The Determinants and Impacts of Foreign Direct Investment in Nigeria

Abstract

This paper examines the determinants and impact of FDI in Nigeria from 1970 through 2009. As a tool for economic development and means of bridging the gaps between the rich and poor nations, emerging economies grant special incentives to attract FDI, but the empirical literature is controversial about the effect of FDI on the growth and development of emerging economies. This study utilizes the Vector Error Correction Model (VECM) to examine this issue. Granger causality methodology was used to analyze and establish the nature of relationship (if any) between FDI and its determinants on one side and economic development on the other. Our empirical analysis reveals that macroeconomic variables (exchange rate, interest rate, inflation) and openness of the economy are among the major and important factors that determine the inflow of FDI into Nigeria during these periods. The GDP and government size exhibited positive but insignificant influence on FDI. The analysis revealed the presence of a long-run equilibrium relationship between FDI and GDP, but FDI does not have any significant effect on the growth as well as the development of Nigeria economy during this period. The study therefore recommends that government should ensure stable macroeconomic policies (as motivating factor for the attraction of FDI into Nigeria) and also increase its expenditure in the area of infrastructural development as ways to accelerate the growth of Nigerian economy which will reduce the excessive dependence of Nigeria on FDI.

Effects of the Determinants of Foreign Direct Investment in Nigeria: Error Correction Mechanism

“…The distinction of this study from other studies on the determinants of FDI inflows in Nigeria is that there has been a period gap as most studies stopped at 2010 (Wafure and Abu, 2010;Uwubanmwen and Ajao, 2012;Oba and Onuoha, 2013;Ndem et al, 2014). Beyond this period, lots of macroeconomic activities changed such as Nigeria GDP growing to become highest in Africa, depreciation of the Nigerian Naira to US dollar, increase in insecurity across the country which led to increase in military expenditure and fluctuations in government consumption expenditure.…”

“…The result shows that economy openness is insignificant to FDI inflow in Nigeria which is against our apriori expectation. However, various studies such as Uwubanmwen and Ajao (2012); Gichamo (2012); Enu et al (2013); Blonigen and Piger (2014); Ndem et al (2014); Maghori (2014) found positive impact of openness on FDI inflows. The table also shows the result of political stability which has a positive and significant impact on FDI inflow at 1%.…”

“…On the contrary, Oba and Onuoha (2013) showed that GDP does not bring about FDI in Nigeria. While Uwubanmwen and Ajao (2012) and Njogo (2013) found economic growth had a positive but insignificant impact on FDI…”

“…Idowu and Awe (2014) noted that FDI into Nigeria has been relatively low and not encouraging given the high Inflation rate. Dinda (2008); Uwubanmwen and Ajao (2012); Maghori (2014) and Danladi and Uwaifo (2015) found that inflation rate is major determinant of FDI in Nigeria. Ohazulike (2012) found negative but significant relationship with FDI in Nigeria.…”

“…Economic theory posits that FDI is sensitive to domestic interest rate. Uwubanmwen and Ajao (2012) found that interest rate is a major determinant of FDI in Nigeria. Danladi and Uwaifo (2015) found a negative impact of first and second lag interest rate on FDI inflows.…”