Munich Personal RePEc Archive

Impact of Foreign Direct Investment on

Economic Growth in Nigeria

Oyegoke, Ebunoluwa O. and Aras, Osman Nuri

Nile University of Nigeria

1 January 2021

Online at https://mpra.ub.uni-muenchen.de/108348/
MPRA Paper No. 108348, posted 21 Jun 2021 22:34 UTC
 Impact of Foreign Direct Investment on Economic Growth
in Nigeria

Ebunoluwa O. Oyegoke*
Osman Nuri Aras*

Nile University of Nigeria, Nigeria

http://doi.org/10.31039/jomeino.2021.5.1.2

Introduction
In most developing countries, Foreign Direct Investment (FDI)
serves as a means of earning foreign reserves via investments,
businesses and foreign aids from advanced countries. FDI is
Received 10 October 2020 considered a valuable source of finance and capital formation,
Revised 22 November 2020
Accepted 12 December 2020 Technology-Transfer and know-how, as well as a viable
medium for trade among countries. The Spillover effect also
allows for the transfer of innovations and invention to the
receiving countries, one of which Nigeria belongs. According
to the requirement for accelerated growth in association with the
Sustainable Development Goals is not completely clear,
however, for economies to experience sustainable and inclusive
development, cross-border trade is paramount (UNCTAD,
2019).
Presently, Nigeria is the first host economy of FDI in Sub-
Saharan Africa, and the third in the continent. Recently, Nigeria
has witnessed several trade policies which aim at diversifying
the economy away from oil revenue. These policies are focused
on improving the industrial sector, and of course, results in
austerity. In 2018, the total FDI inflow to the country was
around USD 1.9 billion, while in 2017, FDI inflow was around
USD 3.5 billion, showing a decrease due to the consequence of
the austerity measures imposed in 2018. At the third quarter of
2019, the FDI was only 3.37% (USD 200.08 million) of the total
Corresponding author:
[email protected] capital inflow for the period.
Oyegoke O. E., Aras O. N.
Journal of Management, Economics, and Industrial Organization, Vol.5 No.1, 2021, pp.31-38.

Traditionally, FDI is designed to improve the recipient economies thereby enhancing economic
growth and development, it is in this view that many developing countries attract foreign
investors with the hope of strengthening their economy by increasing the foreign investment
portfolio. However, most empirical analysis of the impact of FDI on economic growth advises
otherwise, hence, a controversy. According to the existing literature, some empirical results
found a negative relationship between FDI and economic growth, while others opined that as
FDI increases, it results in a boost of output productivity, hence a positive relationship between
the variables (Emmanuel, 2016). Therefore, this study contributes to the existing literature by
investigating the effects of FDI both on the owner, and the host country, using Nigeria as a
case study.
Keywords: Foreign Direct Investment, Economic Growth, Sustainable Development Goals,
Nigeria.

1. Literature Review
In Nigeria, the performance of the FDI has been low, this is as a result of the weak
macroeconomic framework in Nigeria. The success of foreign investments in the country
mainly is determined by the market size, human capital, and stable macroeconomic
environment, and influenced largely by the pull factor and the push factors. FDI has a positive
influence on output, but not significant, suggesting the poor performance of FDI on economic
growth in Nigeria. According (Akanegbu & Chizea, 2017), the country’s share of the global
FDI is an insignificant percentage regardless of the various reforms. Using annual time series
data from 1991-2014, and the neoclassical production function (whereby FDI, capital and
labour are all taken as production inputs), the study employed the Ordinary Least Square
estimation technique to determine the impact of FDI on economic growth in Nigeria, the result
shows a positive but insignificant impact of FDI on output productivity in Nigeria.

Analysing the extent to which economic growth is influenced by FDI inflows in Nigeria, (Egbo,
2010), used annual secondary data spanning 1981-2007 and the OLS estimation technique,
findings show that FDI stimulates growth, hence, a positive relationship. Also, (Emmanuel,
2016) found a positive relationship between FDI and economic growth, using time series data
from 1981-2015, and the multiple regression estimation techniques, the result shows a
statistically significant relationship. In the short run, FDI has a positive and significant impact
on growth in Nigeria, an analysis that was done using annual secondary data between 1979-
2013 estimated using the Error Correction Model (ECM) and the Granger causality test
(Uwubanmwen & Ogiemudia, 2016).

A more recent study by (Anetor, 2019) found that FDI accounts for the significant variation in
Nigeria economic growth compared to other capital inflow into the country. Using quarterly
data from 1961Q1-2016Q4, estimated using the Structural Vector Autoregression model

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Oyegoke O. E., Aras O. N.
Journal of Management, Economics, and Industrial Organization, Vol.5 No.1, 2021, pp.31-38.

(SVAR), to evaluate the effects of shocks of private capital inflow on the growth of the
Nigerian economy. The result shows that shocks of FDI and portfolio investment inflow have
a positive and direct relationship on economic growth Nigeria and is statistically significant.

More empirical evidence reveals a positive relationship between FDI and output productivity
in Nigeria. (Akiri, Vehe, & Ijuo, 2016) contributed to the debate using secondary data for the
period 1981-2014 and result from the VECM shows a significant positive effect of FDI on
economic growth in Nigeria. In Cambodia, FDI also enhances economic growth, a study by
(Sokang, 2018), utilized annual time series data between 2006-2016, analysed using correlation
matrix and multiple regression to investigate the impact of FDI on economic growth in
Cambodia, the result shows a positive relationship. The same result was achieved in Pakistan
by (Gudaro, Chhapra, & Sheikh, 2012) for the period 1981-2010 using time series data, and
the multiple regression techniques. According to (Melynk, Kubatko, & Pysarenko, 2014), there
is also a positive impact of FDI on economic growth in the communism transition countries,
using panel data on annual transition report indicators from 1998-2010, analysed using the
Fixed-Effects estimation to analyse the data.

FDI stimulates growth in the long run, although it exhibits a negative impact on economic
growth in the short run in some selected developing countries under review. Testing the impact
of FDI on both short run and long run economic growth in developing countries (Trang, Duc,
Anh, & Thang, 2019) use VECM, and FULLY MODIFIED OLS (FMOLS) to analyse both the
short and long run impact of FDI on economic growth in developing countries (lower-middle)
income group for the period 2000-2014. In Portugal, there is some convergence among the
trading partners and the country. Research by (LEITAO & RASEKHI, 2013) using panel data,
suggest that FDI and bilateral trade enhance economic growth. Meanwhile, a study carried out
by (Umeora, 2011), shows that FDI does not conform to the A-priori and theoretical
expectation of a positive relationship between FDI and economic growth. Using secondary data
between 1986-2011, a model which was regressed using the OLS and multiple regression
techniques, it was concluded that in Nigeria, there is a negative impact of FDI on economic
growth contrary to other findings.

2. Theoretical Framework

For most developing countries, investments come in different forms either foreign or local
investment, one of the foreign means is the FDI which is a form of direct investment by foreign
multinational companies (MNC) with headquarters in developed countries. This study is
supported by the Harrod-Domar theory of growth which states that for any economy to grow,
a proportion of its GDP must be saved and invested. In other words, the capital-output ratio
and savings available to a country determine the economic growth level.

33
Oyegoke O. E., Aras O. N.
Journal of Management, Economics, and Industrial Organization, Vol.5 No.1, 2021, pp.31-38.

Specifically, in case there is no government intervention, the growth rate of the national income
is positively/directly related to savings-and investment whereby higher savings rate increases
growth, and inversely or negatively related to the capital-output ratio, whereby a capital
increase reduces the GDP growth rate. The main obstacle to growth according to the Harrod-
Dormar’s growth model is a low capital formation which brings about low savings-investment,
however, the main criticism of this theory is that it is a necessary but not sufficient condition
for growth. It is a kick-off requirement for growth, but not sufficient enough to drive growth.

3. Methodology
This study aims to examine the impact of FDI on economic growth in Nigeria by (1)
determining the effect of FDI on the host country, and (2), evaluating the effect on the owners
of FDI using Nigeria as a case study. The variables under consideration are the FDI inflow,
FDI outflow, and the GDP, for the period 1970-2019, which will be collected from the World
Bank indicators (2019 version) and analysed using the ordinary least square (OLS) method. In
a linear form, the model is given as:

GDP=(in FDI, out FDI) hence:

GDP= + 1inFDI + 2outFDI + 

Where: GDP= Gross Domestic Product

inFDI= Foreign Direct Investment inflow
outFDI= Foreign Direct Investment outflow
= The Error term

The model passes through the unit root stationarity test given that annual time series data reacts
to time structure. The result shows all variables are stationary at the first difference I(1).
Therefore, the only acceptable regression technique usually is a simple OLS regression or
ARDL. For this model, the OLS is preferred because it is unbiased in its analysis, and also
because it is a single (2 variable) model. The augmented dickey-fuller (ADF) unit root test
checks for stationarity of the variables.
The Johansen-Cointegration tests for a long-run relationship, (though not compulsory in this
case), results show no cointegrating equation, hence, a simple OLS regression model is justified
(Muhammad, 2017). This model also adopts the specification of (Gudaro, Chhapra, & Sheikh,
2012) with a difference in one variable.
Economic growth is measured by the GDP which is the total amount of goods and services
produced within a country for a given period, usually one year. The data is sourced from World
Bank using the World Bank Indicators. The FDI inflow measures the private and public

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Oyegoke O. E., Aras O. N.
Journal of Management, Economics, and Industrial Organization, Vol.5 No.1, 2021, pp.31-38.

investments into the country, while the FDI outflow represents the direct investments from
Nigeria to other host nations in form of trade, capital and multinational companies. The data is
also sourced from the World Bank indicators.

4. Empirical Results
The simple regression model was specified as:
GDP= + 1inFDI + 2outFDI + 

Augmented Dickey-Fuller unit root test result is presented in table 1 below:

Table 1
ADF- UNIT ROOT TEST
Test Critical t-statistics Probability Stationarity
Value
GDP 1% level -5.528650 0.0000 I(1)
FDI_in 1% level -11.32745 0.0000 I(1)
FDI_out 1% level -7.956152 0.0000 I(1)
Source: Authors’ computation using Eviews 11SV

Table 2 shows the OLS results:

Table 2: OLS Regression Result

Dependent Variable: GDP
Method: Least Squares
Variable Coefficient Std. Error t-Statistic Prob.
C 11.88213 1.901632 6.248386 0.0000
FDI_in 0.706767 0.121062 5.838069 0.0000
FDI_out -0.067700 0.065512 -1.033395 0.3087

R-squared 0.608296. Durbin-Watson stat. 0.671245

Adjusted R-squared 0.585255 F-statistics 26.40012
Prob(F-statistics) 0.000000
Source: Authors’ computation using Eviews 11SV

The R2 is 0.608, implying that about 61 per cent of the variations in GDP is caused by the
independent variables, hence a good fit. The intersect is positive and statistically significant at
1% level of significance, implying that the economy is positive. The coefficient of FDI inflow
is 0.70, suggesting a positive relationship between the GDP and FDI (inflow). One per cent
change in the FDI brings about 0.70%change in the GDP. Conversely, the FDI outflow shows
a negative effect on GDP. The coefficient of the FDI_outflow is (-0.067), but not significant.
The Durbin-Watson statistics is 0.67 which is less than one, suggesting a probable positive

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Journal of Management, Economics, and Industrial Organization, Vol.5 No.1, 2021, pp.31-38.

autocorrelation in the model. To correct this, the Breucsh-Godfrey serial correlation LM test is
used to verify that the error term has the same variance and that there is no serial correlation.
The result is presented in Table 3 below:

Table 3: Breucsh Godfrey Serial Correlation LM Test

F-statistics 12.34124 Prob. F(2,32) 0.0001
Obs*R-squared 16.11171 Prob. Chi-Square 0.0003
No serial correlation up to 2 lags

5. Discussion of Results
This study investigates the effects of FDI inflow and FDI outflow on economic growth with
evidence from Nigeria for the period 1970-20. The OLS single regression result shows FDI
inflow has a positive impact on the economy which implies that the developmental goal of
foreign investment in developing countries is evident in Nigeria. In other words, as FDI
increases its flow into the country, positive economic changes are also recorded. FDI inflow in
Nigeria is the third largest host country to FDI and has always been an economic harbour to
trade and foreign investment. The ease of doing business in Nigeria now ranks 131 according
to the World Bank 2020 index, moving up a total of 15 places in 2019 (World Bank, 2020).

Figure 1: FDI and GDP Chart

FDI inflow and GDP

30

25

20

15

10

0
1980

1996

2012
1970
1972
1974
1976
1978

1982
1984
1986
1988
1990
1992
1994

1998
2000
2002
2004
2006
2008
2010

2014
2016
2018

LNFDI_out LNGDP

Source: Authors’ computation

On the other hand, FDI outflow has a negative effect on economic growth, though not
significant. Perhaps it is as a result of low investment and capital accumulation amongst other
determinants.

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Oyegoke O. E., Aras O. N.
Journal of Management, Economics, and Industrial Organization, Vol.5 No.1, 2021, pp.31-38.

Figure 2: FDI outflow and GDP

FDI outflow and GDP

30

25

20

15

10

0
1980

1996

2012
1970
1972
1974
1976
1978

1982
1984
1986
1988
1990
1992
1994

1998
2000
2002
2004
2006
2008
2010

2014
2016
2018
LNFDI_out LNGDP

Source: Authors’ computation

From the graph, the pattern of FDI investments can be deduced.

6. Conclusion and Recommendation

Investments play a major important role in economic development, be it an investment in
assets, cash flow, capital and other forms, it is expected to exert a positive relationship on the
economy. The magnitude of the effect however does not entirely depend on the direct
investment alone, other economic, social, political, and institutional structure affects the
performance of FDI in the host country. It is pertinent to also note that FDI is an integral part
of trade, hence policies that promote foreign investment and at the same time protect,
supplement domestic production and investment, as well as complements the development
goals of the host countries should be encouraged. I, therefore, recommend that for all FDI
inflow into the country, at least 80% local content should be emphasized and closely monitored
to ensure compliance, thereby strengthening the domestic markets and stimulating a sustained
economic growth.
The impact of FDI outflow on the owners depends on the level of development and financial
strength of the country itself. Investors are attracted by high expected returns on their
investment, as well as a conducive, favourable term of trade and working condition, not to
underestimate internal institutional structure. Since this study is done for Nigeria, being a
developing country, it is evident that any form of investment for Nigeria should be more of an
infusion into the country, perhaps advance the financial strength of the country, as FDI outflow
impedes economic growth (GDP). It is important to also mention that FDI outflow may have
a negative result on most owners of FDI (the USA, and other European countries). A further
test may be conducted.
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Journal of Management, Economics, and Industrial Organization, Vol.5 No.1, 2021, pp.31-38.

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