Impact of Foreign Direct Investment on Poverty Reduction in Nigeria, (1980-2009).

Abstract

The impetus for this study stems from the paradoxical observation that, although Nigeria is blessed with a huge influx of foreign direct investment (FDI), the country suffers from acute and chronic poverty. While this casual observation appears to cast doubts about the effect of FDI, it could be camouflaged by omission of potentially relevant variables. It is the objective of this study, then to investigate the relationship between FDI and poverty in a systematic manner (i.e. By controlling for the effects of other potentially relevant variables).Towards this end, an empirical analysis of the relationship between poverty (measured by the head count ratio) and FDI as well as a host of control variables (such as government expenditure, national debt, inflation, human capital, and infrastructural) was conducted during the period (1980-2009).

Since this study employed time series data, the issue of nonstationarity needs to be addressed beforehand. Using a standard unit root test (i.e. the Augmented Dickey-Fuller test).this study found that each variable is nonstationary in first differences, suggesting a possibility for co-integration. Using standard co-integration tests (i.e. Engle-Granger and Johansen-juselius tests, respectively), this study found that the variables are co-integrated, suggesting that there exists a short relationship among them. The result from Error Correction Model (ECM), uncovered the short-run relationship among the variables under study. The ECM-based estimation results showed that, while poverty reduction is positively related to FDI, government expenditure, and infrastructure, it is negatively related to inflation, national debts, and human capital. Of these findings, a special interest is the result of FDI and poverty reduction, which suggest that FDI does have a positive relationship on poverty reduction. Accordingly, more FDI should be encouraged to Nigeria, especially those that will prompt employment opportunities to the populace.

Key words Foreign Direct Investment, Poverty reduction, Nigeria