EFFECT OF FOREIGN DIRECT INVESTMENT ON ECONOMIC GROWTH IN NIGERIA: 1981 – 2016
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Abstract
The inflow of foreign direct investment (FDI) to developing countries has continued to be on the increase over the years. This study investigates the effects of FDI on economic growth in Nigeria between 1981 and 2016. Structural macroeconometric models consisting of 4 blocks made up of aggregate production, aggregate demand and policy management, monetary and prices and external sector blocks were developed for the purpose of the study. The models have 19 simultaneous equations and 45 variables to capture the required proxies. Three-stage least squares (3SLS) technique was adopted to estimate the macroeconometric system of 19 simultaneous equations to capture the disaggregated effect of FDI on the different sectors of the economy as well as the inter-linkages amongst the sectors in order to give better insight into the variations inherent therein. FDI has positive sectoral effect on output of the productive sectors like agriculture, wholesale and retail services, industries, building and construction and gross fixed capital formation according to the findings of the study. Specifically, the simulation experiment considered four policy scenarios: the implications of 10%, 15%, 20% and 25% increases in the flow of FDI into the Nigerian economy. The simulation experiment on aggregate basis confirms FDI to be a great tool in growing the Nigerian economy. For example except for industry, building and construction the effect of FDI on these sectors is positive and significant. In addition, the aggregate demand and policy management block, except for government final consumption expenditure and private consumption expenditure, the performance of FDI is positive and significant. Again, considering the monetary and prices block, FDI has positive and significant effects on all the variables in the block. External sector block also showed similar results, suggesting that FDI has positive and significant effects on exports, exports of oil and gas and gross domestic product, while the effect on imports is negative, which is in accordance with a priori expectation. The finding shows that FDI has a significant effect on both sectoral and aggregate output of the economy but that the growth effects of FDI differ across sectors. The major recommendation of the study is that government should provide enabling environment in such a way that the flow of FDI would be geared towards financing capital projects such as road networks, railway lines, construction of new power plants and as a matter of urgency provide favourable policy in the area of exchange rate volatility, insecurity and corruption for easy inflow of FDI to the aggregate production sector specifically encouraging agricultural value chain and solid mineral development. This is because the country possesses highest comparative advantage in this sector, which would help relax the unemployment and foreign exchange bottle neck thereby making the economy to grow.
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