Conference of the International Journal of Arts & Sciences,

CD-ROM. ISSN: 1943-6114 :: 6(1):63–72 (2013)

Copyright c 2013 by UniversityPublications.net

FOREIGN DIRECT INVESTMENT AND ECONOMIC GROWTH IN

NIGERIA

Maryam Abdu

Kaduna State University, Kaduna, Nigeria

Foreign direct investment being a long term investment in terms of both inflows and outflows of
investments involves countries participating with joint venture, management, expertise, technology
transfer, manufacturing, and construction with the sole purpose of developing the economy. Most
countries strive to attract foreign direct investment because of its advantage of being a tool for
economic development. Foreign direct investment in Nigeria is determined by market size, a stable
macroeconomic policy, openness to trade, available human capital and other prospects. The study seeks
to investigate the relationship between foreign direct investment and economic growth in Nigeria,
whether there is a relationship between foreign direct investment and economic growth, and if Nigeria
is benefiting from foreign direct investments. Secondary data was used in conducting the research and
the study made use of Minitab Student version statistical analysis. The results revealed that there is a
significant relationship between foreign direct investment and economic growth and that foreign direct
investment contributes positively to economic growth. While exchange rate, exports and external
reserves have a positive effect on economic growth, balance of payments and foreign trade had a
negative effect. There was need for strong macroeconomic policies and security for further foreign
investment to take place in Nigeria.

Keywords: Foreign direct investment, Economic growth.

1. Introduction

Economic growth is the growth in real terms of Gross Domestic Product (GDP) in a given year.
Economies grow as a result of several factors, but growth in GDP is most critical because it signifies the
output of domestic industries thereby creating wealth and employment. Nigeria’s economy is one which
has been and continues to be dominated by the oil sector. Structural reforms pursued have centred on
enhancing the management of public finance and improving the efficiency of the entrepreneurial
environment, but the issue of oil production remains the dominating factor. With a strong surge in oil
production, the economy has achieved an average annual growth rate of about seven per cent over the past
years. A lot can be achieved in terms of economic growth if attention is shifted from the oil sector to the
non-oil sector. Agriculture has been the dominant non-oil productive sector, contributing to the highest
employment sector in the country.
Foreign Direct Investment (FDI) is an issue which attracts considerable attention in economies all
over the world. FDI’s are two ways either inflows or outflows. FDI plays a significant and important role
in global businesses and serves as a gauge of productive assets owned by a foreign investor. With FDI,
the countries participating stand to gain in terms of joint venture, management, expertise, technology

63
6464 Maryam Foreign Direct Investment and Economic Growth in Nigeria
Abdu 6464

transfer, manufacturing, and construction for the purpose of economic development. Graham and
Spauling (2005) state that foreign direct investments provides a firm with new markets and marketing
channels, cheaper production facilities, access to new technology, products, skills and financing. Through
FDI, countries with surplus funds and technology are able to seek advantage of developing countries
where there is availability of labour, hence movement of production to more profitable areas, and at the
same time globalising production and competition.
To promote investments from foreign investors, the United States Department of Commerce initiated
the “Invest in America” policy, a policy which brings together the provision of assistance for both local
and state investment levels. It also facilitates queries of investors, carries out schemes of plans in helping
foreign investors, as well as offering guidelines to investors to access the legal system. In 2008, there was
an estimated US$325 billion of FDI inflow in the United States which was considered the major FDI
recipient in the world.
Nigeria is one country that has attracted FDI inflows. These inflows have recorded positively on the
economic development of the country. FDI in Nigeria is said to be determined by market size, a stable
macroeconomic policy openness to trade, available human capital and other prospects. Egbo, Onwumere
and Okpara (2011), inform that FDI increased from less than US$1 billion in 1990 to US$1.2 billion in
2000; US$1.9 billion in 2004; US$2.3 billion in 2005 and US$4.5 billion in 2006. As a percentage of
GDP, FDI increased substantially in recent years. The same pattern witnessed portfolio investment, which
grew from US$0.2 billion in 2003 to US$2.9 billion in 2005 and US$0.92 billion in 2006. The
improvements were attributed to the economic reforms and the resulting of macroeconomic stability
which instilled great credibility in the Nigerian economy. Much of the FDI inflows were invested in the
oil and gas sector of the Nigerian economy. Chima (2012) reported that the value of FDI that came into
Nigeria in 2011 was US$8.9 billion with the country recording over 20 per cent of the total FDI to Africa.
FDI inflow into Africa in 2011 increased by 28 per cent to US$35 billion from US$27.4 billion recorded
in 2010. Nigeria, South Africa and Ghana were the largest recipients of FDI in the year as they
collectively attracted half of the amount that flew into Africa.
The continued increases in FDI continue to reflect improvements in economic growth, technology,
corporate profits, and expansions in investment projects. Nigeria being a country with a large natural
resources base, market size and a large recipient of FDI, there is the need to study the effects of FDI on
the country’s economic growth to ascertain the continued existence of FDI in the country.

Research Problem

Africa is a region that requires much attention of FDI for economic growth and development to take
place. Unfortunately much of the countries in the region have been unable to access FDI. The African
Union in 2001 initiated the New Partnership for Africa’s Development (NEPAD) to pursue new priorities
and approaches to the political and socio economic transformation of Africa, but most countries are not
able to access the funds from the programme. This development apart from being disturbing does not
inform of the possibility for economic development and growth. FDI is important and necessary for any
economy to achieve a certain and sustained economic growth.
Most of the studies on FDI and growth in Nigeria concentrated on the extractive industry with more
emphasis on the oil sector. This study will look at FDI inflows in both the oil and non-oil industry. On the
issue of economic growth, studies conducted in Nigeria hardly took into consideration economic variables
like foreign trade, external reserves, balance of payments position, and exports. This study looks at these
economic variables as components of FDI.

Research Questions

The research questions identified for the study are as follows:

• Is there any relationship between foreign direct investment and economic growth in Nigeria?
 • Is foreign direct investment contributing to economic growth in Nigeria?
• Is Nigeria benefiting from foreign direct investment inflows?

Objectives of the Study

Given the foregoing, the objectives of the study are:

• To examine the relationship between foreign direct investment and economic growth in Nigeria.
• To identify whether foreign direct investment has an effect on economic growth
• To examine the trend of foreign direct investment in Nigeria

Scope of the Study

In measuring growth, most studies identify economic variables like unemployment, inflation, government
expenditure and gross domestic product as a yard stick. This study will not look into all the variables but
will identify gross domestic product as a proxy for growth. The use of gross domestic product is
emphasised because of the importance of the production of domestic industries within a year, hence the
use of gross domestic product. On FDI, the study looks at variables or factors that are likely to influence
FDI. The scope of the study also looks at FDI inflows in both the oil and non-oil sectors of the economy
over a period of 10 years, from 2000 to 2010.

2. Literature Review

Theories of Economic Growth

Several theories of growth have been identified by Adebusiyi, Englama and Mordi (2010) and Jhingan
(2011). Post World War II growth theories identified by Adebusiyi et al (2010) are Structuralism, the
Linear - Stages – Growth Theory, the Neo – Marxist - Dependency Growth Theory, the Neoclassical
Economic Growth Theories and the New Growth Theory. Jhingan (2011) identified the Harrod – Domar
model of economic growth, the Solow model of growth and the Solow - Swan model of economic
growth.
Structuralism explained how structural aspects of the domestic economy and international economy
impeded the growth of developing countries. This school of thought emerged in Latin America in the
1940’s and argues that the structural changes needed to bring about economic development could only be
achieved by state intervention though tax and state owned enterprises in the internal expansion of the
domestic economy to promote industrialisation (Adebusiyi et al, 2010). The proponents of this theory are
Prbisch (1950, 1952 as cited in Adebusiyi et al, 2010) and Singer (1950 as cited in Adebusiyi et al, 2010),
who argue that the terms of trade problem of developing countries focused on movements in the prices of
primary commodities.
The Linear - Stages – Growth theory emerged when the theorists of 1950’s and early 1960’s viewed
the process of development to be a series of successive stages in economic growth. Economic growth can
therefore be achieved through industrialisation. The dominating proponent of this theory is the Walt W.
Rostow’s stages of growth model who opined that, the process whereby all the developed industrial
nations of the world transformed themselves from backwardness to prosperity can be described in terms
of a series of stages known as traditional society, pre – conditions take off, take off, drive to maturity and
high mass consumption (Adebusiyi et al, 2010).
The Neoclassical Economic Growth theories are concerned primarily with the efficient and cost
effective allocation of scarce resources and with the optimal growth of those resources over time. They
hold that countries develop economically via the market. They argue that in order to stimulate the
domestic economy and promote the creation of efficient market, developing country governments had to
eliminate market restrictions and omit government intervention. This was to be accomplished through the
privatisation of state – owned enterprises, promotion of free trade, reduction or elimination of restrictions
of foreign investment, and a reduction or elimination of government regulations affecting the market
(Adebusiyi et al, 2010).
The New Growth theory opines a strong impetus to the on – going shift from a resource – based
economy to a knowledge - based economy. This economic process which creates and diffuses new
knowledge are critical to shaping the growth of nations, community and individual firms and that
economic growth is a product of increasing returns associated with new knowledge (Adebusiyi et al,
2010).
The Harrod – Domar model of economic growth are based on the experiences of advanced
economies. The model is primarily addressed to an advanced capitalist economy and attempt to analyse
the requirements of steady growth in such economy. Both Harrod and Domar are interested in discovering
the rate of income growth necessary for a smooth and uninterrupted working of the economy. Their
models differ in detail, yet they arrive at similar conclusions (Jhingan, 2011).
The Solow model of growth is built on economic growth as an alternative to the Harrod –Domar line
of thought without its crucial assumptions of fixed proportions in production. This model postulates a
continuous production function linking output to the inputs of capital and labour which are substitutable
(Jhingan, 2011).
The Solow – Swan model of economic growth postulates a continuous production function linking
output to the inputs of capital and labour which leads to the steady state equilibrium of the economy
(Jhingan, 2011).
The endogenous growth theory was developed as a reaction to omissions and deficiencies in the
Solow – Swan neoclassical growth model. It is a theory which explains the long run rate of an economy
on the basis of endogenous factors of the neoclassical growth theory (Jhingan, 2011).
The study adopts the Neoclassical Growth model because the Nigerian economy is structured more
towards the theory. All state owned enterprises have been privatised to make the enterprises run
efficiently and economically, trade policy has been liberalised following the country’s membership in the
World Trade Organisation, and some restrictions were lifted on foreign participation and investments in
Nigeria.

The Concept of Foreign Direct Investment

In the era of Globalisation, many studies on FDI and economic growth have been conducted. Some
studies opine that FDI led to increases in economic growth leading to high per capita incomes.
Borensztein, Gregorio, and Lee (1996) concluded in their research that FDI has a positive effect on
economic growth with a higher magnitude on the stock of human capital available in the host economy.
Alfaro (2003), views that the benefits of FDI vary greatly according to sectors. FDI inflows into the
primary sector tend to have a negative effect on growth whereas FDI inflows in the manufacturing sector
a positive one. That of the service sector was ambiguous. Adebisi, Arogundade, Oluwakayode and
Oyatoye (2011) also concluded in their study on FDI and economic growth in Nigeria, that there was a
positive relationship between FDI and GDP and that a one Naira increase in the value of direct foreign
investment led to N104.749 increase in the value of GDP.
Other studies with a different opinion are that of Choe (2003) whose findings conclude a strong
positive association between economic growth and FDI inflows or that gross domestic investment rates
do not necessarily mean that FDI inflows or gross domestic investment rates lead to rapid economic
growth. Athanasios, John and Katerina (2004), viewed that FDI was focused mainly on the US and
Western countries and concentrated their research on transition economies, using Bayesian analysis in
their study, the results indicated that FDI does not exhibit any significant relationship with economic
growth for the transition countries.
Benefits of Foreign Direct Investment

The benefits of FDI were highlighted in the Earth Summit (2002) as follows:
• Stimulation of national economy - FDI contributes to Gross Domestic Product (GDP), Gross
Fixed Capital Formation (total investments in a host country) and balance of payments. Studies
have indicated a positive link between FDI and GDP, but may however not hold for all countries.
For instance, over the last 10 years, Central Europe witnessed an increase in FDI whilst GDP
dropped. FDI can also contribute towards debt servicing repayments, stimulate export markets
and produce foreign exchange revenue.
• Stability of FDI - FDI inflows can be less affected by change in national exchange rates as
compared to other private sources (portfolio investments of loans). This is partly because
currency devaluation means a drop in the relative cost of production and asset (capital, goods and
services) for foreign companies and hereby increases the relative attraction of a ‘host’ country.
FDI can stimulate product diversification through investments into new businesses, so reducing
market reliance on a limited number of sectors/products (UNCTAD, 1999 as cited in Earth
Summit, 2002).
• FDI can stimulate product diversification through investments into new businesses, so reducing
market reliance on a number of sectors/product (UNCTSD, 1999 as cited in Earth Summit, 2002).
• Promotion of social development - FDI where it generates and expand businesses can help
stimulate employment, raise wages and replace declining market sectors. However, the benefits
may only be felt by small portion of the population, for example where employment and training
is given to more educated, typically wealthy elites or there is an urban emphasis, wage
differentials between income groups will be exacerbated.
• Infrastructure development and technology transfer – there is bound to be transfer of technology,
and human capital, from the foreign country into the receiving country. These transfers are
expected to bring certain benefits and advantages such as it is seen as added knowledge to the
receiving country.

Trends in Foreign Direct Investment in Nigeria

FDI inflows in Nigeria mainly came from the United Kingdom, followed by the United States. Most of
the FDI inflows were accounted for by the oil sector, Shell of the United Kingdom is a key FDI inNigeria
as well as Chevron, Texaco, and Exxon Mobil of the United States. China is currently expanding its
investments in Africa, and Nigeria is one of the countries where Chinese investments are playing a big
role. Currently Nigeria is China’s second largest trading partner next to South Africa with a reported

Table 1. FDI inflows in Nigeria.

2000
2001
2002
2003
2004
2005
2006
2007
2008
2009/10
Source: CBN Statistical Bulletin, 2011
direct investment of US$6 billion. Other countries with FDI sources are Italy, Brazil, the Netherlands,
France and South Africa. Corporate Nigeria (2012) informs that in 1995, the Nigerian Investment
Promotion Commission Act laid out the framework for investment policy in Nigeria allowing foreign
ownership of 100% in all industries except for the oil and gas sector where investments are constrained to
existing joint ventures or new product sharing agreements. Investments from both Nigerian and foreign
investors are prohibited in a few industries crucial to national security such as the production of arms and
ammunition, and military uniforms.

3. Research Methodology

The study made use of secondary data. Sources of data were received from the Central Bank of Nigeria
statistical bulletin, publications from other sources, and the internet.

The Model

The model is derived from the research of Hooda (2011). The variables used in the study are gross
domestic product, foreign trade, external reserves, exports, balance of payments, and exchange rates.
These variables explain the variations of FDIs inflows in Nigeria and are used in the model. In functional
form FDI is expressed as:
FDI = f (BOP, EXCHR, EXP, EXTERSV, FORTR)
While Gross domestic product is expressed as:

GDP = f (FDI)
Where,

FDI = Foreign Direct Investment

BOP = Balance of Payments
EXCHR = Exchange Rates
EXP = Exports
EXTERSV = External Reserves
FORTR = Foreign Trade
Expressed in equation form
FDI = a + 1 BOP + 2 EXCHR + 3EXP + 4 EXTERSV + 5 FORTR + (1)
Where:
a = a constant
= the error term

To analyse the relationship of economic growth and FDI, the equation was expressed as follows:
GDP = a + 1 BOP + 2 EXCHR + 3EXP + 4 EXTERSV + 5 FORTR +
Where,
GDP = Gross Domestic Production
The model’s apriori expectations are:
BOP = Negative
EXCHR = Positive
EXP = Negative
 EXTERSV = Positive
FORTR = Positive

To investigate the relationship of economic growth and foreign direct investment a multiple
regression analysis was conducted using Minitab student version statistical analysis to analyse the results.

4. Data Presentation and Results

Using equation 2, GDP = a + 1BOP + 2 EXCHR + 3EXP + 4EXTERSV + 5 FORTR + , the multiple
regression analysis output which shows the results of the relationship between FDI and 5 independent
variables was as follows:

Dependent variable: GDP

Parameter
CONSTANT
BALANCE_OF_PAYMEN
EXCHANGE_RATE
EXPORTS
EXTERNAL_RESEARVE
FOREIGN_TRADE

The equation of the fitted model is as follows:

GDP = 141515.0 – 0.0848698*BOP + 1857.19*EXCHR + 0.0532545*EXP +
0.0337767*EXTERSV – 0.0171364*FORTR

Table 3. Analysis of Variance (ANOVA) table.

Analysis of Variance (ANOVA)
Source
Model
Residual
Total (Corr.)

R- Squared = 98.9957 per cent

R- Squared (adjusted for d.f.) = 97.7404 per cent
Standard Error of Est. = 19655.9
Mean absolute error = 9910.84
Durbin-Watson statistic = 3.64598 (P = 0.0000)
Lag 1 residual autocorrelation = – 0.840572
The above analysis reveals that since the P value is less than 0.01, there is a significant relationship
between economic growth and FDI at 99% confidence level depicted by R – squared statistics. The
adjusted R – Squared statistics, which is more suitable for comparing models with different numbers of
independent variables, was 97.7404%. The findings further revealed that balance of payments was
negatively related to growth. For every 1% increase in balance of payments, there is a 3.64% decrease in
growth. This result agreed with the apriori expectations of the study. The exchange rate revealed a
positive relationship. For every 1% increase in exchange rate, there is a 2.36% increase in growth. This
7070 Maryam Foreign Direct Investment and Economic Growth in Nigeria
Abdu 7070

agreed with the expectations of the research because the exchange rate plays an important role when any
kind of foreign investment is to take place in the country. Exports and external reserves also revealed a
positive correlation. For every 1 % increase in exports, there is a 4.84% increase in growth and for every
1% increase in external reserves, there is a 2.05% increase in growth. The expectation of the study was
that exports would have a negative effect on FDI. Foreign trade showed a negative correlation. For every
1% increase in foreign trade there is a decrease in growth of4.11%. The expectation of the study was that
foreign trade will be positively related to economic growth.
The findings therefore lead the research in concluding that there is a positive relationship between
FDI and economic growth and that FDI contributes to economic growth in Nigeria. Balance of payments
and foreign trade have a negative effect, while exchange rate, exports and external reserves have a
positive effect on economic growth. With this analysis it can be assumed that Nigeria benefits from FDI.

5. Conclusion

Foreign direct investment is important to economic growth. Most studies opine that there is a positive
relationship between foreign direct investment and economic growth. This translates that economies
should ensure that greater economic activities should be targeted at foreign direct investments. In Nigeria
most of the studies on foreign direct investments revealed a positive correlation with economic growth.
Areas emphasised have been on stock market, labour, inflation, exports, exchange rate, and
unemployment.
This study looked at balance of payments, exchange rate, exports, external reserves and foreign
trade. The variables were different from the previous studies on foreign direct investments. The research
interest was to investigate whether there is a relationship between foreign direct investment and economic
growth, whether Nigeria was benefitting from foreign direct investment inflow and if foreign direct
investment contributed to economic growth. From the results obtained there was a strong relationship
between foreign direct investment and economic growth and that foreign direct investment contributed
positively to economic growth. Exchange rate, exports, and external reserves had a positive effect on
economic growth, while balance of payments and foreign trade had a negative effect. The foreign direct
inflow analysis revealed an increasing trend in inflows with the highest inflow coming from the United
Kingdom, followed by the United States.
The study recommends that other macro-economic issues should be looked at which are expected to
improve the relationship between economic growth and foreign direct investment. From the results
attention should be geared towards improving the balance of payments and foreign trade situation to have
a better and improved effect on economic growth.

References

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export and economic growth in Nigeria. Retrieved on October 10, 2012 from http://www.journalsbank.com/
ejhss_2_1.pdf
2. Adebusiyi, B. S., Englama, A., & Mordi, C.N.O. (2010). The changing structure of the Nigerian economy (2nd
ed.). Lagos: Atisele Vanessa Cards Co
3. Athanasios, V., John, P., & Katerina, L. (2004). Foreign direct investment and economic growth in transition
economies. Retrieved on October 10, 2012 from http://www.asecu.gr/Seeje/issue02/lyroudi.pdf
4. Borensztein, E., De Gregorio, J., & Lee, J –W. (1996). How does foreign direct investment affect economic
growth? Journal of International Research 45(1998) 115 – 135 retrieved on August 27, 2012 from
http://www.olemiss.edu/courses/inst310/BorenszteinDeGLee98.pdf
5. Chima, O. (2012). Nigeria’s foreign direct investments hits $9 bn. Thisday Live. Retrieved on July 18, 2012
from http://www.thisdaylive.com/articles/nigeria-s-foreign-direct-investment-hits-9bn/120321/
6. Choe, J. I.(2003). Do foreign direct investment and gross domestic investment promote economic growth?
Review of Development Economics 7, 44 – 57. Retrieved on October 10, 2012 from http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=377620
7. Corporate Nigeria. (2012). FDI overview: Nigeria has made it into the top 20 global destinations for FDI.
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overview.html
8. Earth Summit (2002). Foreign direct investment: A lead driver for sustainable development? Retrieved on
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th
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Appendix

The StatAdvisor
---------------
The output shows the results of fitting a multiple linear regression model to describe the relationship
between FDI and 5 independent variables. The equation of the fitted model is
Multiple Regression Analysis

Dependent variable: GDP

Parameter
CONSTANT
BALANCE_OF_PAYMEN
EXCHANGE_RATE
EXPORTS
EXTERNAL_RESEARVE
FOREIGN_TRADE
 Analysis of Variance
-----------------------------------------------------------------------------------------------------------------
Source Sum of Squares Df Mean Square F-Ratio P-Value
-----------------------------------------------------------------------------------------------------------------
Model 1.52338E11 5 3.04676E10 78.86 0.0004
Residual 1.54542E9 4 3.86356E8
-----------------------------------------------------------------------------------------------------------------
Total (Corr.) 1.53883E11 9
-----------------------------------------------------------------------------------------------------------------

R-squared = 98.9957 per cent

R-squared (adjusted for d.f.) = 97.7404 per cent
Standard Error of Est. = 19655.9
Mean absolute error = 9910.84
Durbin-Watson statistic = 3.64598 (P=0.0000)
Lag 1 residual autocorrelation = -0.840572
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without permission.