After the finish of common war of Somalia, the integration of the nation with the worldwide economy expanded and Somalia has begun to attract with a bigger inflow of foreign direct investment (FDI). FDI is expected to profit the creating economy by supplementing domestic investment, producing work and through the exchange of innovation. Numerous Studies researched the impact of foreign capital on economic growth in developing countries and a number of them got that negative relationship between the impact of FDI and Economic development at the same time others discovered a positive relationship between FDI and Economic development. However, this thesis observes the impact of FDI on economic growth in Somalia by definite sectoral information for FDI inflows to Somalia over the period 1980-2017s. Different Regression Analyses were used to quantify the relationship between independent (FDI) and dependent variables (macroeconomic indicators). The outcomes got in this exploration indicate a negative connection between FDI and economic growth and possibly a concern for the government of Somalia. The government might focus on necessary modifications and guiding principle suggestion to build foreign investment more gainful. The consequence of this is that the policy connection between real GDP and FDI is fragile and there is a requirement for policy to ensure provision of satisfactory infrastructure to increase the potential advantage of FDI in Somalia.
Keywords: Foreign Direct investment, Economic growth, Somalia, Empirical analysis
The influence of external direct investment on economic development has been a fascinating concern for numerous decades. In African economy, foreign direct investment has played a dynamic role, and the politician trusts that foreign direct investment increases the production of host nations and enhances growth. Foreign direct investment (FDI) is a direct investment into manufacture or commercial in a country by an individual or company of another state, either by purchasing a firm in the target country or by increasing operations of an existing commercial enterprise in that country. This study paper similarly will be the emphasis on how to change foreign direct investment in the extended run and seasonal period over time and effected financial development in Somalia.
1.1 Background of the Study
Foreign direct investment (FDI) plays a crucial role in economic growth. The increase in worldwide production is driven by financial and technological forces. It is also driven by the ongoing liberalization of foreign direct investment and business policies. In this context, globalization gives an exceptional opportunity for developing countries to succeed faster financial development through trade and investment. In the period 1970s, global trade grew more rapidly than FDI, and accordingly, worldwide trade was by far than most other significant international economic activities. This situation changed dramatically in the middle of the 1980s when world FDI started to extend sharply. In this period, the world FDI has increased its significance by shifting technologies and setting up marketing and gaining networks for competent production and procuring networks for efficient manufacture and sales internationally through FDI, foreign investor’s profits from consuming their assets and resources efficiently, while FDI recipients benefit from acquiring technologies and from receiving involved in international production and trade networks. While global FDI flows improved by 25% during 1991-2009, developing countries as a group show an FDI increase of 22% at constant prices (world developing report 2010). FDI flows to poor countries increased to almost 5% of GDP. However, FDI offers much-needed incomes to growing countries such as capital, technology, managerial skills, entrepreneurial ability, brands, and access to markets. These are important for growing countries to industrialize, develop, and create jobs attacking the poverty situation in their countries. As a result, most growing countries recognize the potential value of FDI and have liberalized their investment regimes and engaged in investment upgrade activities to attract various. Globalization and regional integration arrangement can change the level and pattern of FDI and also it decreases the trade costs. However, FDI flows to developing countries started to pick up in the mid-1990s mostly as an outcome of progressive liberalization of FDI regulates in most of these countries and the acceptance of generally more outward-oriented policies. Foreign Direct Investment (FDI) affects the financial development of growing countries positively through the transfer of capital, and technology. It increases activity not only in FDI beneficiary firms. The influence can spread to other companies in the country and sectors through technology spillover, human and capital creation and increasing competition, accordingly raising productivity for the entire economy (A., 2011).
In Sub-Saharan Africa as a whole, whole inward FDI stock has improved from $29.8 billion in 1980 to $317.2 billion in 2009, a relatively lesser increase of ten-fold. This shows that the region has not been as successful at attracting FDI as other parts of the developing world. However, FDI has become a significant part of the discourse on development in Africa. The New Partnership for Africa’s Development (NEPAD), a program set up by a group of heads-of-state from across the continent in 2001, comments that in order to achieve the estimated 7 per cent annual growth rate needed to meet the IDGs (International Development Goals) particularly, the aim of reducing by half the proportion of Africans living in poverty by the year 2015 – Africa needs to fill an annual resource gap of 12 per cent of its GDP, or US $64 billion” (UNCTAD, 2014).
Somalia has a special case about the constitution, according to the developed or even developing countries because Somalia’s constitution includes of three parts Sharia law, customary law and formal law which to the same as pre-colonial constitutions. Customary law is a local law which is mostly used by clans to solve their dispute among themselves but similarly used to share incomes and to solve social and civil matters. Sharia law is based on Hadith and Koran. Each action linked to decision making either concern government administration, or social matter, must obey to the Koran and Hadith. All issues opposite to the Koran and Hadith have not been considered in Somalia even if they are very crucial for nation’s economy and social growth. Official law system in Somalia doesn’t encourage the standard feature of commercial law as it’s shown in the rest of the world. Because the Somali’s official law mostly influenced by colonial power especially British and Italian and many chapters in formal law formed by the military regime that ruled Somalia from 1969 to 1991.after the 1991 military regime was destroyed and this formed to support the influence of customary law because of the absence of law and order in much of Somalia over the past 20 years. However, the customary law does not focus on the importance of updated commercial law either and has tended to defend the interests of the local business choice while competition and the principles of opportunity. In 2014 FDI in Somalia was declined, according to report from (UNACTAD) in 2015 United Nations Conference on Trade and development. The report displays that the FDI inflows to Somalia were documented a 7 percent to decline 106 million US dollars in the last year compared to 107 million US dollars attracted in 2013. In the 2014 FDI report, the significance of services in the international investment landscape is emphasized as the result of a long-term structural trend.
The outcomes got in this exploration indicate a negative connection between FDI and economic growth and possibly a concern for the government of Somalia. The government might focus on necessary modifications and guiding principle suggestion to build foreign investment more gainful. The ramification of this is that the policy connection between real GDP and FDI is frail and there is a requirement for an arrangement to guarantee arrangement of satisfactory foundation to boost the potential advantage of FDI in Somalia.
Based on World Bank data the GDP of Somalia in 2015 was approximately US$ 5,925 million, up from the US $ 5,647 million 2014 and representing an increase of 5% in nominal terms. In addition, the consumer price index declined from 1.3% in 2014 to 1% in 2015 due to lower commodity prices, including oil. Household consumption expenditures and remittances are estimated to constitute the greatest part of GDP. Imports were estimated to be 60% of GDP, while exports were 14.5%. This imbalance between imports and exports has led to a deficit that is usually financed by foreign aid from donor countries.
However, with increased stability, foreign direct investment in Somalia is expected to grow in the coming years, yet current levels remain low, with USD 107 million inflows in 2013. The Somali government views foreign investment as a key component of rebuilding the economy, and actively encourages new investors. They have released multiple statements to this effect and hosted conferences to promote Somalia as an attractive investment opportunity.
1.2 Problem of the study
This study sought to assess the impacts of foreign direct investment projects on economic growth in Somalia, so it is generally understood that economic growth relies directly on both local and foreign investments (Andenyangtso, 2005). Similarly, the level of inflow of FDI relies on the rate at which the economy of the country wishing to attract FDI is growing. It is thought to be a relationship between investment and economic growth in Somalia. Equally, practical studies of the effect of FDI on GDP are concerned with the overall effect FDI in Africa, or with specific aspects of the FDI impact on employment, technology, trade, entrepreneurship and other areas of the economy, such as infrastructures, education, and health. Thus, the impact of FDI on economic growth remains unclear. Many years of war and destruction damaged all infrastructures in Somalia and formed many problems for economy, social and political systems. Although having plentiful of natural resource, the country is still dependent on foreign aid to run its economic and political activities. Foreign direct investment plays an essential role in the economic growth of Somalia. Earlier studies did not completely give details the relationship between FDI and economic growth in the country so there is a gap between in the literature review, therefore, the study examines the impact of FDI on economic growth in Somalia.
1.3 Purpose of the Study
The aim of the research is to investigate whether there is an impact of Foreign Direct Investment (FDI) on the economic growth of Somalia. This will be talented by carrying out a historical and numerical analysis of the connection involving the trend of FDI inflow and its impact on Economic growth in Somalia.
1.4 Objectives of the Study
1. To investigate the impact of Foreign Direct Investment (FDI) on economic growth
2. To identify the relationship between Foreign Direct Investment (FDI) and economic growth
3. To understand the importance of foreign direct investment on economic growth
1.5 Research questions
1. What is the impact of Foreign Direct Investment (FDI) on economic growth?
2. What is the relationship between Foreign Direct Investment (FDI) and economic growth?
3. What is the importance of FDI on economic growth?
1.6 Significance of the Study
Based on the meaning of this research, it tries to study the role of FDI in economic growth in Somalia. Therefore, this research paper will determine the right result of Foreign Direct Investment on Economic growth in Somalia and it will be played a vital role an important contribution to existing literature related to Economic growth in Somalia and its determinants. Finally, this study will contribute to the policies encourage the role of determinants of economic growth. Thus, encourage and sustain economic growth in the county.
1.7 Scope of the Study
The study was confined to the impact of foreign direct investment (FDI) on economic growth in Somalia. The study covered 35 years from 1980 to 2015 and exclusively used secondary data. The data will be collected using questionnaire by the researcher. The questionnaires will be distributed exclusively by the investigator and analysis carried out. The survey is expected to generate a wealth of data / information which will be subjected to detailed analysis to assess the extent of compliance with the range of requirements laid down in the research.
1.8 Limitation of the Study
Every research has limitations because the researcher is human being, and it is not possible to expect every research conducted to be perfect. Limitations of the study were the difficult of getting respondents understand questionnaires which were written in English hence need for translation to Somali.
1.9 Assumptions of the study
This study was undertaken based on some key expectations. The investigator supposed that all the respondents in the nominated sample will offer complete and truthful feedback within the specified study time frame. It was also expected that the overall security of the target study site will not deteriorate meaningfully as to limit survey forms management by the investigator and his enumeration team during data collection, as well as the secondary data found from numerous publications and records were accurate reliable and valid to enable the researcher to carry out the study.
1.10 Definitions of significant terms
Foreign direct investment (FDI): This is an investment made by a firm or entity based in one country, into a firm or entity based in a different country. This differs from indirect investments such as portfolio flows, where overseas institutions invest in equities listed on a nation’s stock exchange. Firms or entities engaging in direct investments significantly have a degree of influence and control over the firm into which the investment is made (Girma, Gorg, and Pisu, 2008).
Economic growth: According to Haller (2012) economic growth is the process of increasing the sizes of national economies, the macroeconomic indications, especially the GDP per capita, in an ascendant but not necessarily linear direction, with positive effects on the economic-social sector. Economic growth can either be: positive economic growth which occurs when the annual average changes in GDP is higher than average growth of population; negative economic growth which occurs when the population growth is higher than the annual average changes in GDP or zero growth rate is which occurs when the annual average change in GDP is equal to the average change in population.
Gross Domestic Product (GDP):GDP is an approximation of marketplace throughput, totaling together the value of all ultimate goods and services produced and traded for monetary values within a specified period of time (Nadaa, 2008).
1.11 Summary of the chapter
The chapter covers the introduction to the thesis, the background, of the impact of FDI of Somalia, statement of the problem and purpose of this study, objectives of the study, research hypothesis, also the importance of the study, the scope of the study, limitations of the study and assumptions of the study is also covered. The chapter ends with the definition of terms and finally the summary of the chapter. This thesis is comprised of five sections; the first section begins with the introduction, followed by section 2 that provides the literature review while in the third section the methodology of data collection is discussed. Section four analyses the data and finally section five presents the findings of the data, including the conclusion and recommendation for further research.