Exploring the Impact of FDI on Fiscal Deficit Reduction in Nigeria
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Background of the Study
Fiscal deficits occur when government spending exceeds revenues and are a major challenge for many emerging economies. In Nigeria, reducing the fiscal deficit is critical for achieving sustainable economic stability. FDI can play a significant role in fiscal consolidation by boosting economic growth, enlarging the tax base, and reducing the need for excessive borrowing (Ibrahim, 2023). The inflow of foreign capital often results in improved production efficiencies, increased employment, and higher disposable incomes, which, if coupled with effective tax policies, can translate into higher government revenues. Moreover, FDI can spur the development of new industries and services, further diversifying the revenue streams and reducing fiscal vulnerabilities (Afolabi, 2024).
This study investigates whether FDI contributes to fiscal deficit reduction in Nigeria by examining its impact on revenue mobilization and public expenditure patterns. It explores the mechanisms by which FDI inflows can lead to fiscal improvements, including technology transfer, increased productivity, and the development of supportive financial markets. The research uses both quantitative fiscal data and qualitative assessments of policy reforms to provide a comprehensive picture of how FDI interacts with fiscal variables (Chukwu, 2025).
Statement of the Problem
Although FDI is expected to reduce fiscal deficits by stimulating economic growth and widening the tax base, Nigeria’s fiscal challenges persist. The anticipated positive effects of FDI on fiscal consolidation are often diluted by inefficiencies in tax collection, misallocation of resources, and external shocks such as oil price volatility. This raises the problem of whether FDI is truly effective in reducing the fiscal deficit or if its benefits are offset by structural shortcomings in fiscal management (Ibrahim, 2023). Addressing this issue is essential for policymakers who seek to align foreign investment strategies with broader fiscal stability objectives (Afolabi, 2024).
Objectives of the Study
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To assess the impact of FDI on reducing Nigeria’s fiscal deficit.
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To identify the mechanisms through which FDI improves revenue mobilization.
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To propose policy interventions that optimize the fiscal benefits of FDI.
Research Questions
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How does FDI influence fiscal deficit reduction in Nigeria?
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What channels mediate the relationship between FDI and improved fiscal performance?
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What policy measures can enhance the fiscal consolidation effects of FDI?
Research Hypotheses
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FDI inflows are associated with a reduction in the fiscal deficit when they stimulate economic growth.
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The effectiveness of FDI in fiscal consolidation is moderated by improvements in tax administration.
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Comprehensive policy reforms will amplify the positive impact of FDI on fiscal deficits.
Scope and Limitations of the Study
The study focuses on fiscal and FDI data in Nigeria from 2020 to 2024. Limitations include difficulties in isolating FDI effects from external economic shocks and potential measurement errors in fiscal data.
Definitions of Terms
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Fiscal Deficit: The shortfall when a government's total expenditures exceed its total revenues.
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FDI: Investment by foreign entities in domestic economic activities.
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Revenue Mobilization: The process of generating government revenue through taxes and other means.
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