Academic journal article American Academic & Scholarly Research Journal

Foreign Direct Investment and Economic Growth in Nigeria: An Empirical Analysis

Academic journal article American Academic & Scholarly Research Journal

Foreign Direct Investment and Economic Growth in Nigeria: An Empirical Analysis

Article excerpt

Abstract. The integration of Nigeria with the global economy increased since the 1990s with greater inflow of foreign direct investment (FDI). FDI is assumed to benefit a developing economy by supplementing domestic investment, generating employment and through the transfer of technology. Studies on the impact of foreign capital on the Nigerian economy, like those of other developing countries remain inconclusive. Most of these studies ignored the possibility of bi-directional causality between foreign direct investment and economic growth. This paper therefore examines the impact of FDI on economic growth in Nigeria, using Vector Auto-regression (VAR) modelling to capture the structure of inter-relationships among relevant variables. The empirical analysis shows that FDI does not granger cause economic growth. Moreover it could not be established that FDI is a statistically important determinant of real GDP in Nigeria. Growth in real GDP is mostly explained by its own shocks. The implication of this is that the policy linkage between real GDP and FDI is weak and there is need for policy to ensure provision of adequate infrastructure in order to maximise the potential benefit of FDI in Nigeria.

Keywords: Foreign Direct investment, Economic growth, Nigeria, Empirical analysis, Openness.


One of the most salient features of today's globalization is the increased flow of capital across the nations. Foreign capital is considered by many countries (especially developing ones) as a major source of resources needed to attain economic growth and development. It is seen as a means of bridging the resources gap inherent in many developing nations. Foreign capital, especially foreign direct investment, is seen as an amalgamation of capital, technology, marketing and management, and thus its role in economic growth and development cannot be overemphasised.

The integration of the Nigerian economy with the global economy increased sharply in the 1990s with the changing economic policies and lowering of barriers to trade and investment. This has led to increased inflow of foreign capital in form of foreign direct investment (FDI) and others. The increased inflows of FDI are expected to result in faster economic growth through trade and investment. Over the years, the inflow of foreign capital to Nigeria has increased tremendously. It rose from N542.3million in 1981 to N2.01 billion in 2005, with the average growth rate of FDI inflows being 10.8% between 1981 and 2006. Despite the phenomenal inflow of foreign capital to Nigeria over the years, the performance of the economy has been epileptic. The economy has remained monocultural, with oil contributing over 60% of GDP on the average since the 1990 and over 90% of the export. It therefore becomes pertinent to examine the impact of foreign direct investment on economic growth in Nigeria

Although there are plethora of studies linking foreign direct investment to economic growth, on Nigeria, with varying outcome [Oseghale and Amokhienam (1987), Oyinlola (1995) and Akinlo (2005) among others], the results from these studies are not unanimous. Some of the studies fail to capture the fact that there could be bidirectional relationship between foreign capital and economic growth. This study therefore contributes to the existing literature by examining the relationship between foreign capital as reflected by FDI, and economic growth in Nigeria using the vector autoregressive analysis (VAR) method. This method enables us to trace the transmission mechanism of FDI to economic growth. Moreover, it permits us to investigate the direction of causality between FDI and economic growth in Nigeria.

The paper consists of five sections inclusive of the introduction, which is the first section. The second section contains the literature review while the third section presents the data description, sources and methodology of analysis. In the fourth section, the estimation procedures and empirical results are discussed. …

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