ANALYSIS OF DETERMINANTS AND IMPACT OF FOREIGN DIRECT INVESTMENT ON NIGERIAN ECONOMY (1981-2013)

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ANALYSIS OF DETERMINANTS AND IMPACT OF FOREIGN DIRECT INVESTMENT ON NIGERIAN ECONOMY (1981-2013)

ABSTRACT

This work investigates the determinants and impact of Foreign Direct Investment (FDI) on Nigerian economy. FDI has become a debatable and topical issue across the globe because of its key role in bridging the savings gap in Least Developed Countries (LDCs). Theoretical argument that savings translate to investment is well documented in literature. Two fundamental issues concerning the potential importance of FDI in LDCs development process has remain unresolved. Firstly, does FDI really contribute to attainment of economic growth in host country as argued by the proponents of the modernization theory? Secondly, as the dependency theorists assert that FDI, although may spur short term economic growth, will generate and accelerate internal distortions that will it ultimately depress or even retard the host country’s economic growth? Based on these arguments, the study investigated the determinants and impact of foreign direct investment on Nigerian economy by analyzing in addition the composition and trend of FDI inflow to Nigeria from 1981 to 2013. Using the dual gap and Solow growth models as theoretical framework, the quantile regression analysis was used to examine the behavior of the variables of interest; such as fiscal deficit, openness, investment in infrastructure, net foreign indebtedness and external reserve. From the result, using the two models; all the variables were statistically significant at upper quantiles which implies that high GDP motivates inflow of FDI to Nigeria at different levels (1%, 5% and 10%) except external reserve which is not statistically significant in q95 with coefficient value of 2.530. In addition, on the impact of FDI, the result revealed that FDI is not statistically significant in q5, q25,and q50 with coefficient values of 2.0351, 1.3403 and -0.9472 respectively. The result in the last two quantiles (q75 and q95) shows that FDI is statistically significant with coefficient values of -1.1307 and -8.0836 at 5% level of significance. Finally, it was found that FDI inflows are mainly in the mining and manufacturing sectors as shown by the composition and trend analysis, others sectors such as agriculture, building and constructions are yet to benefit from the FDI inflows significantly. Based on these key findings, it is therefore recommended that government should relax pre-investment laws and implement tax concession policy so as to attract FDI to these sectors.

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Theoretical arguments abound on the role of foreign direct investment (FDI) in an economy which suggests that foreign direct investment provides an important source of foreign exchange earnings needed to augment inadequate finance (savings) for domestic investments. Also, FDI provides the import substitution that would help to reduce the import bills thereby conserving the foreign reserve while investment in export promotion industries will increase the country’s foreign exchange earnings (Todaro, 1994).According to the neoclassical school of thought, FDI fills the gap between targeted government revenue and locally raised taxes by taxing multinational corporations (MNCS), government are able to realize financial resources for developmental purposes. Hansen and Rand (2006), stressing the role of FDI shows that it has been a good source of improving efficiency of the productive sector through stimulation of economic growth and job creation.

Flows of foreign capital to developed and developing nations have continued to be a topical issue in literature. However, given its key role as driver in fostering growth, such capital had almost dried up between 1972 and 1985 in Nigeria because of public policies introduced by government which were considered to be anti foreign direct investment. The policy drive resulted to debt crisis as government and private investors embarked on massive foreign loan (Anyanwu; 1998).However with the introduction of SAP in 1986, Nigeria began to receive once more substantial flow of foreign investment capital.

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