Modelling the Relationship Between Foreign Direct Investment and TFP Growth in a Developing Economy: Evidence from Nigeria

Abstract

Most developing countries have been seeking to attract foreign direct investment (FDI) with the aim of increasing capital inflow through technological spillover and transfer of managerial skills. FDI can increase economic growth and development of a country by creating employment, and by doing so, increase economic activities that will lead to growth. Nigeria is one of the countries that strive to attract more FDI inflows so as to improve her economy, and the country has adopted policies that drive the motive to attract FDI inflows. This study explores the effect of FDI on sectoral growth over the period 1990–2022.  Vector error correction model (VECM) technique is used to test the effect of FDI inflows on the agriculture, industry and services sectors. The results showed that FDI has a significant positive effect on the services and industry sectors, but a negative effect on the agricultural sector. For policy, Nigeria needs to keep robust bilateral investment treaties with her main FDI partner countries, since those countries are the main sources of FDI inflow to the country. Lowering taxes imposed on businesses and relaxing exchange rate regulations would encourage investors to invest in the country. As FDI flows into different sectors and has a different effect on the sectors, it is recommended to have incentives tailored for these different sectors.

Keywords: foreign direct investment, cointegration, vector autoregressive, vector error correction model, agriculture sector, industry sector, services sector.

DOI: 10.7176/JESD/14-17-04

Publication date: November 30^th 2023