Determinants of Foreign Direct Investment and Its Causal Effect on Economic Growth in Nigeria

Abstract

Foreign direct investment (FDI) is an important tool for the growth of any economy as it is more stable than several forms of capital flows. The consensus is that it provides the much needed requirement for economic development and growth. However, evidences in Nigeria have shown FDI crowding out of domestic firms and possible contraction in the total industry or employment. Hence, this study primarily examined the determinants of FDI and its causal effect on the economic growth in Nigeria. The study specifically examined the effect of macroeconomic variables as the determinants of FDI in Nigeria as well as examined the causal effect of FDI on economic growth in Nigeria. In line with the objectives set to be achieved, the study used co-integration test and vector error correction model on the time series data collected from 1984 to 2015. The study revealed that foreign direct investment is negatively related to economic growth, export, inflation and interest rate while foreign direct investment is positively related to exchange rate and import. All these variables were statistically significant in determining FDI in Nigeria. The study concluded that FDI has a positive impact on the growth of Nigerian economy. Hence, it is recommended that government of Nigeria should promote import liberalisation through the reduction of tariffs; reduce the importation of consumable and intermediate goods and encourage the local industries to produce such goods.

Keywords:  Foreign direct investment, economic growth, Nigeria