Nigeria and Fdi

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FDI and Economic Growth: Evidence from Nigeria
By Adeolu B. Ayanwale Department of Agricultural Economics Obafemi Awolowo University Ole-Ife, Nigeria

AERC Research Paper 165 African Economic Research Consortium, Nairobi April 2007

THIS RESEARCH STUDY was supported by a grant from the African Economic Research Consortium. The findings, opinions and recommendations are those of the author, however, and do not necessarily reflect the views of the Consortium, its individual members or the AERC Secretariat.

Published by: The African Economic Research Consortium P.O. Box 62882 - City Square Nairobi 00200, Kenya

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© 2007, African Economic Research Consortium.

List of tables List of figures Abstract Acknowledgements 1. 2. 3. 4. 5. 6. 7. Introduction Literature review Some stylized facts about FDI in Nigeria Theoretical framework Methodology and analytical framework Results and discussion Summary and conclusion 1 3 9 17 19 25 35 37


List of tables
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Nigeria: Net foreign direct investment inflow (US$ million) Nigeria: Foreign direct investment, 1970–2002 Sectoral composition of FDI in Nigeria, 1970–2001 percentage Basic statistics on FDI in Nigeria, 1970–2002 Summary statistics of included variables Nigeria unit root tests for stationarity, 1970–2002 Regression results: Determinants of FDI Instruments estimates for FDI OLS regression results – FDI and growth OLS regression results – FDI and non-oil growth 2SLS regression results – FDI and growth 2SLS regression results – FDI and non-oil growth Differences between Nigeria and sub-Saharan Africa (mean of selected variables) Actual and percentage share of oil and non-oil export earnings in Nigeria 9 10 12 13 21 24 26 28 28 29 29 30 31 33

List of figures
1. 2. FDI inflow into Nigeria, 1970–2002 Components of FDI inflow to Nigeria 14 16

Most countries strive to attract foreign direct investment (FDI) because of its acknowledged advantages as a tool of economic development. Africa – and Nigeria in particular – joined the rest of the world in seeking FDI as evidenced by the formation of the New Partnership for Africa’s Development (NEPAD), which has the attraction of foreign investment to Africa as a major component. This study investigated the empirical relationship between non-extractive FDI and economic growth in Nigeria and examined the determinants of FDI into the Nigerian economy. Secondary data were sourced from the Central Bank of Nigeria, International Monetary Fund and the Federal Office of Statistics. The period of analysis was 1970– 2002. An augmented growth model was estimated via the ordinary least squares and the 2SLS method to ascertain the relationship between the FDI, its components and economic growth. Results suggest that the determinants of FDI in Nigeria are market size, infrastructure development and stable macroeconomic policy. Openness to trade and available human capital, however, are not FDI inducing. FDI in Nigeria contributes positively to economic growth. Although the overall effect of FDI on economic growth may not be significant, the components of FDI do have a positive impact. The FDI in the communication sector has the highest potential to grow the economy and is in multiples of that of the oil sector. The manufacturing sector FDI negatively affects the economy, reflecting the poor business environment in the country. The level of available human capital is low and there is need for more emphasis on training to enhance its potential to contribute to economic growth.

The contribution of a number of institutions and individuals towards the production of this paper is gratefully acknowledged. First, the African Economic Research Consortium for funding the study under its thematic research grant scheme, and to its...
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