The Determinants and Impacts of Foreign Direct Investment in Nigeria

This paper examines the determinants and impact of FDI in Nigeria from 1970 through 2009. As a tool foreconomic development and means of bridging the gaps between the rich and poor nations, emerging economiesgrant special incentives to attract FDI, but the empirical literature is controversial about the effect of FDI on thegrowth and development of emerging economies. This study utilizes the Vector Error Correction Model (VECM)to examine this issue. Granger causality methodology was used to analyze and establish the nature ofrelationship (if any) between FDI and its determinants on one side and economic development on the other. Ourempirical analysis reveals that macroeconomic variables (exchange rate, interest rate, inflation) and openness ofthe economy are among the major and important factors that determine the inflow of FDI into Nigeria duringthese periods. The GDP and government size exhibited positive but insignificant influence on FDI. Theanalysis revealed the presence of a long-run equilibrium relationship between FDI and GDP, but FDI does nothave any significant effect on the growth as well as the development of Nigeria economy during this period. Thestudy therefore recommends that government should ensure stable macroeconomic policies (as motivating factorfor the attraction of FDI into Nigeria) and also increase its expenditure in the area of infrastructural developmentas ways to accelerate the growth of Nigerian economy which will reduce the excessive dependence of Nigeria onFDI.