Do democratic institutions and foreign direct investment affect economic growth? Evidence from Nigeria

Abstract

A reciprocally re-enforcing relationship exists between institutions, foreign direct investment and economic growth. The importance of sound democratic institutional structures and foreign direct investment for enhancing economic growth is well documentedin literature. Sound institutional framework which supports foreign direct investment is significant for driving rapid economic growth. Important factors that have undermined rapid and sustained economic growth are the weak institutional structure, decrepit state capacity and low level of foreign direct investment in Nigeria. Democratic structures reflected in the rule of law, effectiveness and predictability of the judiciary and enforce ability of contract proceedings is imperative for accelerating economic growth. It is against this backdrop that this study is empirically based. Employing the Generalized Method of Moments (GMM) estimation techniques on annual time series data covering the period from 1981 to 2015, the relationship between these variables was empirically investigated. The empirical findings reveal that democratic institutions and foreign direct investment are significant variables for driving rapid economic growth in Nigeria. In particular, the results, using Nigerian data, show that weak institutions have a destabilizing impact on growth. The impact of FDI, on the other hand, is found to be positive and significant. Against the background of these findings, we recommend sound institutional framework as well as appropriate and consistent macroeconomic policies that encourage foreign direct investment to propel rapid economic growth in Nigeria.

Keywords: Democratic Institutions, Foreign direct investment, Economic growth, GMM