Research Article

Foreign Direct Investment and Economic Growth: Empirical Evidence from Nigeria

Mohammed Aminu Bello1*
1 Department of Business Administration, Bayero University Kano
* Corresponding author: mabello.bus@buk.edu.ng
Published: Dec, 2024
DOI: 10.67894/bjms.2024.pp1ji1jz
Pages: 179-204

Abstract

The study investigates the effect of foreign direct investment (FDI) on the economic growth of Nigeria by examining the long run and the short run relationship between the variables over the period of 1978 to 2022 using the Auto-Regressive Distributed Lag approach (ARDL). The study finds that in the long run, FDI, gross fixed capital formation and labour force participation have positive effect on economic growth, while military expenditures have negative effect. However, gross fixed capital formation was indicative of having a significantly negative relationship with the economic growth in the short run, but variables such as FDI, military expenditures and labour force participation were found to have positive impact. Inflation shows negative significant relationship in both the short and long run whereas final consumption expenditure showed insignificant relationship in both the short and long run. The study recommends among other things, that Nigeria should strengthen R&D efforts to reduce dependence on imports and increase self-sufficiency, Nigeria should improve the power sector as it is crucial to alleviating Nigeria’s energy crises and ensuring the smooth operation of industries across the country and that Nigeria should maintain macroeconomic stability in order to encourage savings and private investment, which will lead to high overall investment in the country. 

Keywords

ARDL Economic Growth FDI Nigeria

References

  1. Adeniyi, O., Fashagba, J. A., & Adeyemo, S. A. (2012). Foreign direct investment and economic growth in Nigeria: A time series analysis. Journal of Economic and Sustainable Development, 3(9), 18-29.
  2. Adetunji, A. O., & Alabi, O. (2022). Sectoral analysis of foreign direct investment in Nigeria: Implications for sustainable development. Journal of Economic Studies, 49(1), 58-76.
  3. Ahmad, M. H., & Ahmed, Q. M. (2002). Foreign capital inflows and domestic savings in Pakistan: cointegration techniques and error correction modeling. The Pakistan Development Review, 41(4), 825-836.
  4. Ajose, K., & Oyedokun, G. E. (2018). Capital formation and economic growth in Nigeria. Accounting and Taxation Review, 2(2), 131-142.
  5. Akinlo, A. E. (2004). Foreign direct investment and growth in Nigeria: An empirical investigation. Journal of Policy Modeling, 26(5), 627-639.
  6. Akram, M. M., & Afzal, M. (2014). Dynamic role of zakat in alleviating poverty: a case study of Pakistan. Research Journal Social Sciences, 1, 1-25.
  7. Alexiou, C., & Tsaliki, V. P. (2007). Foreign direct investmentled growth hypothesis: evidence from the Greek economy. Zagreb International Review of Economics & Business, 1, 85- 97.
  8. Ali, H., Qingshi, W., Ullah, I., & Ali, Z. (2017). How terrorism affects foreign direct investment in Pakistan. International Journal of Economics and Financial Issues, 7(3), 625-631.
  9. Ali, N., & Hussain, H. (2017). Impact of foreign direct investment on the economic growth of Pakistan. American Journal of Economics, 7(4), 163-170.
  10. Alper, A., & Verougstraete, M. (2018). Tapping capital markets and institutional investors for infrastructure development. MPDD Working Paper Series WP/18/04, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
  11. Amir, H., Khan, M., & Bilal, K. (2015). Impact of educated labor force on economic growth of Pakistan: a human capital perspective. European Online Journal of Natural and Social Sciences, 4, 814-831.
  12. Arby, M. F., & Batool, I. (2007). Estimating quarterly gross fixed capital formation. SBP Working Paper Series, No. 17.
  13. Asghar, N., Awan, A., & Ur Rehman, H. (2012). Human capital and economic growth in Pakistan: a cointegration and causality analysis. International Journal of Economics and Finance, 4(4), 135-147.
  14. Atesoglu, S. (2002). Defense spending promotes aggregate output in the United States - evidence from cointegration analysis. Defense and Peace Economics, 13(1), 55-60.
  15. Azar, S. A. (2009). US growth and inflation. Journal of Business & Economics Research, 9, 35- 48.
  16. Baliamoune-Lutz, N. M. (2004). Does FDI contribute to economic growth?. Business Economics, 39(2), 49-56.
  17. Bello, M. A. (2020). The effect of economic reforms on economic growth Evidence from Nigeria. Global Journal of Accounting and Economy Research, 1 (2): 97-112.
  18. Bint-e-Ajaz, M., & Ellahi, N. (2012). Public-private investment and economic growth in Pakistan: an empirical analysis. The Pakistan Development Review, 51(4), 61-78.
  19. Biswas, B., & Ram, R. (1986). Military expenditure and economic growth in less developed countries: an augmented model and further evidence. Economic Development and Cultural Change, 34(2), 361-72.
  20. Blejer, M. I., & Khan, M. S. (1984). Government policy and private investment in developing countries. IMF Staff Paper, 31(2), 379-403.
  21. Carbonell, J. B., & Werner, R. A. (2018). Does foreign direct investment generate economic growth? a new empirical approach applied to Spain. Economic Geography, 94(4), 425-456.
  22. Choe, J. I. (2003). Do Foreign Direct Investment and Gross Domestic Investment Promote Economic Growth?. Review of Development Economics, 7(1), 44-57.
  23. Crespo, N., & Fontoura, M. P. (2007). Determinant factors of FDI spillovers - what do we really know?. World Development, 3, 410-425.
  24. Devarajan, S., Swaroop, V., & Zou, H. F. (1996). The composition of public expenditure and economic growth. Journal of Monetary Economics, 37, 313-344.
  25. Dickey, A. D., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366), 427-431.
  26. Dogan, B., & Akyuz, M. (2017). Female labor force participation rate and economic growth in the framework of Kuznets curve: evidence from Turkey. Review of Economic Business Studies, 1, 33-54.
  27. Dritsakis, D. N., Varelas, E., & Adamopoulos, A. (2006). The main determinants of economic growth: an empirical investigation with granger causality analysis for Greece. European Research Studies Journal, 9(3-4), 47-58.
  28. Dutta, D., & Ahmed, N. (2004). Trade liberalization and industrial growth in Pakistan: a cointegration analysis. Applied Economics, 36(13), 1421-1429.
  29. Epaphra, M., & Massawe, J. (2016). Investment and economic growth: an empirical analysis for Tanzania. Turkish Economic Review, 3(4), 578-609.
  30. Fisher, S. (1993). The role of macroeconomic factors in growth. Journal of Monetary Economics, 32(3), 485-511.
  31. Ghazali, A. (2010). Analyzing the relationship between Foreign Direct Investment Domestic Investment and Economic Growth for Pakistan. International Research Journal of Finance and Economics, 47(47), 124-131.
  32. Ghosh, A., & Phillips, S. (1998). Warning: inflation may be harmful to your growth. IMF Working Papers, 45(4), 672-710.
  33. Gibescu, O. (2010). Does the gross fixed capital formation represent a factor for supporting the economic growth?. MP RA Paper 50135, University Library of Munich, Germany.
  34. Gudaro, A. M., Chhapra, I. U., & Sheikh, S. A. (2012). Impact of foreign direct investment on economic growth: A case study of Pakistan. Journal of Management and Social Sciences, 8(2), 22-30.
  35. Haider, S. Z. (2018). Pakistan's major problems and their solutions, Pakistan Today, available from https://www.pakistantoday.com.pk/2018/06/16/pakistans-major-problems-and-their-solutions/
  36. Harvey, A. C. (1981). The Econometric Analysis of Time Series, Oxford: Philip Allan.
  37. Jawaid, S. T., & Saleem, S. M. (2017). Foreign capital inflows and economic growth of Pakistan. Journal of Transnational Management, 22(2), 121-149.
  38. Igbokwe, M. C., & Onuorah, A. (2022). Political stability and foreign direct investment in Nigeria: A cointegration analysis. African Journal of Economic Review, 10(1), 33-47.
  39. Jeff-Anyeneh, S. E., & Ibenta, S. (2019). Government expenditure and economic growth: evidence from the Nigeria economy (1981 - 2016). Advances in Research, 19(4), 1-14.
  40. Jehangir, M., Lee, S. & Park, S. W. (2020). Effect of Foreign Direct Investment on Economic Growth of Nigeria: The ARDL Approach. Global Business & Finance Review, 25 (2), 19-36. Https://doi.org/10.17549/gbfr.2020.25.2.19.
  41. Johnson, A. (2006). The effects of FDI inflows on host country economic growth. The Royal Institute of Technology. Centre of Excellence for Studies in Science and Innovation Working Papers, No. 58.
  42. Khalid, M., & Alsalim, M. (2015). The impact of military spending on economic growth: evidence from the US economy. Research Journal of Finance and Accounting, 6(7), 183- 190.
  43. Khan, A. H., & Kim, Y. H. (1999). Foreign direct investment in Pakistan: policy issues and operational implications. EDRC Report Series No. 66, Asian Development Bank, Manila.
  44. Khan, M. S. (1996) Government investment and economic growth in the developing world. The Pakistan Development Review, 35, 419-439.
  45. Lach, L. (2010). Fixed capital and long run economic growth: evidence from Poland. MPRA paper No. 52280, University Library of Munich, Germany.
  46. Laurenseson, J. S., & Chai, J. C. H. (2003). Saving and Investment in China. The China Journal, 51, 164-165.
  47. Lechman, E., & Kaur, H. (2015). Economic growth and female labor force participation- verifying the Ushaped feminization hypothesis. new evidence for 162 countries over the period 1990-2012. Economics and Sociology, 8(1), 246-257.
  48. Li, X., & Liu, X. (2005). Foreign direct investment and economic growth: an increasingly endogenous relationship. World Development, 33, 393-407.
  49. Lim, D. (1983). Another look at growth and defense in less develop countries. Economic Development and Cultural Change, 31, 377-384.
  50. Lucas, R. E. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3-42.
  51. Mah, J. S. (2000) An empirical examination of the disaggregated import demand of Korea - the case of information technology products. Journal of Asian Economics, 11, 237-44.
  52. Mallik, G., & Chowdhury, A. (2001). Inflation and economic growth: evidence from four South African countries. Asian-Pacific Development Journal, 8(1), 123-135.
  53. Mubarik, Y. A. (2005). Inflation and growth: an estimate of the threshold level of inflation in Pakistan. SBP-Research Bulletin, 1, 35-43.
  54. Nantwi, O., & Erickson, V. C. (2019). Foreign direct investment and economic growth in South America. Journal of Economic Studies, 46(2), 383-398.
  55. Nilofer, N., & Qayyum, A. (2018). Impact of foreign direct investment on growth in Pakistan: the ARDL approach. MPRA Paper No. 86961, University Library of Munich, Germany, revised 2018.
  56. Nwankwo, S., Okwu, A. T., & Ezeani, E. J. (2021). Foreign direct investment and local enterprise development in Nigeria: An empirical analysis. Journal of Small Business and Enterprise Development, 28(3), 405-423.
  57. Obi, J., & Eke, C. (2019). Assessing the impact of foreign direct investment on Nigeria's economic growth. International Journal of Economics and Finance, 11(6), 1-14.
  58. Ogunleye, E. O., Adegbite, E. O., & Owolabi, S. A. (2018). The determinants of foreign direct investment in Nigeria: Evidence from time series data. Journal of Global Economics, 6(2), 1-10.
  59. Olokoyo, F. O. (2012). Foreign direct investment and economic growth: A case of Nigeria. Journal of Management and Business Research, 12(2), 22-29.
  60. Onafowora, O., & Owoye, O. (2018). Public debt, foreign direct investment and economic growth dynamics: empirical evidence from the Caribbean. International Journal of Emerging Markets, 5, 769-791.
  61. Oni, O., Ajayi, O., & Agboola, A. (2020). The role of infrastructure in attracting foreign direct investment: Evidence from Nigeria. Journal of Economic and Financial Sciences, 13(1), 1-12.
  62. Pacific, Y. K. T., Shan, L. J., & Ramadhan, A. A. (2017). Military expenditure, export, FDI and economic performance in Cameroon. Global Business Review, 18(3), 577-589.
  63. Pattichis, C. A. (1999). Price and income elasticities of disaggregated import demand: results from UECMs and an application. Applied Economics, 31, 1061-71.
  64. Pesaran, M. H., & Shin, Y. (1996). An autoregressive distributed lag modelling approach to cointegration analysis, London: Cambridge University Press.
  65. Pradhan, R. P., Arvin, M. B., Noman, N. R., & Bhinder, H. K. (2013). Military expenditure and economic growth: using causality, cointegration and missing variables. International Journal of Computational Economics and Econometrics, 3(3-4), 164-186.
  66. Prieto, A. B. T., & Lee, Y. (2019). Determinants of stock market performance: VAR and VECM designs in Korea and Japan. Global Business & Finance Review, 24(4), 24-44.
  67. Rahman, M. M., & Saqui, F. T. K. (2018). Impact of labour force participation on economic growth in South Asian Countries. https://www.pdfs.semanticscholar.org/bd24/1dfb075e00335eee355f8da9c6fd54b534c6.pdf
  68. Ramirez, M. D. (2006). Is foreign direct investment beneficial for Mexico? An empirical analysis, 1960-2001. World Development, 34(5), 802-817.
  69. Rizeq, R. Y. (2015). The impact of government expenditure on the economic growth in Palestine (2000Q1-2012Q2). Online thesis for degree of Master in Economics, available at: https://www.fada.birzeit.edu/xmlui/bitstream/handle/20.500.11889/1510/thesis_09072015_115317.pdf?sequence=1&isAllowed=y
  70. Saqib, N., Masnoon, M., & Rafique, N. (2013). Impact of foreign direct investment on economic growth of Pakistan. Advances in Management & Applied Economics, 1, 35-45.
  71. Sarker, B., & Khan, F. (2020), Nexus between foreign direct investment and economic growth in Bangladesh: an augmented autoregressive distributed lag bound testing approach. Financial Innovation, 6:10.
  72. Shafuda, C. P. P. (2015). An examination of the relationship between government spending and economic growth in Namibia. Master Thesis, Unam University of Namibia, Available at: https://www.semanticscholar.org/paper/Anexamination-of-the-relationship-between-spending-Shafuda/864d23d90f3fd38595dad4010871b467b1442ce8
  73. Siddique, H. M. A., Ansar, R., Naeem, M. M., & Yaqoob, S. (2017). Impact of FDI on economic growth: evidence from Pakistan. Bulletin of Business and Economics, 6(3), 111-116.
  74. Solow, R. M. (1956). A contribution to the theory of economic growth. The Quarterly Journal of Economics, 70(1), 65-94.
  75. Švigir, M., & Miloš, J. (2017). Relationship between inflation and economic growth; comparative experience of Italy and Austria. FIP-Financije i Pravo, 5(2), 91-101.
  76. Thirlwall, A. P., & Barton, C. A. (1971). Inflation and growth: the international evidence. Banca Nazionale del Lavoro Quarterly Review, 98, 263-275.
  77. Tsani, S., Leonidas, P., Costas, F., Ioannis, C., & Pantelis, C. (2013). Female labour force participation and economic growth in the South Mediterranean countries. Economic Letters, 120, 323-328.
  78. Ubi, A. S., Onuorah, A. C., & Nnadi, M. (2020). Corruption and foreign direct investment in Nigeria: A causal relationship. Nigerian Journal of Management Sciences, 8(1), 1-12.
  79. Ugochukwu, U. S., & Chinyere, U. P. (2013). The impact of capital formation on the growth of Nigerian economy. Research Journal of Finance and Accounting, 9, 36-42.
  80. UNCTAD. (2019), World Investment Report, available from https://unctad.org/en/PublicationsLibrary/wir2018_en.pdf
  81. Uneze, E. (2013). The relation between capital formation and economic growth: evidence from sub-Saharan African countries. Journal of Economic Policy Reforms, 16(3), 272-286.
  82. Ur Rehman, N. (2015). FDI and economic growth: empirical evidence from Pakistan. Journal of Economics and Administrative Sciences, 1, 63-76.
  83. Waheed, M., & Ghulam, A. A. (2019). Improving Pakistan's public and private investment, available from http://blogs.worldbank.org/endpovertyinsouthasia/improving-pakistan-s-public-and-private-investment
  84. Whyman, P. B., & Petrescu, A. I. (2017). The economics of Brexit: A cost-benefit analysis of the UK's economic relationship with the EU. Palgrave Macmillan, Basingstoke: UK.
  85. Wong, C. Y., & Adams, C. (2002). Trends in global and regional foreign direct investment flows, in opportunities and challenges for Cambodia, Laos and Vietnam, proceedings of the 2002 Conference on Foreign Direct Investment, [online] Hanoi, International Monetary Fund and the State Bank of Vietnam. Available from http://www.imf.org/external/pubs/ft/seminar/2002/fdi/eng/pdf/wong.pdf
  86. World Bank (2019b), Ease of Doing Business Rank, available from https://www.doingbusiness.org/en/rankings
  87. World Bank. (2019a), World Development Indicators, available from https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=PK
  88. Yildirim, J., Sezgen, S., & Öcal, N. (2005). Military expenditure and economic growth in middle-eastern countries: a dynamic panel data analysis. Defense and Peace Economics, 16(4), 283-295.
  89. Zareen, S., & Qayyum, A. (2014). An analysis of the impact of government size on economic growth of Pakistan: an endogenous growth. MPRA Paper No. 56139, University Library of Munich, Germany
How to Cite

Bello, M. A. (2024). Foreign Direct Investment and Economic Growth: Empirical Evidence from Nigeria. Bayero Journal of Management Sciences, 6(2), 179-204. https://doi.org/10.67894/bjms.2024.pp1ji1jz

M. A. Bello, "Foreign Direct Investment and Economic Growth: Empirical Evidence from Nigeria," Bayero Journal of Management Sciences, vol. 6, no. 2, pp. 179-204, December 2024. doi: 10.67894/bjms.2024.pp1ji1jz

Share this article:
Facebook X / Twitter LinkedIn
Download PDF View Full Text (PDF) Back to Articles