An Analysis of Foreign Direct Investment (FDI) and Economic Growth: Empirical Results from Nigeria

In theory Foreign Direct Investment (FDI) is believed to have several positive relationship with the economic growth of the host country (such as productivity gains, technology transfers, the introduction of new processes, managerial skills and know - how, employee training) and in general it is a significant factor in modernizing the host country’s economy and promoting its growth. It is in this light that this paper offered to take the impact of FDI on Nigeria’s economic growth. Using annual data over the period 1981 to 2014, this study examines the contributions of FDI to Nigeria’s economic growth. Employing an unrestricted vector autoregressive model (VAR), empirical estimates showed that over the period of analysis, FDI had a negative influence on economic growth in the country. This is contrary to the theories highlighting the importance of improving trade openness giving FDI inflows a prominent role in the development strategy of a country.


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Onakoya, (2010) seeks the impact of FDI on GDP in different sectors of Nigeria country through using threestage least square (3SLQ) technique and Macro Econometric model of simultaneous equation. He found that FDI affect the GDP but significantly cast an impact on the output of that economy. Iqbal, (2010) investigated the relationship of FDI and GDP in Pakistan. Cobb -Douglas Production function was used along with regression equation to draw conclusion from data period of 1971-2009. He concluded that the effects of Imports substitution and exports oriented economies is different and support the Bhagwati's hypothesis which means FDI's spillover effect in much greater in the latter economy than the former economy. Tran & Dinh, (2010) do the study in the Vietnam to see the spillover effects of FDI in its economy.
Endogenous growth model is used and get the results that there is little evidence of spillover effects of FDI at micro level. Makki & Somwaru, (2010) seek the impact of FDI on trade and economic growth in 66 developing countries by using cross sectional data. They concluded that FDI interacts positively with trade and FDI promotes domestic investment. It has been also concluded that sound policies and stability are the preconditions for FDI to increase GDP rate. All results are drawn by using econometric model for production function. Mohammad & Zulkornain, (2012) conducted the study in Malaysia and used time series data from 1970 to 2010. Methodology was based on Toda Yarn Moto test for causality effect on relationship and Bounds testing (ARDL). They draw the conclusion that FDI has indirect effect on GDP.
Noormamode (2013), seek the impact of FDI on economic growth and also studied that host country social and economic conditions matter on FDI spillover effects. A panel VAR model was used and found that there is no clear cut evidence on growth effects of FDI. Khadaroo & Seetanah, (2014) studied the endogenous relationship between FDI and GDP through panel data of 23 OECD countries for the time series from 1985 to 2010. For this purpose they used two simultaneous equations coupled with generalized methods of moments and draw the conclusion that both factors affect the economy and FDI is the major contributor to accelerate the GDP rate.
Lall (2014), opined that FDI inflow affects many factors in the economy and these factors in turn affect economic growth. This review shows that the debate on the impact of FDI on economic growth is far from being conclusive. The role of FDI seems to be country specific and can be positive, negative or insignificant, depending on the economic, institutional and technological conditions in the recipient countries.
Uma, & Ezeoke, (2014) explained that FDI plays an extra ordinary and growing role in global business and economics. It can provide a firm with new markets and marketing channels, cheaper production facilities access to new technology products, skills and financing for a host country or the foreign firms with the investment, can provide a source of new technologies, capital processes products, organization technologies and management skills and other positive externalities and spillover that can provide a strong impetus to regional economic growth. Obwona, (2014) noted in his study of the determinants of FDI and their impact on growth in Uganda that macroeconomic and political stability and policy consistency are important parameters determining the inflow of Foreign Direct Investment (FDI) into Uganda and that Foreign Direct whether we can reject the restrictions implied by the reduced rank of  .

Empirical Result
This section presents results of empirical analyses of the study. Unit root is first conducted, then followed by Johansen co-integration result and lastly vector autoregressive (VAR). In this section, we present the empirical results on the impact of foreign direct investment on the Nigerian economy. In order to determine whether the macro variables are stationary or otherwise, unit root tests are conducted if non-stationary at levels, we then go ahead to determine the order of integration. Next a test of co-integration is carried out between all the variables of the study. Test for the stationary of the variables are presented in table 1 below.
The ADF test here consists of estimating the following regression: Where εt is a pure white noise error term, t is the time or trend variable and where = ( − ), = ( − ), etc. The number of lagged difference terms to include is often determined empirically, the idea being to include enough terms so that the error term in Eq. (vi) is serially uncorrelated, so that we can obtain an unbiased estimate of δ, the coefficient of lagged .
The test results suggest that the null hypothesis of unit root for the five time series namely, real gross domestic product (RGDP), foreign direct investment (FDI), gross capital formation (GCF), domestic savings (DSAV) and domestic investment (DINV) cannot be rejected at levels. This prompted us to test the Augmented Dickey-Fuller (ADF) test at first levels. The result as shown in table1 suggests that the null hypothesis of the variables can be rejected in the first difference. These shows that some of the variables are stationary at first difference and are integrated of order one or are 1(1) series while some are stationary at order 2.   Res pons e of FDI to FDI Response to Cholesky One S.D. Innovations ± 2 S.E. Figure 1 above reveals that a response shock in FDI has a negative impact on economic growth in Nigeria in the 1 st period and declining gently to zero in the 2 nd period and thereafter becomes negative in the 9 th period, maintains a stable path up to the 20 th period and dampens down gradually to the end of the 30 th period. The own shocks of FDI exerts positive effect in the 1 st period up to the 15 th period, then declines to zero and maintains a gentle stable path up to the 30 th period. The shock from FDI on GCF is positive in the 1 st , 2 nd and 3 rd but dies off and becomes a country.
Therefore, government needs to go a step further and actively seek to attract FDI by marketing our economy and setting up national investment promotion agencies. Nigeria should adopt a proactive approach towards FDI promotion, and explicitly look for ways to increase its benefits in terms of technology, skills and market access.
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