Analysis of determinants and impact of foreign direct investment on nigerian economy (1981-2013)

Thesis 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.