and suitable to the agricultural sector of Nigeria and therefore preferred to FPI.
The debate over the benefits of foreign direct investment to promotion of growth in
developing economies is legion. For instance, (Althukorala, 2003) opined that FDI
provides much needed resources to developing countries such as capital, technology,
managerial skills, entrepreneurial ability, brand and access to markets which are essential
for developing countries to industrialize, develop, create jobs and attack the poverty
situation in their countries. Whereas, (Alfaro et al. 2004) argues that the growth enhancing
effect of FDI is only possible in countries with developed financial systems.
Studies in Nigeria such as (Omisakin et al. 2009; Egbo and Onwumere, 2009)
amongst a host of others regard FDI as significant to Nigerias economy while studies like
(Akinlo, 2004; Omankhanlen, 2011) disagree with that perspective. According to
(Ayanwale, 2007), the relationship between FDI and economic growth in Nigeria is
unclear. This indication is buttressed by (Imodu, 2009) who explained that previous
studies carried out on the linkage between FDI and economic growth in Nigeria are not
unanimous in their submission.
This leaves the question of the significance and sustainability of FDI to Nigerias
economic growth yet unanswered; therefore this creates the need to examine this
relationship from a more streamlined perspective, i.e. conducting on a sector specific
study rather than an entire economy study.
The level of FDI in the agricultural sector of Nigeria is abysmally low; Ogbanje et al
(2010) revealed that the agricultural sector suffers the heaviest marginalization in terms of
inflows of foreign investment in spite of the sectors significance to Nigeria as a major
provider of employment, foreign exchange and economic sustenance. The major reason
for this poor record could not be far from the high level of economic and political
instability that has battered the nations image.
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A few studies exist that have attempted to model the relationship between Nigerias
agricultural output and the inflow of foreign direct investment into the agricultural sector
whereas copious amount of investigations have been conducted to model the relationship
between FDI and economic growth in Nigeria. Studies like (Ogbanje et al. 2010) that have
attempted to focus on this path also suffer a major weakness by not examining the
productivity of the agricultural sector relative to FDI based on the inflows of FDI specific
to the sector but, rather, they conducted their research with inflow of FDI to the entire
economy.
The methodologies of empirically assessing impact of FDI in these economic growth
studies are quite similar. They mostly favor time series data over cross-sectional data and a
number of them prefer the autoregressive models developed by Christopher Simms over
the traditional simultaneous equation models of the Cowles foundation. This is because
these models are more robust at detecting the dynamic interactions involved within their
framework.
Within the framework of autoregression models, different approaches and techniques
can be employed to observe dynamic interactions and establish a relationship between FDI
and economic growth. For instance, (Tang et al. 2002; Shan, 2002) utilized impulse
response function and variance decomposition technique while (Dritsaki et al. 2004)
applied a cointegration and causality approach.
A large number of the empirical studies on FDI-economic growth relationship in
Nigeria employ the cointegraton and causality approach. For instance, (Egbo and
Onwumere, 2011) found out that a positive long-run relationship exists between FDI and
GDP while (Osinubi and Lloyd, 2010) analyzed the direction and significance of the effect
of foreign private investment alongside domestic investment, and net export on economic
growth in Nigeria. They found out that these variables were all positively related to
economic growth. However (Akinlo, 2004) used error correction models (ECM) to show
that private capital and lagged foreign capital have little or no statistically significant
effect on economic growth and likewise (Omankhanlen, 2011) used OLS and discovered
that FDI has not contributed significantly to the economic growth of Nigeria.
The place of agriculture in Nigerias economy cannot be overemphasized, agriculture
has over the years made tremendous impact on the countrys economy and still of great
relevance even with immense rivalry encountered from the oil sector after the oil boom. If
Nigerias agricultural sector is to return to its place of pride in Nigerias economy, then

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issue of provision of funds and increased availability of capital needs to be addressed. As
defined by (Ogbanje et al. 2010), lack of capital is the major sustenance of the vicious
circle of poverty; this provokes the need for adequate funding since the agricultural sector
is important to alleviating poverty.
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3 NIGERIA AND ITS AGRICULTURAL SITUATION
3.1 Geographical Location
The name Nigeria was taken from the Niger River running through the country.
Nigeria was colonized by the British in the late nineteenth and early twentieth century but
gained independence on 1
st
of October, 1960. According to the (Library of Congress, 2008)
country profile on Nigeria, Nigeria is the seventh most populous country in the world and
the most populous in Africa. Nigeria is a country situated in western part of Africa with
geographical coordinates of 10 degrees 00N, 8 degrees 00E. It shares border with
Republic of Benin in the west, Chad and Cameroun in the east, and Niger in the North. Its
coast in the south lies on the Gulf of Guinea at the Atlantic Ocean.
The comprehensive geography of Nigeria is divided into regions such as--- the south,
or Guinea coastlands; the central region, and the northern part of Nigeria. The country
consists of 36 states or provinces with Abuja as its current capital. The Federal Ministry of
Environment of Nigeria (FMEN) in 1993 estimated Nigerias irrigated land to be 9,570
km
2
; they state that arable land constitutes about 35 percent; pasture 15 percent; forest
reserve 10 percent; settlements 10 percent and the remaining 30 percent considered
uncultivable for one reason or the other (FMEN, 2001).
Nigeria is a country of marked ecological diversity and climatic contrasts, the lowest
point is the Atlantic Ocean at sea level while the highest point is the Chappal Waddi at
2,419m (Eroarome, 2009). The geology of Nigeria is dominated by igneous structures that
form most of the highlands and hills. The rocks of the basement complex, mainly of
igneous origin, are encountered in over 60 percent of the surface area. The landforms can
simply be classified into highlands, plateau, hills, plains and river valley systems. The
landforms are more deeply dissected in the south than in the northern parts (Udo, 1970).

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Figure 3.1 Map of Nigeria
Source: (maps.com, 1993)
3.2 Climatic and Agro Ecological Zones
The climate of Nigeria varies greatly due to its close proximity to the Equator and the
Tropic of Cancer. The tropical region which falls towards the southern part has
temperatures of 90F while the subtropical regions in the north experience a temperature
of 60F to 100F. Two main seasons are prevalent in Nigeria; rainy season and dry season
widely known as Harmattan.
The weather pattern of Nigeria is dictated largely by the seasonal northward and
southward oscillatory movement of the Inter-Tropical Discontinuity (ITD). The moist
southwesterly winds from the South Atlantic Ocean, which is the source of moisture
needed for rainfall and thunderstorms to occur, prevail over the country during the rainy
season (April October). In reverse, northeasterly winds which raise and transport dust
particles from the Sahara Desert prevail all over the country during the Harmattan period
(November March). The overall changes in temperature, rainfall and other
meteorological parameters determine the changes in climate in the country each year
(NIMET, 2010).
Rainfall in Nigeria is characterized by both latitudinal and longitudinal variations. In
the southern part of the country, the seasons could be classified as March, April, May
(MAM), April, May, June (AMJ) and June, July, August, September, (JJAS) while the
northern area has one rainfall season June, July, August, September, (JJAS). The June,
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12
July, August and September, (JJAS) season is common to both the southern and northern
parts of the country (Omogbai, 2010). Nigeria consists of nine agro ecological zones
ranging from (i) The mangrove forest and coastal vegetation, (ii) the freshwater swamp
communities, (iii) the tropical high forest zone, (iv) the derived Guinea savanna with relict
forest, (v) the Southern Guinea savanna zone, (vi) The northern Guinea savanna zone, (vii)
The Jos plateau, (viii) The Sudan savanna, and (ix) The Sahel savanna (Oyenuga, 1967).
The principal food crops are yam, cassava, and maize in the south; millet, sorghum, and
cowpea in the drier north. Cocoa, rubber, oil palm, groundnuts, and cotton are the main
cash crops.
Nigeria is a country blessed with rivers such as; Anambra, Cross River; Gongola,
Hadejia; Kaduna, Katsin-Ala; Ogun, Owena; Osse, Sokoto; Kamadugu, Yedseram;
Osun,Yobe, and Zamfara. Nigeria is also rich in varied natural resources; some of the
prominent minerals found in this region are natural gas, petroleum, tin, iron ore, coal,
limestone, lead and zinc. The most popular animals found in the jungles of Nigeria are---
elephants, buffalo, lions, leopards, antelope, monkeys, jackals and hyenas.

Figure 3.2 Agro ecological Zones in Nigeria
Source: (www.mapcruzin.com/free-world-landuse-maps.htm)
3.3 Sectorial Classification of Nigerias Economy
Nigerias economy can be observed and studied based on the type and degree of its
production activities. Some activities fall under the category of primary or secondary
production activities while others are under tertiary production activities. Agriculture,

13
mining, and quarrying including oil and gas make up primary production activities; they
have been the lifelines of the nation accounting for about 65 percent of the real gross
output and over 80 percent of government revenues. In addition, they account for over 90
percent of foreign exchange earnings and provide 75 percent of employment.
In contrast, secondary activities comprising manufacturing, building and construction
which traditionally have greater potential to broaden the productive base of an economy
and generate sustainable foreign exchange earnings and government revenues account for
a mere 4.14 percent and 2.0 percent of gross output respectively. The last category -
services which depend on wealth generated by the productive sectors for their operations
comprise about 30 percent of gross output. Significantly, the prominence of the tertiary
category on the economy has been on the rise in the last decade accounting for over 35
percent of the growth of the real gross domestic product (GDP). Thanks to growth and
development of the telecommunications sector; the sectors share of GDP and contribution
to growth of GDP jumped from barely 1 percent and 3 percent respectively in 2005 to over
3 percent of GDP share and over 14 percent of GDP growth respectively, in 2010. This
represents an annual average growth rate of about 34 percent in the last five years.
Similarly, wholesale and retail trade sector accelerated by more than 10 percent per annum
in the last five years, accounting for over 32 percent of GDP growth and 16 percent of
GDP during 2006-2010. Manufacturing sectors contribution to real GDP growth which
declined from over 5 percent in 2005 to about 3.96 percent in 2009, however edged up to
4.14 percent in 2010. The lackluster performance of the manufacturing sector reflects the
appalling state of infrastructure and a constellation of other growth-inhibiting constraints
as well (World Bank, 2012).
The Nigerian stock exchange in 2011 carried out market segmentation in a bid to
restructure its industry sectors; they classed the Nigerian economy into the following;
Agriculture, construction/real estate; consumer goods, financial services, health care;
Information communication technology (ICT), industrial goods; natural resources, oil and
gas; services, utilities, and conglomerates. The structure of Nigerias economy is largely
oil-based which explains why transformation agenda of the countrys economic team is
focused on diversifying the economy.
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14

Figure 3.3 Map of Nigerias Economic Activity
Source: (Eroarome, 2009)
As with many other economies of the world, Nigeria is not an autarkic nation, it also
depends on other economies for goods in which it lacks comparative advantage or cannot
efficiently produce. The World Bank explains in its 2012 report on economic overview
and performance of global economies that over the last ten years, Nigeria has been
carrying out an ambitious reform agenda. The most far reaching of those was to base the
budget on a conservative reference price for oil that is a benchmark price, with excess
saved in a special, Excess Crude Account (ECA). The economy responded with strong
growth between 2003 and 2010 averaging 7.6 percent.
Resources from the ECA proved invaluable to Nigeria during the global financial crisis
of 2008-2009, and financed a fiscal stimulus that maintained strong growth in domestic
demand and GDP throughout this period. GDP growth expanded from 6.0 percent in 2008 to
7.0 percent in 2009. The fiscal stimulus continued into 2010 which contributed to rapid
growth in domestic demand and GDP (8.4 percent), but could also be associated with the
continuation of double-digit inflation (13.8 percent), the depletion of remaining ECA
reserves, and a remaining balance of payments deficit despite the strengthening of oil prices.
Gross monetary foreign reserves declined from USD 42 to 32 billion during the year, the
draw-down of the ECA in 2010 despite the economic recovery and stronger oil prices
exposed weaknesses in the rules surrounding the management of the fund, motivating the
government to establish the Sovereign Wealth Fund in 2011 with the purpose of adopting
stronger rules for the responsible management of the countrys oil wealth.

15
Table 3.1 Summary of Key Economic Facts
Indicators Value Year Obtained
Budget Expenditures $.03 trillion 2011
Budget revenues $.01 trillion 2009
Debt - external $.01 trillion 2011
Distribution of Family Income -
GINI Index 43.70 percent 2003
Exports $101.10 billion 2011
GDP per capita, PPP $2,399.39 2010
GDP, PPP $.38 trillion 2010
Imports $67.36 billion 2011
Industrial production growth rate 1.80 percent 2011
Inflation rate (consumer prices) 10.80 percent 2011
Labor force 51.53 million 2011
Population 170.12 million 2012
Unemployment rate 4.90 percent 2011
Source: (globaledge.msu.edu and export.gov)
3.4 Importance of Agriculture to Nigerias Economy
Historical evidence reveals that agriculture, especially the crop production sub-sector,
from the pre and post-independence era was the cash cow of Nigeria. It was the major
source of foreign exchange earnings for Nigeria and the highest employer of labor. In
international trade markets, Nigerias agriculture dominated particularly with the export of
groundnut, palm oil, cocoa, and cotton.
Agriculture was once the mainstay of the economy (accounting for over 60 percent of
GDP and 90 percent of exports at the time of independence). However, it has been
neglected in favor of the oil sector (UNCTAD, 2009). Oil and gas is now governments
main source of revenue as it contributes about 70 to 80 percent of revenue purse and
comprises over 90 percent of export earnings and 25 percent of GDP. The development of
the oil and gas sector led to a neglect of the agricultural sector and consequent decline of
the sector. Agriculture value added to the GDP declined from 48.6 percent in 2002 to 32
percent in 2006 (World Bank, 2012).
The countrys failure to benefit from its vast agricultural resources has turned it into a
net importer of agricultural commodities. The value of agricultural imports in 2010 was a
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16
whooping USD 56,400 million, an increase from the 2009 value of USD 4,885 million
while the value of agricultural exports for 2010 was a paltry USD 1164 million, though a
rise from the 2009 figure of USD 991 thousand. Thus, agricultural sector of Nigeria has
not recorded much growth; average growth rate from 2005- 2011 is 0.96 percent (FAO,
2012). The declining competitiveness of Nigerias agriculture reflects the steep decline in
exports and rise in imports of agricultural commodities (Walkenhorst, 2007).

Figure 3.4 Agricultural Products Import Quantity Indices
Source: (FAO, 2012)
Poverty in Nigeria is high and concentrated in the rural areas. As depicted by (Eboh,
2010), agricultural sector performance and the poverty trend are somewhat associated;
when Nigeria recorded negative annual average agricultural growth from 1981-1985, the
poverty trend increased from 28 percent in 1980 to 43 percent in 1985. However, from
1986-1990 when the country recorded higher annual average agricultural growth (6.7
percent per annum); the poverty trend declined from 43 percent in 1985 to 34 percent in
1992. Again, a decline in annual average agricultural growth (2.4 percent per annum) from
1990-1996 was accompanied by subsequent increased poverty from 34 percent in 1990 to
65.6 percent in 1996.
Table 3.2 Agricultural Sector and sub-sectors contribution to real GDP in percentage
Activity Sector 2005 2006 2007 2008 2009 2010 2011
Crops 36.69% 37.20% 37.48% 37.56% 37.16% 36.40% 35.80%
Livestock 2.61% 2.63% 2.64% 2.66% 2.65% 2.61% 2.60%
Forestry 0.54% 0.54% 0.53% 0.53% 0.53% 0.52% 0.51%
Fishery 1.36% 1.37% 1.37% 1.38% 1.37% 1.34% 1.32%
Total for Agriculture 41.20% 41.74% 42.02% 42.13% 41.71% 40.87% 40.23%
Source: (CBN Statistical Bulletin, 2011)

17
The story of agriculture in Nigeria today is not as impressive as it was before; it has
been displaced by the oil and gas sector, also the services sector such as
telecommunication is pulling its weight against it. However, concerted efforts by
government to improve the sector can awake the sleeping giant and return it to its place of
pride. The major focus of the Nigerian government for agriculture is sufficiency in food
production and surplus for use as industrial raw materials for export. The priority areas
include:
All aspects of direct agricultural production, but in particular, rehabilitation of
groundnut, cotton, cocoa and oil palm production, fish production and forest
reserves.
Investment in processing of agricultural produce and storage facilities.
Investment in processing of agricultural input supply and distribution.
Agricultural mechanization e.g. Adoption and use of farm equipment (such as
bulldozers, tractors, etc.) including the provision of land clearing and land
preparation services.
Agricultural support activities including research and funding of research activities.
Water resources development, especially for irrigation and flood control
infrastructures along river basins.
Development of earth dams and construction of wash bores and tube wells.
Development and fabrication of appropriate small-scale and mechanized
technologies for both on-farm processing (e.g. Threshing) and secondary
processing of agricultural produce for consumption or storage.
Provision of an enabling policy environment for private sector to take the lead in
production and value chain processes.
Promotion of inclusive policy implementation.
Increasing annual budgetary provision to 10 percent for agricultural development
in line with the Maputo declaration of 2003 as from 2011.
Review of commodity marketing policy.
Review of rural development sector strategy to raise the quality of life of rural
dwellers.
Liberalization of the markets for fertilizer and other inputs through the private
sector and government subsidy to be administered through innovative targeted
voucher scheme.
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Promotion of private seed company involvement and community seed
development while quality control is assured by the national agricultural seed
council.
Increase in tractor density from 0.3 horse power per hectare by 2015 through
private sector participation.

Figure 3.5 Africa's Largest Agricultural producers 2010
Source: (FAOSTAT, 2012)
3.5 Overview of Nigerias Agricultural Sub-sectors
The agricultural sector of Nigeria is categorized into four sub-sectors namely; Crop
production, Livestock production, Fisheries production and Forestry Production.
3.5.1 Crop Sub-Sector
Food crops account for the bulk of the Nigerias agriculture. Major food crops in the
southwestern Nigeria include: plantain/banana (Musa spp), maize (Zea mays L.), rice
(Oryza sativa L.) and root crops such as cassava (Manihot esculenta Crantz), yam
(Dioscorea spp), sweet potato (Ipomoea batatas(L.) Lam), and cocoyam (Xanthosoma
spp). In the savannah zone; sorghum (Sorghum bicolor l.), maize, millet (Pennisetum
glaucum) and cowpea (Vigna unguiculata (L.) Walps) (Okigbo, 1980; Mudahar, 1986).
The contribution of crop production to the agricultural sectors GDP has been on a
steady rise, the latest value for net crop production index (2004-2006 = 100) in Nigeria
was 99.3 as of 2011. Between year 2000 - 2011, the value for this indicator has fluctuated
between 79.44 in year 2000, 105.00 in 2006 and 98.67 in 2010 (FAOSTAT, 2013). The

19
crop production sub-sector ranks the highest amongst contributions from all the other sub-
sectors of the agricultural sector.
Table 3.3 Top 20 crop commodities produced in Nigeria- Year 2011 (tonnes)
Ranking Crop Commodity Value
1 Cassava 52,403,500
2 Yams 37,115,500
3 Maize 9,180,270
4 Oil palm fruit 8,500,000
5 Sorghum 6,897,060
6 Fresh Vegetables 6,000,000
7 Paddy Rice 4,567,320
8 Citrus fruit 3,500,000
9 Cocoyam 3,265,740
10 Groundnuts with shell 2,962,760
11 Sweet potatoes 2,725,000
12 Plantains 2,700,000
13 Cowpeas (dry) 1,860,800
14 Tomatoes 1,504,670
15 Sugar cane 1,450,000
16 Palm oil 1,350,000
17 Millet 1,271,100
18 Fresh Fruits 1,250,000
19 Onions 1,238,090
20 Okra 1,060,620
Source: (FAOSTAT, 2013)
3.5.2 Livestock Sub-Sector
Nigeria is the largest livestock producer in Sub-Saharan Africa. However, Ethiopia
and Sudan respectively have the largest livestock population in the African continent
(Lamorde, 1998). The estimated domestic ruminant population in Nigeria has been put at
13.9 million cattle, forming 60 percent of the livestock population, 34.5 million goats, 22
million sheep (both accounting for 35.2 percent of the total population of the worlds small
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20
ruminants) equine and camels account for 3.6 percent and 0.6 percent of the livestock
population respectively (RIMS, 1992).
Table 3.4 Stocks of live animals (Head) in Nigeria (2008-2011)
Livestock 2008 2009 2010 2011
Cattle 16,293,200 16,435,000 16,013,400 18,871,400
Goats 53,800,400 55,145,400 56,524,100 57,300,000
Pigs 6,908,030 7,184,360 7,471,730 7,700,000
Sheep 33,874,300 34,687,300 37,422,600 38,000,000
Source: (FAOSTAT, 2013)
3.5.3 Fisheries Sub-Sector
Nigeria enjoys exclusive fishing rights over 256,000 Km
2
of the adjoining Atlantic
Ocean (80 Km coastline x 320 Km) termed 'Exclusive Economic Zone' (E.E.Z.). Nigeria's
Fishing Industry is classified into Artisanal fishery and Industrial fishery. Artisanal fishery
is carried out in Costal and brackish waters as well as inland in lakes and rivers while
industrial fishery is carried out in deep coastal water as well as deep sea water and
includes shrimping (Oyatoye, 1982).
The fisheries subsector, though records the lowest contribution to agriculture GDP is
also an important subsector in the Nigerian economy. According to Central Bank of
Nigerias published figures, a total of about 6 percent to 7 percent of Nigerias
Agricultural GDP has been realized from fisheries from 2005 - 2011.


Figure 3.6 Quantity of Fish Capture Prodcution in Metric Tonnes
Source: (FAO Country STAT Nigeria, 2013)

21

Figure 3.7 Aquaculture Production in Nigeria
Source: (FAO Fisheries and Aquaculture Department, 2013)
3.5.4 Forest Sub-Sector
The forestry sub-sector compared to the fisheries sub-sector performs a little better in
its contribution to agricultural GDP and overall development of the agricultural sector in
Nigeria. The sub-sector faces two main challenges to its growth which are; (i) A Low
proportion of rainforest suitable for trees to grow relative to the total land mass of the
country, only about 11 percent of the total land mass in Nigeria is earmarked as public
forest estate out of which 26 percent is in the high forest area (Aribisala, 1993; Aziakpono,
1994), and (ii) the gregarious exploitation of round logs for export until its ban in 1976
during the oil glut era (Ogunwusi, 2012).
This over exploitation of the wood resources has impacted negatively on the
development of the forest products industry. Historically, the forest products industry in
Nigeria was one of the most developed within the Nigerian economy in the 1960s to the
early 1970s. During this period, export of wood products and agricultural commodities
provided more than 70 percent of the countrys GDP. However, these challenges coupled
with several other factors such as aging of equipment resulted in the dwindling fortune of
the countrys forest industry (Ogunwusi, 2012).

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Figure 3.8 Top 10 Plantations in Nigeria
Source: (FAO Country STAT Nigeria, 2013)
3.6 Factors Affecting Development of Agriculture in Nigeria
The agricultural sector has a huge potential to transform and diversify Nigerias
economy and make it less dependent on oil and gas. However, a host of constraints act as
stumbling blocks towards the attainment of this potential. Some of the factors that impede
the development of the agricultural sector are summarized into the following;
3.6.1 Absence of Political Will
This factor is the skeleton for the framework of other factors. Previous administration
and handlers of the agricultural sector have displayed a weak political impetus to drive
change in the agricultural sector. It is the job of the government to create an enabling
environment, develop infrastructure, safeguard investments, reduce official bottlenecks,
and motivate local and international investors to participate and increase investments in
the sector.
3.6.2 Inefficient Financing System
Low level of participation by the local and foreign investors, and insufficient credit
systems all contribute to unavailability of capital for the main stakeholders of the sector
predominantly the farmers. The complexity of some of the credit systems is a major
discouragement to these farmers. Although, the federal government through the Central
Bank of Nigeria set up Commercial Agricultural Credit Scheme (CACS) to give farmers
access to long-term funds at low interest rates. However, private commercial banks also

23
need to improve their participation and lower the interest rate for credits. The task of
financing is daunting and cannot be left for the government alone.
3.6.3 Infrastructural Challenge
Resources available to the sector is minimal and should therefore be efficiently
disbursed, enormous amount of funds have been leached away through subsidization of
fertilizer schemes which are usually hijacked by corrupt government officials and their
cohorts. These funds should instead be used to develop more rural and basic infrastructure,
access roads from farm to the markets should be built to facilitate the flow and sale of
commodities at good prices and most importantly to minimize post-harvest losses. Other
infrastructures such as irrigation and storage facilities should also be made more available.
Limited accessibility cuts small-scale farmers off from sources of inputs, equipment and
new technology and this keeps yields low.

Figure 3.9 Government expenditure on capital stock
Source: (FAO, 2012)
3.6.4 Poor Farming Techniques and High Risk Aversion
The lack of sophisticated and modern management procedures to address climatic
factors and incidence of pest and diseases pose adverse effects on yield. Also,
technological level is low and there is limited availability of quality seed varieties and
crop management packages
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3.6.5 Underdeveloped Input and output markets
The subsistence nature of farms implying the minuteness in size and multiple
fragmentations is one of the major impediments to agricultural progress and efficiency.
Surveys in Nigeria show that 44 percent of male farmers and 72 percent of female farmers
across the country cultivate less than 1 hectare of land per household.
3.7 Government Funding of the Agricultural Sector
One of the most effective and majorly used instruments of financing the agricultural
sector in Nigeria is the Budget. Budget for agricultural sector at all levels of government is
channeled through two main frameworks which are recurrent expenditure and capital
expenditure. Mogues, et al. (2008) indicates that public spending in the agriculture sector
of Nigeria is astronomically low. Less than 2 percent of total federal expenditure was
allotted to agriculture during 2001 to 2005; far lower than spending in other key sectors
such as education, health, and water contrasting dramatically with the sectors importance
in Nigerias economy and the policy emphasis on diversifying away from oil, an allotment
well below the 10 percent goal set by African leaders in the 2003 Maputo agreement.
However, (Adofu, et al. 2012) discovered that this minimal budgetary allocation to
agricultural sector still has a significant effect on agricultural production. Figure 3.10
overleaf shows the trend between budgetary allocation to the agricultural sector and output
of agricultural production, this trend displays the existence of a positive relationship.

Figure 3.10 Trend of Budgetary allocation to agriculture and output of agricultural
production
Source: (CBN Statistical Bulletin, 2009)

25
4 FOREIGN DIRECT INVESTMENT IN NIGERIA
4.1 Determinants of FDI in Nigerias Economy
A good number of theoretic and empirical studies have outlined various factors that
determine the inflow of FDI to Nigeria. Authors such as (Anyanwu, 2011) follow the
theoretic angle while from an empirical perspective, (Singh and Jun, 1995) highlight
export orientation as the strongest variable for explaining why a developing country
attracts FDI. Many other authors have carried out different empirical analysis to study the
determinants of FDI to Nigeria. Some of which are; (Dinda, 2010) and (Adefeso; Essien;
Eshenake; Nurudeen; and Okpara, 2012). Results from these studies interestingly differ.
For instance, (Nurudeen, 2012) reveals that Nigerias market size (GDP) has a significant
negative effect on FDI while (Anyanwu, 2011) negates that revelation.
The determinants of FDI are enormous, though it is difficult to determine the exact
quantity and quality of FDI determinants that should be present in a location for it to
attract a given level of inflows; nevertheless, it is clear that a critical minimum of these
determinants must be present before FDI inflows begin to occur (Ngowi, 2001). Some of
the outstanding common factors that determine foreign investment in Nigeria include but
not limited to the following;
4.1.1 Market Size
Market size is significant because it is one of the first considerations of foreign
investors, traders, and potential immigrants about an economy. It is measured as GDP per
capita. With reforms in economic policy, investment laws and also improved financial
system, Nigerias market size is growing in terms of purchasing power along with a vast
population.
Historically, from 1960 until 2011, Nigeria GDP per capita averaged USD 371.67
reaching an all-time high of USD 561.90 in December of 2011 and a record low of USD
236.39 in December of 1968 (World Databank, 2013). FDI in Nigeria is resource-seeking
and therefore undermines the importance of market-size as a key determinant as
(Chakrabarti, 2001) asserts that market size should be the key determinant for market-
seeking FDI not for resource-seeking FDI. Most studies on FDI determinants in Nigeria
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26
such as (Anyanwu, 1998; Ibrahim, 2008; Nurudeen, 2012) to mention a few all rate
market size as a significant factor in attracting FDI. However, (Dinda, 2010) does not
share this view.
Table 4.1 Nigerias GDP per Capita (2002-2011)
Indicator Name 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
GDP per capita growth
(annual %)
-1 8 8 3 4 4 3 4 5 5
GDP per capita (current
US$)
455 508 644 803 1015 1129 1375 1091 1443 1502
GDP per capita
(constant 2000 US$)
371 399 431 443 459 476 492 514 541 566
Source: (World Databank, 2013)
4.1.2 Openness of the Economy
It is generally expected and accepted that a countrys degree of openness to
globalization and international trade should positively affect the inflows of FDI to the
country particularly inflows of resource-seeking or export-oriented FDI. It is usually
measured as (X + M)/GDP where X is import and M is export. Chakrabarti (2001) defines
it as trade intensity which refers to the ease with which capital can be moved in or out of a
country by investors. Most empirical studies on the determinants of FDI in Nigeria such as
(Anyanwu, 1998; Dinda, 2010; Adefeso, 2012) agree that openness of the economy is of
key essence to attracting FDI.
4.1.3 Exchange Rate
Exchange rate is keenly related to foreign investments as it is the rate at which a
foreign currency can be purchased or transacted locally. Nigeria in 1986 shifted from the
fixed to a flexible exchange rate system in a bid to achieve growth in exports, reduce high
rate of imports, attract more FDI, and improve the overall economy. When measured using
its nominal value, it serves as opportunity cost for potential investors who use the rate to
compare with what obtains in other parts of the world (Edun, 2011). Masayuki and
Ivohasina (2005) explain that if the exchange rate of a country depreciates, it attracts FDI
since foreign firms may merge with or acquire domestic industries.
However, (Ogunleye, 2009) argues that exchange rate volatility is being increasingly
recognized as a disincentive to the choice of the region as FDI destination because it adds

27
to the list of risks inherent in the region. In fact his study reveals endogeneity between
exchange rate volatility and FDI inflows in Nigeria. In addition, (Udoh and Egwaikhide,
2008) assert that exchange rate volatility exerts a negative effect on FDI. This implies that
stability of exchange rate is germane to the flow of FDI to Nigeria as against the recurring
phenomenon of volatility been experienced.

Figure 4.1 Factors affecting exchange rate volatility in Nigeria
Source: (Shehu, 2012)
4.1.4 Political Environment
The importance of a good and stable political environment as one of the key
determinants of the inflows of foreign direct investment into the host country cannot be
underscored. A stable political environment is simply a booster of investor confidence and
it is identified by the probability of change of government and the frequency of occurrence
of political violence. Nigeria still has some hurdles to cross in order to attain political
stability.
4.1.5 Human Capital
This refers to the availability of people or workforce that has requisite knowledge,
capabilities, skills, and experience to cope with the pace of emerging and dynamic
technologies. Human capital can be measured using the demography of the work force,
rate of recruitment and security of jobs, level of training and the performance level or
output.
Liquidity
Surfeit
Huge
Service Debt
Payments
High
Arbitrage
Premium
High Import
Dependency
Macroecono
mic
Instability
Exchange
Rate
Volatility
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28
The nexus of wage rate and level of skill of workforce greatly influence the flow of
FDI to the host country. Countries with lower wage rate have the advantage of attracting
more FDI for instance the call centers of major telecommunication companies in U.S.A
operates from India because the labor in India is relatively cheaper compared to U.S.A.
However, FDI flows more into countries with a highly skilled labor force. Although wage
rate in Nigeria is relatively low, it is unbalanced by an equally minimally skilled labor
force.
4.2 Sectorial Analysis of FDI in Nigerias Economy
A sector wise analysis of FDI in Nigeria would be inchoate without a brief on the
source of foreign direct investment to Nigeria. USA is Nigerias greatest source of FDI
attaining USD3.4 billion in 2008. The UK is another key FDI contributor as it accounts for
about 20 percent of Nigerias total foreign investment. China is also following the trail to
be one of Nigerias most important sources of FDI; in Africa, Nigeria its second largest
trading partner. From USD3 billion in 2003, Chinas direct investment in Nigeria is
reported to be now worth around USD6 billion. Other significant sources include Italy,
Brazil, Netherlands, France, and South Africa.
However the lion share of foreign direct investment (FDI) into Nigeria is in the oil
and gas sector, for instance receives 75 percent of Chinas FDI into Nigeria goes into oil
and gas. Figure 4.2 below, depicts the distribution of FDI in various sectors of Nigerias
economy. The agricultural sector is one of the least attractive sectors for FDI in Nigeria.
Through 1970 to 2001 the sector comprised only 1.7 percent of the total FDI (FAO, 2012).

Figure 4.2 Sectorial Analysis of Cumulative Foreign Direct Investment in Nigeria
Source: (CBN Statistical Bulletin, 2010)

29
4.3 Effect of FDI on overall Economic Growth
FDI is seen to complement scarce domestic financial resources. It is also expected to
help modernize production by transferring know-how and technology while increasing
domestic productivity and competition, and improving international competitiveness
(Ernst, 2005). Several other literatures provide insights to how FDI can impact the
economy of a developing economy. For instance, (Adams, 2009) used the theory of
development and world systems to convey his points on angles by which FDI can impact
the economy of the host country.
4.3.1 Augmentation of domestic savings
Domestic savings in Nigeria is abysmally low; this is due to the low production
coupled with over-dependence on primary commodities. With the accumulation of foreign
capital inflows, the domestic resources of any economy are augmented thereby enhancing
economic development. Multinational enterprises (MNEs) by the virtue of their large size
and financial strength have access to financial resources not available to many host
countries domestic firms, the funds may be gotten from the capital market or sourced
internally from the company because of their size and reputation (Edun, 2011).
For capital-scarce developing countries like Nigeria, such offshore capital inflows
are desirable as they help to stimulate investment, employment and growth. A high inflow
of foreign private investment would lead to rise in gross domestic investment, which will
in turn lead to growth (Anthony, 2011). According to a World Bank report released in 2011,
Foreign capital inflow, which comprises Foreign Direct Investment, FDI, (investment in
real assets) and Foreign Portfolio Investment (investment in financial assets) in Nigeria for
2010 stands at N7.7 billion (Afego, 2012).
4.3.2 Job creation
One of the reasons why policy makers of countries strive to attract foreign direct
investment (FDI) is to create new jobs in their economies. The impact of FDIs on
employment can be direct when, for instance, a foreign company employs a number of the
host countrys citizens while it could be indirect when jobs are created for local suppliers
and people who are not directly connected to the company as a result of increased
spending by either the company or its employees. Specific to Nigeria, more investments in
manufacturing and other extractive sectors would lead to increase in the number of jobs
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30
4.3.3 Enhancing efficiency
Borensztein et al. (1997) in their study suggests that FDI is an important vehicle for
the transfer of technology. When multinational enterprises invest in a foreign country, they
often transfer significant technology. Adams (2009) corroborates this submission in his
study; he asserts that in the context of developing countries, FDI contributes to the
economic development of the host country by enhancing its efficiency through the transfer
of new technology, marketing and managerial skills, innovations and best practices.
4.4 Effort of Government at Attracting FDI
It is believed that the private sector is the primary actor in trade and investment
while the major role of government especially in developing countries like Nigeria, should
to create an environment conducive for private economic activities. The effort of various
governments to attract FDI into Nigeria has been to repeal laws that are inimical to foreign
participation in Nigerias business environment. This they did by tweaking the first and
second indigenization policy of 1972 and 1977 respectively then under the Nigerian
Enterprises Promotion Decree (NEPD); they tightened or loosened different aspects of the
policy till a complete release of restrictions of foreign participation was achieved in 1999
when Nigerian Investment Promotion Commission (NIPC) was set up in a bid to create an
investment friendly environment for accelerated inflow of foreign investment into the
national economy.
At the continental level, the Nigerian Government aligns with the rest of Africa
under the New Partnership for Africas Development (NEPAD) while at the national level;
it pursues the agenda of attracting FDI through (NIPC). NIPC was created to serve as the
first point of contact for investors who intend to set up projects in any sector of the
Nigerian economy. It is charged with the responsibility of attracting, promoting and
coordinating investment promotion activities in the Nigerian economy. The commission
since its commencement of operations has organized Business and Investment Forums
(BIFs) across the world, mainly to showcase the investment opportunities in Nigeria, the
incentives available to investors, and various reforms being undertaken to improve the
investment climate. Innovatively, the commission set up a One-Stop Investment Centre
(OSIC) where investors can interface with all relevant government agencies at a single
location where it also networks, and match-make both local and foreign investors.

31
These efforts significantly impacted the inflow of FDI mostly in non-oil sectors;
from USD1.0billion in 1999 to USD20.0billion in 2008, and slight decline to
USD12.0billion in 2009 due to the global meltdown/economic crises (UNCTAD Yearly
Reports). (Zakari et al. 2010) employed an independent t-test to empirically evaluate the
role of NIPC in attracting FDI to Nigeria and revealed that within his observed time frame
the commission succeeded at improving Nigerias lot with regards to inflow of FDI. The
government has also explored other means to attract foreign investments such as;
establishment of Free Trade zones which has been particularly successful in Nigeria,
developing investment incentives such as terminal tax holidays, exemption duties and but
not limited to setting up specialized committees such as Doing Business and
Competitiveness Committee and `Investor-Care Committee to specifically handle the
interests of foreign investors.
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32
5 EMPIRICAL ANALYSIS OF ECONOMIC EFFECTS OF
FDI IN THE AGRICULTURAL SECTOR OF NIGERIA
The core objective of this empirical study is to evaluate and forecast the impact of
foreign direct investment in the agricultural sector of Nigeria from 1980-2007 by
employing a vector auto regression (VAR) model to assess its impact specifically on
agricultural output and labor.
5.1 Model Specification
The model employed in this study is a vector auto regression system of three time
series variables; FDI, output and labor consisting of three equations. Each of the variables
serve as the dependent variable in each of the equations while the regressors in all the
equations are lagged values of all the variables.
An unrestricted VAR with lag length p can be expressed as:
1 1
... .....................................................................................(5.1)
t t p t p t
Y C Y Y

= +u + +u ++
Where Y
t
denotes a vector of variables (agricultural output, labor and FDI), C
represents a vector of corresponding constant terms;
1,,

p
are matrices of coefficients
and
t
is an unobservable zero-mean independent white noise process. This model is often
referred to as a VAR
(p)
process because the number of lags are the same p.
Given three endogenous variables, the basic VAR model can be mathematically expressed
with the following estimation equations:
1 1 1 1 1
1 1 1
1 1 2 3 ..................................................(5.2.1)
k k k
t j t j j t j j t j t
j j j
Y Y Y Y o | o c

= = =
= + + + +


2 1 1 1 2
1 1 1
2 1 2 3 .................................................(5.2.2)
k k k
t j t j j t j j t j t
j j j
Y Y Y Y o | o c

= = =
= + + + +


3 1 1 1 3
1 1 1
3 1 2 3 ..................................................(5.2.3)
k k k
t j t j j t j j t j t
j j j
Y Y Y Y o | o c

= = =
= + + + +


Where the ' s c re the stochastic error terms called impulses or innovations or shocks,
while Y1, Y2 and Y3 are the variables and K is the maximum lag length. Lutkepohl (2007)

33
explains that given a sample y
1,
,y
t
and pre-sample values of y
-p+1,,
y
0
, the K equations of
a an unrestricted VAR as we employed in this study may be estimated separately by least
squares (LS) without losing efficiency relative to generalized LS (GLS) approaches. In
fact, in this case LS is identical to GLS. Under standard assumptions, the LS estimator is
consistent and asymptotically normally distributed.
5.2 Methodology
5.2.1 Unit Root Test
Sharp (2010) defines unit root theory as the cornerstone to the methodology used for
testing the stationarity or non-stationarity of a time series. Differencing of variables in a
VAR model to the first or second order helps to eliminate their stochastic trend and unit
roots. To carry out unit root test in this study, we will employ the Augmented Dickey-
Fuller tests using three test equations. These equations are mathematically expressed as;
1 1
1
.................................................................................(5.3.1)
k
t t t i t t
i
y y y y

=
A = A + + A +


1 1
1
...................................................................................(5.3.2)
k
t t i t t
i
y y y o

=
A = + + A +


1 1
1
............................................................................(5.3.3)
k
t t t i t t
i
y y y y o

=
A = + + + A +


Where
1 t t t
y y y

A = is the first difference of the series; , and are parameters


to be estimated while is a stochastic disturbance term.
5.2.2 Co-Integration Test
Co-integration indicates the presence of a causal relationship between the variables
but it fails to show the direction of this relationship. If a variable does not have unit root at
first difference, then the variable is said to be integrated at first difference (I
1
), if the
variable has unit root at first difference, then we move on to check at second difference, if
it does not have unit root at this point, then the variable is said to be integrated at second
difference (I
2
). The implication here is that; only variables that have the same integration
order can be employed in a model.
( )
1

ln 1 .................................................................................................(5.4.1)
n
trace i
i r
T
= +
=


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34
( ) max 1

ln 1 ....................................................................................................(5.4.2)
r
T
+
=
Where
trace
is the trace statistic,
max
is the eigen-max statistic,
1

denotes the
smallest Eigen-values, and T is the sample size. The null hypothesis tested in
trace
is no
co-integration.

5.2.3 Lag length Selection
Lagging can be explained as a system of creating new variables from or within the
same variable. A VAR model that employs same lag length for each of the variables is
referred to as VAR
(p)
model. Determining the optimal lag length is important as Lutkepohl
(2005) asserts that choosing lags unnecessarily (over-lagging) will reduce the forecast
precision of the corresponding estimated VAR
(p)
model whereas under-lagging a model
also could result in loss of potentially useful information from the distant past.
This study employed Schwarz (1978) info criterion to determine lag length. This criterion
alongside Bayesian information criterion are the most applied in the empirical analysis of
both univariate and multivariate time series.
( ) 2
1
1 ln
ln ( ) ...........................................................................................(5.5)
T
p
t
t
T
SC m
T T

= +


Where
t
(p)
are the estimated residuals of the VAR
(p)
process, while m is the number
of estimated parameters and T is the sample size. We used this information criterion to
help automatically select the optimal lag length. This decision is supported by the
assertion of (Ivanov and Kilian, 2005) that Schwarz Information Criterion (SIC) is more
accurate for finite sample size.
5.2.4 Impulse Response Analysis
The most unambiguous way to analyze causality between variables in a VAR
framework is to trace out the effects of shocks in those variables by computing and
observing their interactions through an impulse response function; also with this system,
individual coefficients in the estimated framework can be easily interpreted. With impulse
response function, we can determine the response of one variable to an impulse or
innovations or shocks in the error term of another variable in a system that involves a
number of other variables as well. Lutkepohl (2007) provides a mathematical definition
explaining that if the process y
t
is I(0), it has Wolds moving average (MA) representation.

35
0 1 1 2 2
...,........................................................................................(5.6)
t t t t
y u u u

= u +u +u +

Where u represents coefficients of this equation, they may be interpreted as
reflecting the responses hitting the system.
5.2.5 Variance Decomposition
As against the objective of impulse response functions, the aim of variance
decomposition is to obtain accurate information about forecast ability even though both
computations are useful in assessing how shocks to economic variables reverberate
through a system. (Kirchgasner and Wolters, 2007) formulate an equation to show that
variance can be decomposed into those parts that are generated by the impact of the
individual innovations
m
e , 1,... m k = on the variable j when a forecast over t periods is
performed.
1
0
1
2
1 0
( )
, 1,... , 1, 2,..............................................................................(5.7)
( )
i
jm
i
jm k
i
js
s i
m k
t
t
t
|
e t
|

= =
= = =


With an increasing time horizon, i.e. for t , it is not only the variance of the
forecast error but also the variance of the variable itself that can be decomposed into those
fractions that are generated by the different innovations
m
e . As these fractions are by
construction, orthogonal to each other, they add up to one. Thus analysis of the forecast
error leads to a decomposition of the variances of the variables in the system. It is also
important to consider the ordering of the variables when conducting these tests, as in
practise the error terms of the equations in the VAR will be correlated, so the result will be
dependent on the order in which the equations are estimated in the model.
5.3 Result Presentation and Analysis
5.3.1 Descriptive statistics
Table 5.1 below presents descriptive statistics of the macroeconomic data in natural
log form; it shows the minimum and maximum values of data with as well as their
standard deviation.
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36
Table 5.1 Descriptive Statistics
LOG (FDI) LOG (LABOR) LOG (OUTPUT)
Mean 6.163550 9.437671 11.17186
Median 7.097342 9.440102 11.42612
Maximum 7.192859 9.448491 11.84764
Minimum 4.764735 9.418330 9.975622
Std. Dev. 1.076626 0.007886 0.593251
Skewness -0.342763 -1.045413 -0.809189
Kurtosis 1.247110 3.199716 2.309315
Jarque-Bera 4.132996 5.146683 3.612223
Probability 0.126628 0.076280 0.164292
Sum 172.5794 264.2548 312.8119
Sum Sq. Dev. 31.29634 0.001679 9.502557
Observations 28 28 28
Source: (Authors estimation, 2012)

A skewness statistics is a measure of where the data lies i.e. (if the data is balanced
around the mean or if it is weighty either to the left or right). We can express the range of
skewness mathematically as; -1 < x <1 where x is the skewness value. Table (5.1) above
shows that the skewness values of FDI and output are higher than -1 but not equal to 1
which means they are not skewed but the skewness value for Labor is close to -1 which
implies it is negatively skewed. The next statistic kurtosis is a measure of flatness or
peaking of the variables relative to their normality. Table (5.1) also indicates that kurtosis
values of labor and output are close to three which is the standard value while the kurtosis
value for FDI is a distant half of three. Having positive values of kurtosis across all the
coefficients implies that the entire distribution are peaked not flat meaning the data set is
normal and reliable for analysis. The Jarque-Bera statistic uses the skewness and kutosis to
determine if the data set has a normal distribution. It can be mathematically expressed as;
( )
2
2
1
3 .........................................................................................................(5.8)
6 4
T
s k
(
+
(


The JB statistics tests the null hypothesis that each variable in the model is
distributed normally by testing the joint hypothesis that kurtosis and skewness are near

37
three and zero respectively. It is measured against the chi squared distribution. Table (5.1)
shows that the p-value of the kurtosis for the three variables as greater than 0.05 which
implies that each of these series are evenly or normally distributed.
5.3.2 Stationary and Unit Root Tests Results
We subjected the variables in the model to a stationarity test as part of the necessary
diagnostic check and to ensure that our model is specified correctly. If the variables are not
stationary that is, having a unit root, ordinary least squares (OLS) cannot estimate the
coefficients in the model efficiently. It is only when economic variables are either
stationary or corrected and made stationary that they can be suitable for economic analysis,
forecasting and making policy decisions. This test was carried out in line with the
procedure of Dickey and Fuller (1981) in which test of test of null hypothesis of unit roots
are carried out via three test equations models namely; (1) no intercept and no trend (2)
intercept (3) intercept and trend. Accepting or failing to accept the null hypothesis is
hinged on the result of the t-statistics and p-values of the Augmented Dickey Fuller (ADF)
statistics; if the p-value is significant i.e. less than 0.05 and the t-statistics is greater than
the critical value (in absolute terms), we fail to accept the null and vice versa.
Another key reason for carrying out these tests is to determine the integration order
of the variables in the model. It is pertinent to note that integration order is determined by
taking the first or second difference of the variables and also the autoregressive function in
the statistical software (eviews 5.1) does the differencing and not the ADF test. The
variables all have an integration order of I
1
.
Table 5.2 Unit root test of agricultural output for stationarity at first difference
Variable Statistic
Model (1)
ADF None
Model (2)
ADF
Intercept
Model (3)
ADF Trend and
Intercept
Log (output)
5 percent sig level -1.9654 -2.9810 -3.5950
ADF

-2.1368 -5.8028 -6.3071


Probability 0.0340 0.0001 0.0001
Ho: D log (output) has a unit root
Results in Table (5.2) shows that agricultural output is made stationary after first
differencing, we choose model (2) because its p-value is more significant than that of
model (1) even though they both meet the condition of t-statistics been less than the
critical value. Due to results obtained we therefore reject the null hypothesis.
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38
Table 5.3 Unit Root Test of Labor for Stationarity at First Difference
Variable Statistic
Model (1)
ADF None
Model (2)
ADF Intercept
Model (3)
ADF Trend and Intercept
Log (labor)
5 percent sig level -1.9544 -3.0049 -3.6450
ADF

-2.4680 -0.9926 -14.752


Probability 0.0158 0.7373 0.0000
H
0
: D log (labor) has a unit root
Results in Table (5.3) shows that labor is made stationary after first differencing, here
we choose model (1) as it meets the conditions required to reject the null hypothesis.
Therefore, we the null hypothesis of unit root is rejected.
Table 5.4 Unit Root Test of FDI for Stationarity at First Difference
Variable Statistic
Model (1)
ADF None
Model (2)
ADF Intercept
Model (3)
ADF Trend and Intercept
Log (FDI)
5 percent sig level -1.9544 -2.9810 -3.5950
ADF

-4.6297 -5.0351 -4.9915


Probability 0.0001 0.0004 0.0024
H
o
: D log (FDI) has a unit root
Results in Table (5.4) shows that FDI is made stationary after first differencing, here
we also choose model (1) as it meets the conditions required to reject the null hypothesis.
Therefore, we the null hypothesis of unit root is rejected. In the three cases, we reject the
null hypothesis (H
o
). (Mackinnon, 1994) critical value for rejection of hypothesis of unit
root applied. ADF

is the critical value and D means differencing.


Source: Authors estimation using Eviews 5.1
5.3.3 Co-integration Test Results
Since all the variables have the same order of integration, the next step will be to
obtain the number of co-integrating vector(s) and determine if our model is or is not a co-
integrated model. To do this, we will employ Johansen-Juselius maximum likelihood
method of co-integration. If our model is co-integrated, then VECM, a restricted form of
VARs will have to be used but if not, we continue with the unrestricted model. The
implication of the variables if found to be co-integrated means that they all share a
common stochastic trend and will grow proportionally, in order words, a long run
relationship exist amongst them. The JJ maximum likelihood test will be done on the
variables in their non-stationary form.

39
Table 5.5 Unrestricted Cointegration Rank Test (Trace)
Hypothesized No. of
CE(s)
Eigenvalue Trace Statistic 0.05 Critical Value Prob.**
None * 0.768647 51.24535 29.79707 0.0001
At most 1 0.441895 14.65010 15.49471 0.0667
At most 2 0.002792 0.069893 3.841466 0.7915
Trace test indicates 1 cointegrating equation(s) at the 0.05 level
denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
For unrestricted co-integration rank test (Trace): We reject its H
o
on No CE while
we fail to reject the H
o
s on At most I CE and At most 2 CEs. The Trace test indicates
one co-integrating equation (CE) at 0.05level.
Table 5.6 Unrestricted Cointegration Rank Test (Maximum Eigenvalue)
Hypothesized No.
of CE(s)
Eigenvalue Trace Statistic 0.05 Critical Value Prob.**
None * 0.768647 36.59525 21.13162 0.0002
At most 1 * 0.441895 14.58020 14.26460 0.0446
At most 2 0.002792 0.069893 3.841466 0.7915
Max-eigenvalue test indicates 2 cointegrating equation(s) at the 0.05 level
denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
For unrestricted co-integration rank test (Maximum Eigenvalue): We reject its H
o
on
No CE and At most 1 CE but fail to reject H
o
for At most 2 CEs. The Maximum
Eigenvalue test indicates two CEs at 0.05level.
Other ways to conclude on this test would be to follow the number of CEs determined
or to identify the number of rejections (*) from both tests. Equal number of CEs or equal
number of rejections supports for VECM while unequal number of CEs or rejections
supports VAR. We can deduce that agricultural output, labor and FDI do not have a
stochastic trend justifying our use of a VAR model.
5.3.4 Model Stability Diagnostic Check
Statistically, there is a strong linkage between model stability, forecasting, and policy
analysis. It is imperative to diagnose the residuals of an autoregressive model through its
roots to verify the absence of serial correlation and normality of distribution.
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40

Figure 5.1 AR roots of characteristic polynomial

Figure 5.1 shows the graphical representation of the AR roots using a complex
coordinate system. It explains that the VAR model does not have a root outside the unit
circle implying that our model satisfies the stability condition.
5.3.5 Residual Test
Table 5.7 Residual Test Results
Lags LM-Stat Prob
1 11.64723 0.2339
2 14.11512 0.1183
probs from chi-square with 9 df
Ho: no serial correlation at lag order h
Table 5.7 above shows results of residual test, we fail to reject H
o
to further confirm
there is no serial correlation of the residuals.
Source: Authors estimation from E-views 5.1
5.3.6 VAR Model Estimation Results
Every VAR environment has an equation for each of the variables; our main interest
was the equation where agricultural output is the dependent variable and lags of all the
variables as independent variables. The VAR estimates do not present the p-values for
testing the corresponding parameters. However, based on each value of the t-statistics, it is
easy to conclude whether or not a lagged variable has a significant adjusted effect on the
corresponding dependent variable, by using a critical point of t
0
= 2 or 1.96. For example,
if |t
0
| > 2, or 1.96, then it can be concluded that the corresponding independent variable has
a significant adjusted (partial) effect. Based on the t-statistics values, OLS estimates reveal

41
that only the first lag of output is significant to explain variability in output while the other
independent variables are not significant.
However, the model has an R
2
of 95.94 percent indicating that it is nicely fitted, a DW
value of 2.27 showing that the residuals in the model are not serially or auto correlated and
an adjusted R
2
of 94.66 percent meaning that about 5.33 percent of the variability in
agricultural output coming from other factors were not observed in this model. For the
sake of brevity the results of the vector autoregression estimates is presented at as
appendix (A), p-values of Coefficients presented as appendix (B) and Lag length selection
criteria results presented as appendix (C).
5.3.7 Wald Test results
Wald test is an econometric property of time series variables used to test joint
significance of several independent variable coefficients on the dependent variable.
Table 5.8 Wald Test Results
Wald Test:
System: Untitled
Test Statistic Value df Probability
Chi-square 0.721276 2 0.6972
Null Hypothesis Summary:
Normalized Restriction (= 0) Value Std. Err.
C(3) 0.013480 0.109125
C(4) -0.053250 0.092126
Restrictions are linear in coefficients.
Table 5.8 shows results of Wald test of joint significance on both lags of FDI. The null
hypothesis of this test is that the combination of coefficients is not significant to explain
variability in the dependent variable. In this case, we accept the null as the p-value of chi-
square is greater than 0.05.
5.3.8 Impulse response Function Results
The figures below are the graphical representation of the impulse response function; the
ordinates indicate the fluctuations caused by impacts of the units, while the abscissa shows
the duration of fluctuations. The solid line represents the response function curve or forecast
estimates while the two dotted lines define the 95 percent confidence interval. IRF helps to
2013
42
determine in what manner or for how long each of these variables affect each other if a
shock is applied to the innovations or residual. The shock is applied to the residuals by
giving them One Standard Deviation 2S.E. Ordering of variables is very important when
using IRF and therefore Cholesky dof adjusted was used to carry out ordering.

Figure 5.2 Response of log (FDI) to log (FDI)
Figure 5.2 explains that given one standard deviation of FDI after positive impact, it
responds by trending downwards. In the first phase the response value is 23.50 percent, in
the fourth phase; response is zero and afterwards goes negative. This means that if FDI
increases over time, due to influence of certain conditions, its contribution would weaken
and after a certain period the influence would become counterproductive hindering its own
growth. It shows that FDI inflows in the agricultural sector are not smooth and easily
affected by other conditions.

Figure 5.3 Response of log (LABOR) to log (FDI)
In figure 5.3, at the beginning, the response value of labor on the shock or impact of
FDI is zero, and slides to the minimum value -0.20 percent in the seventh session as its

43
greatest response to the shock. Here the IRF is negative indicating that if the current FDI
increases due to impact of certain conditions the agricultural sector will reduce
unemployment for the next seven years or lags.


Figure 5.4 Response of log (OUTPUT) to log (FDI)
Figure 5.4 shows the response of output to a shock of FDI. Its highest fluctuation is at
the second session while the lowest is at the third session where a sharp negative trend is
observed before it again heads towards the center. The response value of output is close to
zero, that is, if the current FDI increases due to impact of certain conditions, it does not
result in any change in output, either current or during the subsequent lag.
5.3.9 Variance Decomposition
Variance decomposition literarily means breaking the variance of the error of forecast
for each variable into several components. It is a structure that helps to analyze
contribution rate of the impact of each structural change on the endogenous variable
(usually measured by variance).
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44

Figure 5.5 percent log (FDI) variance due to log (FDI)
Figure 5.5 shows that in the first five periods, the change of FDI is mostly due to its
own contribution with volatility of variance between 53 -100 percent. This indicates that
pre-FDI investment in the agricultural sector has a decisive impact on the latter part of the
changes. Starting from the sixth period, the change of FDI depends on other factors, that is,
other factors play a decisive role on the change of FDI. Without considering the
contribution of FDI on its own, other factors (including labor, output, etc.) in the tenth
period contributes the change in quantity of the food reserves up to 64.92 percent, with
outputs contribution up to the maximum 53.5 percent, while the labor contribution of FDI
is very small.

Figure 5.6 percent log (LABOR) variance due to log (FDI)
Figure 5.6 explains that FDIs contribution on the variance of the labor shows an
increasing trend, up to 9.5 percent in the first period, with increase of lag phases, FDI has
a greater impact on the labor movements, and in the tenth period, its contribution is up to
the rate of 41.14 percent.

45

Figure 5.7 percent log (OUTPUT) variance due to log (FDI)
Figure 5.7 explains that FDIs contribution on the variance of output is close to zero,
indicating that FDI has an weak impact on the output of agricultural sector, fluctuating
between 0.26 percent -0.39 percent, virtually negligible. The effect of FDI on output is
consistent all through the lag phases.
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46
6 SUMMARY AND CONCLUSION
6.1 Conclusion of Research
The relationship between agriculture FDI and agricultural sector production in
Nigeria is a new area of study. We find support for the view that there is a very low level
of FDI that flows into the agricultural sector of Nigeria. For each of the hypotheses posed
in this study, we establish the following findings; first, that FDI inflow to the agricultural
sector does not significantly affect the output of the agricultural sector while it has a
positive significant relationship on labor generation. Second, that FDI inflow to the
agricultural sector does not have a complimentary long-run relationship with output of the
agricultural sector while a complimentary long-run relationship exits with labor generation.
Therefore in respective order, we reject the first null hypothesis while we accept the
second null hypothesis and also we reject the third null hypothesis while we accept the
fourth null hypothesis. The reason for this non-significant relationship between FDI
inflows into the agricultural sector and the sectors output could be a combination of two
factors. First, because of the low level of FDI in the agricultural sector and second, the
type of FDI that flows into the sector is not technology-oriented, i.e. the kind of FDI that
the sector receives focuses more on enhancing the sectors capacity and capability of
providing jobs for the unemployed (irrespective of how crude or meager these jobs might
be) and focuses less on the providing the necessary level of technology required to
improve output in the sector.
Thus, we conclude that if Nigeria wants to increase the level of production and
holistically develop its agricultural sector, open policies towards FDI are important.
Nigeria does have a preponderance of human resources and natural resources, such as
water, and land which enhances the ability to produce primary agricultural products.
However, the expansion of agriculture production, reduction in reliance of import, and
attainment of food security requires capital, energy, technology, and international business
connections. It is the second list that Nigeria is lacking. FDI can serve as a ready supply of
such inputs.

47
6.2 Policy Recommendations
Based on the review of literature and empirical analysis, and findings of this research
study, the followings policies are recommended to reduce the barriers to FDI significance
in the agricultural sector of Nigeria.
1. Government should seek for more FDI into the agricultural sector since the success
of sector is essential to the attainment of a truly diversified economy in Nigeria.
Factors such as foreign ownership restrictions and multiple corporate taxes that
scare the investor from investing should be reviewed and addressed.
2. Government should not just focus on attracting FDI to the sector but attract the
type of FDI that seeks to enhance domestic capacity or domestic investment.
3. Government must further target specific types of FDI that are able to generate
spillover effects in the entire value chain of the agricultural sector and by extension
the overall economy.
4. Government should provide more funding and support for universities, colleges
and other research and development (R & D) institutions so that new innovations
can be created. The growth and competitiveness of a sector thrives on its
innovations. Where innovation is constantly occurring, there FDI will be attracted.
Overall, good corporate governance and the rule of law must be allowed to prevail so
as to not only attract FDI but to ensure that the agenda, aims and objectives of all
stakeholders are met.
6.3 Recommendations for Further Study
Diversification of the economy is the burning issue in Nigeria. This study is not an
attempt to provide all the answers to why FDI is not significant in the agricultural sector
of Nigeria. However, a more detailed research into the various sub-sectors i.e. crop,
livestock, fishery and forestry should be conducted to ascertain the sub-sector to which
FDI can best be channeled in order to maximize output.
2013
48
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ACKNOWLEDGEMENT
All glory to God Almighty, the One who has blessed me with this privilege and given
me the enablement to see this programme to its completion.
My sincere appreciation goes to the government and people of the Peoples Republic of
China and most especially the Chinese Scholarship Council for affording me this
opportunity.
I wish to appreciate my erudite supervisor in person of Professor Liu Ying for
showing so much interest in the smooth running of my studies and my overall wellbeing in
China. I also wish to acknowledge all staff of the department of international cooperation
& exchange for their coordination and timely assistance whenever sought.
I graciously thank my family for all their support and encouragement-my parents (Mr.
Mrs. M.A Idowu), my uncle & aunt (Cmdre. & Mrs. S.R Shekoni), Uncle Jide Idowu, my
siblings, and my heartthrob Mrs. Oluwafifunmike Ayomideji Idowu. I love you all.
I also wish to express humble thanks to my colleagues and friends on campus, top on
the list is Wang Yi Zhou, Izuchukwu, Rebecca Agboola, Alhaja Modinat Adekoya, Aishat
Biu, Rosina Heita, He Ya Qing who translated the abstract of this dissertation into Chinese,
Huang Zhou Qin, Xiang Ai, Chen wen Qiong, Xiang Yong and a host of others.


Idowu Ayodeji Adetunji
06 June, 2013

55
APPENDIX A: VECTOR AUTO REGRESSION ESTIMATES
Vector Autoregression Estimates
Date: 11/07/12 Time: 16:24
Sample (adjusted): 1982 2007
Included observations: 26 after adjustments
Standard errors in ( ) & t-statistics in [ ]


LNOUTPUT LNFDI LNLABOUR


LNOUTPUT(-1) 0.638533 0.334022 -0.000251
(0.22321) (0.43059) (0.00253)
[ 2.86064] [ 0.77573] [-0.09904]

LNOUTPUT(-2) 0.324468 0.562524 0.002344
(0.24657) (0.47565) (0.00280)
[ 1.31590] [ 1.18263] [ 0.83794]

LNFDI(-1) 0.013480 0.490306 -0.000505
(0.10913) (0.21051) (0.00124)
[ 0.12353] [ 2.32915] [-0.40814]

LNFDI(-2) -0.053250 0.108833 -0.000831
(0.09213) (0.17772) (0.00105)
[-0.57801] [ 0.61240] [-0.79522]

LNLABOUR(-1) -11.15661 43.69148 1.560900
(13.6502) (26.3320) (0.15485)
[-0.81732] [ 1.65926] [ 10.0803]



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LNLABOUR(-2) 11.76359 -25.42161 -0.563604
(14.7649) (28.4822) (0.16749)
[ 0.79673] [-0.89254] [-3.36499]

C -4.992999 -179.8332 0.009863
(51.9517) (100.217) (0.58933)
[-0.09611] [-1.79443] [ 0.01674]


R-squared 0.959430 0.961488 0.977742
Adj. R-squared 0.946619 0.949326 0.970713
Sum sq. resids 0.281941 1.049165 3.63E-05
S.E. equation 0.121815 0.234988 0.001382
F-statistic 74.88818 79.05879 139.1033
Log likelihood 21.92161 4.838918 138.3777
Akaike AIC -1.147816 0.166237 -10.10598
Schwarz SC -0.809098 0.504955 -9.767260
Mean dependent 11.25560 6.269081 9.437347
S.D. dependent 0.527239 1.043888 0.008075


Determinant resid covariance (dof
adj.) 1.19E-09
Determinant resid covariance 4.63E-10
Log likelihood 168.7285
Akaike information criterion -11.36373
Schwarz criterion -10.34758



57
APPENDIX B: P-VALUES OF COEFFICIENTS IN VECTOR
AUTO REGRESSION MODEL
System: UNTITLED
Estimation Method: Least Squares
Date: 11/08/12 Time: 18:32
Sample: 1982 2007
Included observations: 26
Total system (balanced) observations 78


Coefficient Std. Error t-Statistic Prob.


C(1) 0.638533 0.223214 2.860638 0.0059
C(2) 0.324468 0.246575 1.315902 0.1935
C(3) 0.013480 0.109125 0.123526 0.9021
C(4) -0.053250 0.092126 -0.578006 0.5655
C(5) -11.15661 13.65025 -0.817319 0.4171
C(6) 11.76359 14.76488 0.796728 0.4289
C(7) -4.992999 51.95169 -0.096109 0.9238
C(8) 0.334022 0.430590 0.775732 0.4411
C(9) 0.562524 0.475654 1.182632 0.2419
C(10) 0.490306 0.210508 2.329154 0.0234
C(11) 0.108833 0.177716 0.612398 0.5427
C(12) 43.69148 26.33198 1.659255 0.1026
C(13) -25.42161 28.48217 -0.892545 0.3759
C(14) -179.8332 100.2173 -1.794433 0.0780
C(15) -0.000251 0.002532 -0.099039 0.9215
C(16) 0.002344 0.002797 0.837942 0.4056
C(17) -0.000505 0.001238 -0.408145 0.6847
C(18) -0.000831 0.001045 -0.795220 0.4298
C(19) 1.560900 0.154846 10.08033 0.0000
C(20) -0.563604 0.167490 -3.364995 0.0014
C(21) 0.009863 0.589331 0.016736 0.9867


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58
Determinant residual covariance 4.63E-10



Equation: LNOUTPUT = C(1)*LNOUTPUT(-1) +
C(2)*LNOUTPUT(-2) + C(3)
*LNFDI(-1) + C(4)*LNFDI(-2) + C(5)*LNLABOUR(-1) +
C(6)
*LNLABOUR(-2) + C(7)
Observations: 26
R-squared 0.959430 Mean dependent var 11.25560
Adjusted R-
squared 0.946619 S.D. dependent var 0.527239
S.E. of regression 0.121815 Sum squared resid 0.281941
Durbin-Watson stat 2.265008

Equation: LNFDI = C(8)*LNOUTPUT(-1) + C(9)*LNOUTPUT(-
2) + C(10)
*LNFDI(-1) + C(11)*LNFDI(-2) + C(12)*LNLABOUR(-1) +
C(13)
*LNLABOUR(-2) + C(14)
Observations: 26
R-squared 0.961488 Mean dependent var 6.269081
Adjusted R-
squared 0.949326 S.D. dependent var 1.043888
S.E. of regression 0.234988 Sum squared resid 1.049165
Durbin-Watson stat 2.136775

Equation: LNLABOUR = C(15)*LNOUTPUT(-1) +
C(16)*LNOUTPUT(-2) +
C(17)*LNFDI(-1) + C(18)*LNFDI(-2) +
C(19)*LNLABOUR(-1) + C(20)
*LNLABOUR(-2) + C(21)
Observations: 26

59
R-squared 0.977742 Mean dependent var 9.437347
Adjusted R-
squared 0.970713 S.D. dependent var 0.008075
S.E. of regression 0.001382 Sum squared resid 3.63E-05
Durbin-Watson stat 1.999177


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APPENDIX C: LAG LENGTH SELECTION CRITERIA
VAR Lag Order Selection Criteria
Endogenous variables: LNFDI LNLABOUR
LNOUTPUT
Exogenous variables: C
Date: 11/11/12 Time: 05:24
Sample: 1980 2007
Included observations: 26


Lag Log L LR FPE AIC SC HQ


0 62.35055 NA 2.09e-06 -4.565427 -4.420262 -4.523624
1 154.3934 155.7648 3.54e-09 -10.95334 -10.37268* -10.78613
2 168.7285 20.95137* 2.43e-09* -11.36373* -10.34758 -11.07112*


* indicates lag order selected by the criterion
LR: sequential modified LR test statistic (each test at 5%
level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion