Capital Account Liberalisation and Foreign Direct Investmentin Nigeria: A Bound-Testing Approach

Abstract

This study focuses on the neoclassical counter-revolution framework to investigate the relationship between capital account liberalisation and foreign direct investment in Nigeria for the periods 1980-2011. The technique of analysis employed is the Bound-Testing Approach. This technique, which was later re-parameterized to investigate the short-run dynamics, is primarily used to ascertain the long-run equilibrium condition among the variables. The results obtained largely supports the neoclassical counter-revolution framework which craves for government involvement in the natural workings of the economy to a minimal level; only for regulatory purposes. Thus, market-based measures towards FDI should be checked with legal/political measures; especially for capital control purposes. More so, the rate of inflation has alternate effect on FDI in Nigeria; implying that the effect of price level on FDI has not been consistent. On the whole, foreign direct investment in Nigeria is found to be driven by non-capital account liberalisation. In effect, the liberalisation of capital account transactions in Nigeria does not matter for FDI; either in the short-run or long-run situation. As such, government should focus on non-liberalising factors such as qualitative governance, price stability and institutional development in order to enhance foreign direct investment in Nigeria.

Key Words: Bound-Test, Capital Accounts, Foreign Investments, Neo-Classical.