Global Journal of Human Social Science
Determinants of Foreign Direct Investment in Nigeria: An Empirical Analysis Obida Gobna Wafureα Abu, NurudeenΩ
Abstract: The role of foreign direct investment in the development of Nigerian economy cannot be over emphasized. Foreign direct investment provides capital for investment, it enhances job creation and managerial skills, and possibly technology transfer. This paper investigates the determinants of foreign direct investment in Nigeria. The error correction technique was employed to analyze the relationship between foreign direct investment and its determinants. The results reveal that the market size of the host country, deregulation, political instability, and exchange rate depreciation are the main determinants of foreign direct investment in Nigeria. The authors recommend the following policies among others: expansion of the country’s GDP via production incentives; further deregulation of the economy through privatization and reduction of government interference in economic activities; strengthening of the political institutions to sustain the ongoing democratic process; gradual depreciation of the exchange rate; and increased investment in the development of the nation’s infrastructure.
GJHSS Classification (FOR) 140103, 140202, 1502 & 1504
Keywords: Foreign direct investment, deregulation, unit root, co integration. I.
oreign direct investment (FDI) not only provides developing countries (including Nigeria) with the much needed capital for investment, it also enhances job creation, managerial skills as well as transfer of technology. All of these contribute to economic growth and development. To this end, Nigerian authorities have been trying to attract FDI via various reforms. The reforms included the deregulation of the economy, the new industrial policy of 1989, the establishment of the Nigeria Investment Promotion Commission (NIPC) in early 1990s, and the signing of Bilateral Investment Treaties (BITs) in the late 1990s. Others were the establishment of the Economic and Financial Crime Commission (EFCC) and the Independent Corrupt Practices Commission (ICPC). However, FDI inflows to Nigeria have remained low compared to other developing countries (see appendix 1). For instance, FDI inflows increased from N786.40 million in 1980 to N2, 193.40 million in 1982, but soon dropped to N1, 423.50 million in 1985. The value of FDI rose from N6, 236.70 million in 1988 to N10, 450.0 million and N55, 999.30million in 1990 and 1995, respectively. However, the value of FDI fell drastically to N5, 672.90 million in 1996 and further to N4, 035.50million in 1999. The inflows of FDI has continued to rise since the year 2001, moving from About -Obida Gobna Wafure and Abu, Nurudeen Department of economics University of Abuja, Nigeria α
N4,937.0million to N13,531.20million in 2003 and N20,064.40million in 2004. The FDI inflows stood at N41,734.0million in 2006 (CBN, 2006). In terms of growth rate, FDI inflows dropped from 95.6 percent in 1971 to -31.20 percent and -17.23 percent in 1976 and 1984, respectively. Although the growth of FDI increased by 182.68 percent in 1986, the value soon fell by 24.76 percent in 1989 and further to -89.87 percent in 1996. Since the year 2000 the growth of FDI has remained positive except in 2001 when the value was -70.00 percent. The recent surge in FDI inflows to the country is attributable to the reduction in the nation’s debt profile (through debt arrangements with London club and Paris club) and the renewed confidence of foreign investors in the Nigerian economy (CBN, 2006). This study is important because Nigeria (before the year 2003) had experienced declining and fluctuating foreign investment inflows. Beside, Nigeria alone cannot provide all the funds needed to invest in various sectors of the economy, to make it one of the twenty largest economies in the...