The Determinants and Impacts of Foreign Direct Investment in Nigeria

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