Foreign Direct Investment and Economic Growth in Nigeria: An Empirical Analysis

Abstract

The integration of Nigeria with the global economy increased since the 1990s with greater inflow of foreign direct investment (FDI). FDI is assumed to benefit a developing economy by supplementing domestic investment, generating employment and through the transfer of technology. Studies on the impact of foreign capital on the Nigerian economy, like those of other developing countries remain inconclusive. Most of these studies ignored the possibility of bi-directional causality between foreign direct investment and economic growth. This paper therefore examines the impact of FDI on economic growth in Nigeria, using Vector Auto-regression (VAR) modelling to capture the structure of inter-relationships among relevant variables. The empirical analysis shows that FDI does not granger cause economic growth. Moreover it could not be established that FDI is a statistically important determinant of real GDP in Nigeria. Growth in real GDP is mostly explained by its own shocks. The implication of this is that the policy linkage between real GDP and FDI is weak and there is need for policy to ensure provision of adequate infrastructure in order to maximise the potential benefit of FDI in Nigeria.