The Relative Impact of External Capital on Manufacturing Output in Nigeria

Abstract

External capital is one of the major sources of investible resources in most developing Countries and is made of foreign direct investment (FDI),foreign aid (AID) and external debt. In this study, the relative impact of external capital on manufacturing output, on one hand, and on Economic growth, on the other hand, in Nigeria,  are examined. Economic growth is proxied by gross domestic product (GDP) growth. Employing the Ordinary Least Squares (OLS) method and an annual time series data for the period between 1982 and 2013 obtained from World Bank’s website, it is found that in the short-run, a $1 inflow of FDI is accompanied by a statistically insignificant 0.45 cent reduction in manufacturing output, a $1 inflow of foreign aid is accompanied by a statistically significant 49 cents reduction in manufacturing output and a $1 inflow of external debt is accompanied by a statistically significant 18 cents reduction in manufacturing output. This implies that FDI has a zero impact on manufacturing output while AID and external debt has a significant negative impact on manufacturing output in Nigeria. Therefore, all forms of external capital have different levels of negative individual impact on manufacturing output in Nigeria. Also, it is found that in the short-run, a $1 inflow of FDI is accompanied by a statistically significant $13.4 reduction in economic growth, a $1 inflow of aid is accompanied by a statistically insignificant $5.68 increase in economic growth and a $1 external loan inflow is accompanied by a statistically insignificant $1.73 increase in economic growth. This implies that FDI has a significant impact on economic growth, while AID and external debt has an insignificant or zero impact on economic growth. Therefore, not all forms of external capital do have significant impact on economic output in Nigeria. It is therefore recommended that government should make the business environment more investor friendly, make doing business in Nigeria easy, ensure prudent borrowing, ensure appropriate utilization of borrowed funds, ensure project continuity and ensure financial inclusiveness.

Keywords: Foreign direct investment, foreign aid, external debt, manufacturing output, economic growth.