An Analysis of Incentives for Foreign Direct Investment (FDI) and its Effects on Economic Growth: The Case of Nigeria.

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An Analysis of Incentives for Foreign Direct Investment (FDI) and its Effects on
Economic Growth: The Case of Nigeria.
By
Abbas Ghamloush
E-mail: abbas.ghamloush@online.liverpool.ac.uk
Dept. of International Accounting and Finance, University of Liverpool Online
Dissertation Advisor:
Dr. Quach Manh Hao

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Acknowledgements:
I wouldlike to thankmyadvisorDr. Quach Manh Hao forhispatience andsupportthroughoutmythesis
study.Beside myadvisor,aspecial thanksgoestomy cousinMr. Ali Fouani whoguidedme findingthe
thesistopicinadditiontohis quality contributioninthe qualitative sectionof the thesisstudy.
My sincere thanksgoestomyemployer,Fouani NigLtd,asI wouldneverhave beenabletocomplete
my Msc study withouttheircontinuousmotivation,love,andsupport.More importantisofferingme an
acceptance to study an online programme knowing thatstudyingatoffice mayaffectmyproductivityat
work.
Finally,Iwouldlike tothankmyparents,three brothers,andmysister.All of them providedme with
spiritual support andencouragement requiredtocomplete thisamazingjourney.

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Table of Contents
Page
TITLE PAGE…………………………………………………………………………………………………………………………………….1
ACKNOWLEDGEMENTS……………….………………………………………………………………………………………………….2
CHAPTER
I. Introduction
1.1. ResearchAim,Questions,andObjectives……………………………………………………………. 4
1.2. Feasibilityof the Study………………………………………………………………………………………..6
1.3. Justificationof the Topic……………………………………………………………………………………..6
II. Literature Review
2.1. RelationbetweenFDIandGDP…………………………………………………………………………… 8
2.2. Determinantsof FDI…………………………………………………………………………………………… 12
III. Methodologyand Data
3.1. The LinearRegressionModel……………………………………………………………………………… 17
3.2. Unit RootAnalysis……………………………………………………………………………………………… 20
3.3. OrdinaryLeastSquaresRegression……………………………………………………………………..20
IV. Discussionof Results
4.1. Unit RootTest Analysis……………………………………………………………………………………….22
4.2. Hypothesis………………………………………………………………………………………………………… 24
4.3. OLS TestAnalysis……………………………………………………………………………………………….24
4.4. FDI DeterminantsAnalysis………………………………………………………………………………….27
V. Conclusionand Recommendations………………………………………………………………………………..31
VI. References…………………………………………………………………………………………………………………….32

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1. Introduction
1.1- Research Aim, questions,andobjectives:
ForeignDirectInvestment(FDI) isacritical part of international economicsystem.Several studieshave
notedthe importance of FDIsince early1980s (Obinna,1983; OECD, 1998; Adams,2009, and Carp,
2012). Most of the developingcountrieslookatFDIas a catalystfor development;thisexplainsthe rapid
growthof FDI inthe last twodecadesall overthe world. UNCTADdefinedFDIasan investmentmade to
acquire lastingorlong-terminterestinenterprisesoperatingoutsidethe economyof the investor.
OthersclassifiedFDIasan investmenttoacquire 10% of votingstocksof a lastingmanagementandat
least10% of equitysharesinanenterprise operatinginacountryotherthan investor’sowncountry
(WorldBank,2007). Countriescanreceive finance beyondnationalborder;therefore itisanimportant
source of external fund. Otheradvantagesof FDIontargetedcountryare notlimitedtoadvancesin
technology,improve qualityof products,reduce unemploymentrate,andsustaineconomicgrowth.
Differentreasonscontribute towardsthe attractionof FDIintoseveral countries. Investmentpromotion,
fiscal andfinancial incentives,tax incentives,andregulatoryincentivesare examplesof the main
measuresthatcan be takenby a potential hostcountry. FDIintraditional marketsomarketswithhigh
risksand noformal managerial rulesisusuallyverybeneficial tothe recipienteconomyasitbringsnew
wayof managementandcreatesnewprofessionswhichcontributespositivelytowardsraising
productivityof humancapital. Forinstance,humancapital enhancementresultingfromeducationand
trainingeffortisnotcarriedout bygovernmentinNigeria.However, itismainlycarriedoutby
multinationalcompanies(MNC).Forexample,whenMTN came intoa primitivemarketlikeNigeriain
2001, itbringsalongin additiontotechnology,new technical knowledgeandmanagementtechniques
whichservedasthe base for betterskill levelsof the workforce.Indeeditisamutual benefitforboth
NigeriaandMTN. For MTN, itbecomesthe biggestmobileoperatorinNigeriaandWestAfricaonlyfew
yearsafterinceptionin2001. Therefore,Nigeriaprovidedthe marketsize factor.Onthe otherhand,
Nigeriaadoptedthe requiredtechnologyforfurtherdevelopmentinadditiontohumancapital
enhancementatnocost for the government.
Accordingto UNCTADreport releasedinJune 2014 inrelationtoFDI inAfrica,FDI to Africaisincreasing
due to intra-AfricanflowswhichisledbySouth-Africa,Nigeria,andKenya.The share of announced
cross-borderinvestmentsincreasedto18 percentbetween2009 and 2013; however,thispercentage
was lessthan10% between2003 and2008. Intra-Africaninvestmentissignificantforsmall African
countriesasa source of foreigncapital especiallynon-oil exportingcountries. Accordingtothe same
report,FDI inflowtoAfricareflecteda4 percentincrease in2013 up to $57 billion.Thisincrease inFDI
inflowismainlydrivenbytwomainfactors:investmentseeking (regional &international) and
infrastructure investment. AfricaiscontinuouslyattractingFDIinflow due tohighexpectationsof
sustainedpopulationandeconomicgrowth.FDIinflow toSouthernAfricaincreasedin2013 to 13 billion
dollarsfrom6.5 billiondollarsin2012. Thisis drivenmainlybythe increase of FDIinflow toSouthAfrica
and Mozambique. FDIinflow toNorthAfricaremainedhighat15.5 billionevenafter7% decline inFDI
inflowstothe region. InEastAfrica,FDI inflowsincreasedby15% to $6.2 billion due toincrease inflows
to bothKenyaand Ethiopia.FDIflowstoWestAfricadeclinedby14% witha total amountof $14.2
billion.Thisismainlydrivenbythe decrease in FDIflowstoNigeria. The aimof thispaperis to have an
ideaaboutthe main incentivesof FDIinNigeria,inadditiontodeterminingthe relationbetweenFDIand
economicgrowth(GDP) inNigeria.The governmentinNigeriahasbeengivingaspecial attentionforFDI

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throughofferinganumberof incentives thatwelcomesforeigninvestorsinmostof the sectorsexcept
some keyones(suchas the military andoil sectors).The incentivesofferedbythe governmentto
foreigninvestorsare notlimitedtothe abilityof foreignersto own100% enterprise,tax relief,noneed
for importlicense,andrepatriationof foreigncapital investment(UNCTAD,2006). More important,the
Nigerianlawsproviderequiredprotectionof foreigninvestment. Forinstance,itallows depreciationfor
capital assets.Moreover,ithasprovisionsagainstnationalizationandcompulsorypurchase of company
assets. One of the mainattractionsin Nigeriatoforeigninvestorsisthe greatdemandforgoodsand
servicesas FDI increasedfrom$2 billionin2003 to $8.8 billionin2011.
The Nigerianeconomyisdominatedbythe oil sector;sogovernmentistryingtodiversifythe economy
throughprovidingprotection andincentives toforeigninvestment. Accordingto4th
quarter2014
ForeignTrade Reportof the National Bureauof Statistics(NBS),the Nigeria’sexportsrise by20 percent
fromN14,245.3 billionin2013 to N17,203.9 billionin2014. However,thisfigure isstill dominatedby
crude oil where itcontributesfor74.4 percentof the value of total domesticexporttrade. Accordingto
the same report,a total of US$20.750 billion netcapital wasimportedin2013. Thiscapital was divided
intodifferenttypesof investmentsuchasFDI (equity),FDI(others),portfolioinvestment(equity,bonds,
and moneymarketinstruments),andotherinvestmentssuchastrade credits, loans,andcurrency
deposits.Portfolioinvestment occupiedthe firstpositionwith34% of total capital importedinto the
countryduring2014 4th
quarter.The secondpositionisoccupiedbyFDIwith30% of total capital
importedduringthe same period.The reportalsoshowedthe top5 capital importationbybusiness
type.Shareshadthe largestportionof total capital importedin2014 to Nigeria.Telecommunication
occupiedthe secondposition;whilefinancing,manufacturing/production,andoil &gas occupiedthe
third,fourth,andfifthplace respectively. Bycountryof origin,the UnitedKingdomcontinue toholdthe
largestshare of capital importedbybusinesstype in the lastquarterof 2014 accordingto the National
Bureauof Statistics.The US providedthe secondlargestsource of capital forthe quarterunderstudy,
while Saudi ArabiaandEgyptprovidedrespectivelythe thirdandfourthlargestsource of capital
imported.
The favorable economicenvironmentinNigeriaisthe maindriverthatcontributestowardsattracting
private capital inflow. Accordingtothe WorldInvestmentReportpublishedbyUNCTADin2014, FDI
increasedinall majoreconomies(developed,developing,andtransitioneconomies) during2013. FDI
flowstoWestAfricain 2013 wasrecordedat $44 billion.Nigeriawasone of the countriesinWestAfrica
that had FDIinflowabove 3billiondollarsalongwithSouthAfrica,Mozambique,Egypt,Morocco,
Ghana, andSudan. The heartof the debate isthe motivesthatdrivesforeigninvestorstoexportcapital
intoNigeriaandwhetherFDIinflow intoNigeriareflectspositive economiceffects. The relationbetween
FDI and economicgrowthinNigeriaisstill notclearafternumerousstudiesinthisarea(Adelegan,2000;
Adams,2009; Carp,2012; Olusanya,2013; Olayiwola&Okodua,2013). In the firstquarterof 2013, the
Real Gross DomesticProduct(GDP) grew by6.56 percentincorrespondence withthe same quarterin
2012 accordingto the Central Bankof Nigeria(CBN).Thiswasmainlydrive bythe growthinnon-oil
sectorsuch as hotels,real-estate services,construction,andsolidmineralstomentionfew.Thisclearly
showshownon-oil sectorcontributestobe a major driverinthe Nigeriaeconomy.
For thisreason,thispaperwill addressbelow researchquestions:
a- What isthe effectof FDIon NigerianeconomicgrowthGDP?
b- What are the maindeterminantsof foreigndirectinvestmentinNigeria?

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The paper ismainlyquantitativewhereittriestoidentifythe impactof FDIinflow onNigerianeconomic
growthrepresentedbyGDP.The researchertriestoprove a strongrelationbetweenFDIandGDP. The
model will mainlystudythe relationbetweenthe 2variablesfora periodof 43 years(1970-2013);
however,some attentionwill be giventoothermacroeconomicfactorssuchas interestrate (INTR),
exchange rate (EXR),andinflation(INF).The relationbetweenFDIandGDP will be impliedfroma
regression model.The outputof thismodel willthenbe confirmedthroughasurveywhichisshared
withseniormanagersof foreigncompaniesoperatingcurrentlyinNigeria.
1.2.Feasibilityofthe study
The author is a manager in a foreign company operating currently in Nigeria. Indeed, the
management is enthusiastic about the project where it provided a list of variable contact list for
MDs and CEO’s of foreign companies in Nigeria. Moreover, several senior managers confirmed
their willingness to be interviewed for the study if needed. A survey about the determinants of
FDI in Nigeria is shared with 50 MDs and CEOs of companies working in Nigeria. This will serve
as a primary source of data.
The secondary source of data which is related to financial figures of FDI in Nigeria is collected
from the official website of Central bank of Nigeria in addition to other financial sources such as
banks operating in Nigeria. The author will extract 5 sets of data assigned to the five variables
under study (FDI, GDP, EXR, INF, & INTR) for the period between 1970 and 2011. The data
related to FDI, GDP, INF, and INTR will be collected from the National Bureau of Statistics
published in the website of Central Bank of Nigeria. Data related to exchange rate will be
collected from FCMB bank. These time series sets will be entered in statistical and econometric
forms where the output result will be applied on a linear regression equation to identify the
impact of different independent variables on the dependent one GDP.
1.3.Justificationof the topic:
The topic is related to MSC module, International Accounting and Finance. The author looks
briefly into the impact of FDI inflow on economic growth in general. The author wants to get a
better understanding on this relation specifically in Nigeria. Moreover, the author will look at
some of the factors that limit FDI inflow to Nigeria in addition to the factors that contribute
positively on increasing the flow of FDI to Nigeria.
The desired research is expected to fill a number of gaps in the area of study. Up till now, there
is no clear correlation between FDI inflows and Nigerian economic growth. Few studies
separated between FDI inflow into service sector and FDI into manufacturing sector. Some
researches resulted in a positive correlation, others resulted in negative ones. The author
expects to contribute more on this correlation through empirical analysis. Moreover, there is no
clear idea on the major incentives of FDI inflow into Nigeria. Akinlo (2004) argues that labor
force is the top incentive that contributes towards FDI inflow; others argue that the market size
is main incentive. The author expects to contribute more on this topic through the undergoing
research especially that some interviews will be conducted with owners and managers of
biggest foreign companies in terms of revenues and importation.

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The author plans to submit the final dissertation draft to the employer’s management. It is hoped
that the conclusions to be drawn from the research will give a better understanding for the
author’s company on how to get the best out of the investment in Nigeria from market seeking to
strategic asset seeking. Further, it is hoped that this study will serve as a bridge for further
research on the relation between FDI and growth of economy in Nigeria especially that this
relation is still not clear; future research may include below topics:
a- Impact of FDI inflow on the development of stock market in Nigeria.
b- Impact of the Nigerian level of human capital on attracting FDI into Nigeria.
c- How is Nigeria affected by FDI flow increase or decrease to West Africa?
Finally, the author believes that the final results of this dissertation will be significant on macro-
level basis. Because several macroeconomic variables are being analysed in this dissertation,
suggestions might be made to policy makers on laws and regulations which might be too
heedless resulting in manipulation of law or too strict which results in discouraging business
from bringing capital into Nigeria.
2. Literature Review:
MNC and foreign investments have grown abruptly after the Second World War; the expansion
of FDI really took off during the 1960s (Nayak & Choudhory, 2014). As a result of this
expansion, several theories tried to explain FDI. However, there is no single theory that can
explain all types of foreign direct investment, nor it can explain an investment made by a country
into a specific region. Therefore, the two main factors to be considered when applying an FDI
theory are type and origin of investment. The early theories of FDI are based on perfect
competition. MacDougall (1958) established one of the earliest theories of FDI based on perfect
competitive market assumptions. Kemp (1964; cited in Nayak & Choudhory, 2014) elaborated
the theory of McDougall. Expecting a two-nation model and costs of capital being equivalent to
its peripheral profitability, MacDougall and Kemp both expressed that when there was free
development of capital from a contributing nation to a host nation, the minimal efficiency of
capital had a tendency to be leveled between the two nations. This is on the grounds that in the
long haul the contributing nation gets higher income from its speculation abroad.
Other theories of FDI are based on imperfect markets; such theories discuss that there is no
need of FDI in a world characterized by perfect competition. FDI based on imperfect market was
developed based on different approaches. The industrial organization approach was developed
by Hymer (1976). According to Hymer’s theory which was developed in his 1960 doctoral
dissertation, a firm operating abroad has some disadvantages when compared to domestic
firms; these are not limited to language, consumer’s preference, and legal system requirements.
Moreover, a foreign firm is always facing the risk of foreign exchange rate. Therefore, abroad
operation is only profitable when these disadvantages are off-set by the firm specific advantage
such as availability of superior technology with the firm, brand name, patent, economies of
scale, expertise skill, and cheaper sources of goods and services. Monopolistic approach is the
second form of FDI based on imperfect markets; this approach is an extension to Hymer’s
theory and was developed by Kindleberger (1969). Kindleberger argued that even though when
firms have some firm-specific advantages such as brand name or superior technology; they are
only useful in the case of imperfect market. It is better for a firm to exploit its monopolistic power

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in a foreign country than sharing its advantages with potential customers. Another explanation
of FDI based on market imperfection was formulated by Kinckerbocker (1973). In the economic
literature, it has been declared that market size and utilization of abundant factors available in
the host country are the two main attractions when choosing a particular location. Kinckerbocker
added a third motive: firms might invest in a country to match a rival’s move. In other words,
firms might invest in the same country where competing firms are investing.
Beside FDI theories based on perfect and imperfect market competition, Aliber (1970; cited in
Nayak & Choudhory, 2014) introduced another theory of FDI based on strength of currency.
This theory is based on the difference between currency in source and host country. Aliber
argued that countries with strong currency are more likely to attract FDI than countries with
weak currency. This hypothesis was proved to be consistent with UK, US, and Canada.
Another theory of FDI is related to international trade; Smith (1776) made one of the early
attempts to provide a theory that explains international trade. Smith explained that trade flows
between nations occur when a nation has a flat out favorable position in the production of one
commodity and hindrance in the creation of another commodity. This theory was elaborated by
Ricardo (1817) based on comparative advantage. He argued that a country will export a
commodity assigned to a comparative cost advantage and it will import another commodity
assigned to least cost advantage.
The effect of foreign direct investment (FDI) inflow on Nigerian economic growth is an ongoing
discussion that continuously appears on national press as well as in academic literature. In
economies where poverty reductions are unattained, required investments are also unattained.
There is a positive correlation between level of saving and investment. Therefore, it is argued
that FDI serves as a bridge to fill the gap between savings and investments. Nigeria is one of
the countries where the saving rate is very low; this reflects the importance of FDI in this
country.
2.1. Relation betweenFDIand GDP:
Africa has been globally the most underdeveloped region in the long term; very low income and
lack of basic human needs prevented Africa from exerting a significant influence on international
economic order. However, many African countries are now seeing high FDI inflows which
contributes toward rapid GDP growth. Eva (2015) analyzed FDI inflows to Africa and its effect
on the current African economic situation. The study was based on international reports
published by certified organizations in order to shed light on the relation between GDP growth
and FDI inflows in Africa. Although the findings of the study pointed out some positive forms of
relation between FDI and GDP in Africa; however, these foreign investments failed to improve
African’s living conditions in most African countries. The additional capital brought into Africa
plays a significant role in creating new employment, supplementing domestic savings,
integrating Africa into the global world economy, bringing new technologies, and encouraging
efficiency of domestic roles. All these factors are significant in sustaining the growth of African
economy. However, the author differentiated between economies of Sub-Saharan Africa (SSA)
and North Africa where the last is more developed. Due to rapid and huge FDI inflows into Sub-
Saharan African countries, its GDP growth in 2010 was growing at a rate 2 times higher than
that of advanced countries. Moreover, this rate is expected to be three times higher in 2015 due

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to the strong growth trend in SSA. Based on this, Africa will remain a major recipient of FDI in
the coming years especially in low income countries assigned to SSA.
Tekin (2011) investigated foreign direct investment in some of the least developed countries and
analyzed its relation to economic growth and exports through panel granger causality analysis.
In countries like Sierra Leone, Haiti, and Rwanda, the findings indicate a unidirectional causality
from exports to GDP. However, in Angola, Zambia, and Chad, the findings indicate a
unidirectional causality from GDP to exports. Regarding the relation between FDI and economic
growth, the results show that FDI is causing GDP in Togo and Benin while GDP is causing FDI
in Gambia, Malawi, Madagascar, and Burkina Faso. Therefore, there is a significant relation
between FDI and economic growth in only 6 countries out of 18 least developed countries. The
main reason for this result could be due to the very low levels of FDI in national incomes
assigned to countries under study. Although FDI is on a rising trend in these countries, the
share of FDI in GDP remains very low. It is also noted that FDI is concentrated in few countries
mainly the ones that are rich in mineral resources. Moreover, in all countries studied, there were
no single case where FDI caused a significant negative effect on real GDP. The study also
examined the relation between FDI and exports where it was concluded that there is a granger
causality from FDI to real exports in Yemen, Mauritania, Haiti, Niger, Chad, and Togo;
moreover, a granger causality from real exports to GDP is identified in Haiti, Senegal, Zambia,
Madagascar, Malawi, and Rwanda.
Usman & Ibrahim (2012) investigated the impact of FDI and monetary union on economic
growth in the Economic Community of West African States (ECOWAS). A common currency in
ECOWAS sub-region is a desire since the group was found in 1975. However, lot of challenges
is avoiding the group from achieving this target. Regarding monetary union, the authors depend
on comprehensive evidence from the European Union to show how common currency in
ECOWAS can play an important role in stimulating the flow of FDI in the sub-region. The
research concluded a positive relation between FDI and economic growth in the ECOWAS.
Alege & Ogundipe (2013) investigated the relationship between FDI and economic growth in
ECOWAS sub-region. Using the System-GMM panel estimation, the authors approached the
study covering the period 1970-2011. The benefit of System-GMM is that it allows including
explanatory variables in the studied model. For this reason, the authors included quality of
institutions and role of human capital as explanatory variables in the model. In contrary to the
previous studies, this study showed insignificant and also negative impact of FDI on economic
growth of the ECOWAS countries. Adamu (2014) studied also the impact of FDI on economic
growth in the ECOWAS. The author estimated the regression coefficient for all the countries
under the regional group for the period 2000-2009. FDI was found to be positively related to
economic growth.
Rachdi & Saidi (2011) investigated the impact of portfolio investment and foreign direct
investment on economic growth. The empirical study is based on 100 countries from both
developing and developed economies for the period 1990-2009. The author used three
economic and statistical estimators (GMM, WG, and GLS) to investigate the impact of FDI
inflow on economic growth. The results of the three estimators reflected positive and significant
impact of FDI on economic growth for developing (69 countries) and developed (31 countries)
economies. Moreover, the results showed insignificant and negative impact of portfolio
investment on economic growth of developing economies. However, the same coefficient is
positive and significant in developed economies.

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Obadan (1982) studied the Nigerian economy for the period 1973-1990 and he discovered a
positive relationship between FDI and GDP. The author revealed that the economy was growing
at an annual average rate of 1.85%; the foreign capital contribution to this rate is around 54%.
Shiro (2006) analyzed the impact of FDI inflow on the Nigerian economy for the period between
1970 and 2005 as well as analyzing the ability of the government to attract sufficient FDI inflow
that is adequate to accelerate the pace of economic growth in the country. Econometric and
statistical methods were used to determine the dependence of Nigerian economy (GDP) on FDI
inflow. Major economic indicators such as gross fixed capital formation (GFCF) and index of
industrial production (IIP) were added to the research in order to study their relation to FDI.
Results of the research reflect positive relation between FDI and each of the other variables
(GDP, GFCF, and IIP). However, results show that contribution of FDI inflow to Nigerian
economic growth is not significant. Therefore, more FDI should be attracted to the country
through improving the economic climate for foreign investors. This climate can be found through
political stability in addition to laws and regulations that ensure the rights of foreign investors.
The author added that the domestic investors are the key for foreign investors. The Nigerian
government has very little incentives for domestic investors. Therefore, encouraging domestic
investors first is a must in order to attract adequate capital to Nigeria.
Edomiekumo (2009) examined causal relationship between FDI and GDP in Nigeria between
1970 and 2007. The author proved through Granger causality that the direction of causality
between the two variables is from FDI to GDP. That is, when FDI inflow increases in Nigeria,
there is more economic development in the country. Moreover, empirical evidences in the study
showed that GDP has its own impact also on FDI. Therefore, FDI causes GDP and vice versa.
Osinubi (2010) analyzed the significance and direction of foreign private investment on GDP in
Nigeria between 1970 and 2005. The study found that foreign private investment has positive
impact on GDP. That is, all other variables held constant, 1 unit increase in FDI will lead to
0.00059 increase in GDP.
Umoh, Jacob, & Chuku (2012) investigated the relationship between FDI and GDP in Nigeria
between 1970 and 2008. In order to check if there is bi-directional relationship between FDI and
GDP, single and simultaneous equation systems were employed. The result of this paper
showed that FDI has positive impact on GDP. Moreover, the study showed that GDP has also
positive impact on FDI. In other words, GDP and FDI are jointly determined.
Ogbonna et al. (2012) also examined the relationship between FDI and economic growth in
Nigeria by using granger causality regression equation. The authors found that the relationship
between the two variables is statistically insignificant. However, FDI still has a positive impact
on GDP.The authors included some other variables in the regression equation such as gross
fixed capital formation, exchange rate, consumer price index, and net exports. The study
showed that these variables have impact on GDP.
Inekwe (2013) examines the relation between FDI, employment rate, and economic growth in
Nigeria. The study examined this link in both manufacturing and servicing sector. The results of
the study showed that there is a positive relation between FDI and economic growth plus a
positive relation between FDI and employment rate in the servicing sector. Moreover, the results
also showed a negative relationship between FDI and economic growth plus a positive relation
between FDI and employment rate in the manufacturing sector.

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Oregwu & Onuoha (2013) looked at some factors that may affect FDI inflow to Nigeria such as
GDP, openness of trade, inflationary levels, communication, and transport. The data of these
variables was interpreted for ten years (2001-2010). The result of the analysis showed that
there is no direct correlation between Nigeria’s GDP growth and FDI inflow. According to the
study, this result is a sign that economic growth in Nigeria is brought up by the oil sector;
unfortunately, it is not enough to attract the required FDI in Nigeria. Moreover, openness of
trade is not significant for FDI inflow. This is because foreign sector is not adding value to the
manufacturing sector and this is proved in the World Bank Report (2001) where it shows that
the percentage share of manufactured goods in Nigeria’s exports is 1% with 99% share for
primary commodities. The study concluded that there is no direct correlation between FDI and
GDP.
Onwunmi (2012) analyzed the relation between FDI and economic growth in Nigeria. The result
of the analysis didn’t provide much support for the positive relation between FDI and GDP. The
author didn’t ignore the importance of FDI to Nigerian economy; however, the analysis of the
study showed that FDI as a single variable didn’t exert independent growth effect in Nigeria for
the period of study.
Akinlo (2004) investigated the relation between FDI and Nigerian economic growth in Nigeria for
the period 1970-2001. The results according to the error correction model (ECM) shows that
FDI doesn’t have a significant effect on economic growth. However, it supported the argument
that extractive FDI might not be growth enhancing as much as manufacturing FDI. Therefore,
the challenge for Nigeria is to attract the right form of FDI which will contribute toward the
economic growth of Nigeria in addition to providing a balanced economy. Moreover, the results
of the study showed that the labor force have a significant effect on economic growth.
Therefore, the author recommended expansion of labor force to raise the stock of human capital
in the country. This study showed that export is a very important factor and has a significant
positive effect on growth of the Nigerian economy. The findings of this study matched with that
of Inekwe(2013) who discussed that FDI into service sector has less significant effect than
manufacturing FDI on Nigerian growth.
Ayanwale & Bamire (2004) examined the relationship between FDI and firm level productivity in
Nigeria. The study found a positive and significant impact of foreign investment on domestic
investments. Domestic firms are main factors that contribute to the success of foreign ones.
However, the productivity level of foreign firms remains higher than that of domestic ones. This
is because foreign firms are larger in size and more export oriented in addition to higher
expertise staff.
Nurudeen, Wafure, & Auta (2011) also examined the relation between FDI and economic
growth in Nigeria for the period 1970-2008 which is similar to the study of Akinolo (2004) in
terms of the period of study and the methods used to examine the link in question. The analysis
of annual data was analyzed using the error connection technique and ordinary least squares.
The result of the analysis shows that the Nigerian market size (GDP) has a significant negative
effect on FDI. Moreover, the results reflected negative effect of inflation on FDI inflows.
Olusanya (2013) also analyzed the relation between FDI and economic growth in Nigeria.
However, this study examined the relation from a different perspective; it differentiated between
a pre and post deregulated economy. The analysis was divided into three periods: 1970 to
1986, 1986 to 2010, and 1970 t 2010. The results of the study showed that between 1970 and

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1986 (the pre-deregulation era), there is causality relationship from FDI to GDP which means
that FDI is caused by GDP. While in post deregulation era, the result of the analysis showed
that there is no causal relationship between FDI and GDP. The overall conclusion from this
study is that there is a one-way relationship between FDI and GDP and this relation is from
GDP to FDI.
Oyatoye et al. (2011) concluded their study with a positive relation between FDI and GDP for
the period under study (1987-2006). The authors stated that this relation is not only positive, but
also significant as 1 Nigerian Naira (NGN) increase in FDI will lead to NGN 104.749 increase in
GDP. Therefore, the study recommended that government should provide more encouragement
to foreign investors as FDI will also enhance exportation of goods which in turn will improve
GDP in Nigeria. These findings totally disagree with other studies who concluded their studies
with insignificant relation between FDI inflow and economic growth in Nigeria such as Orgerwu
& Onuoha (2013) and Olusanya(2013).
All of the above studies answered the first research question on the relation between FDI and
economic growth from a different perspective. The purpose of these researches is almost the
same; however, each research has its own characteristic regarding country(s) under research,
period of the research, or even the econometric and statistical method used. Regardless of
these characteristics, some researchers concluded their studies with a significant (positive or
negative) relationship between FDI and economic growth, other researchers concluded their
studies with an insignificant relation between FDI and GDP. Obadun (1982), Shiro(2006),
Edomiekumo (2009) and Adamu (2014) concluded their studies with a significant and positive
impact of FDI inflow on economic growth. Nurudeen, Wafure, & Auta (2011) found that there is
a significant and negative impact of FDI inflow on GDP. Alege & Ogundipe (2013) come to an
end that there is insignificant but negative impact of FDI inflow on economic growth. Ogbonna et
al. (2012) & Onwunmi (2012) reached to a conclusion that FDI inflow has insignificant but
positive impact on FDI inflow.
2.2.Determinantsof FDI
Over the past few decades, authors all around the globe investigated the potential determinants
of foreign direct investment. Dua & Garg (2015) analyzed some of the macroeconomic
determinants of FDI in India. The results of the study indicate that higher domestic return, higher
domestic input, good infrastructure, and depreciating exchange rate are important determinants
of foreign direct investment. Moreover, credit worthiness has also a positive impact on FDI.
However, macroeconomic instability affects FDI inflow negatively. Theoretically, openness of
trade has positive impact on FDI; however, the results of the revealed the opposite. The
negative contribution for openness of trade on FDI inflow to Nigeria means that FDI to inflow is
tariff jumping as explained by the authors. Another important result in this study showed that an
increase in FDI inflow to other emerging countries reduce FDI inflow to India. This shows the
level of competition between different emerging economies. De los Santos (2014) analyzed the
importance of multinational corporations (MNC’s) in the flow of foreign direct investment
between nations. For this purpose, the author collected data from Chile and analyzed how FDI
will affect the economic growth and development in the country. The empirical results of the
study suggest that the growth in Chilean economic activity serves as a main attraction for
foreign investors. Moreover, the avoidance of overvaluation of Chilean exchange rate (Chilean
peso) played an important role in attracting FDI inflow to Chile. Moreover, the empirical results
showed high ratio of payments on the external debts to exports which exerts a negative

13 | P a g e
significant effect on FDI inflow into Chile. Nevertheless, the author stated that MNC serves as a
bridge for fast and easy attraction of foreign investment.
Malhotra, Russow, & Singh (2014) tried to evaluate the determinants of foreign direct
investment in four emerging markets: Brazil, Russia, India, and China for the period between
1995 and 2012. The study was based on both economic and non-economic variables. Ten
economic variables and ten institutional variables were analyzed. Economic variables analyzed
are: budget balance as percentage of GDP, change in real wages, current account as
percentage of GDP, current account as percentage of XGS, debt service as percentage of XGS,
GDP per head of population, inflation, international liquidity, real GDP growth, and
unemployment rate. Institutional variables analyzed are: bureaucracy quality, corruption, ethnic
tensions, external conflict, government stability, internal conflict, law and order, military in
politics, religious tensions, and socio-economic conditions. The results of the study showed that
both two types of variables exert a significant impact on FDI flows to countries under study. The
study also showed that high GDP results in more FDI inflow to the countries under study.
Williams (2015) investigated FDI in Latin America and the Caribbean (LAC) using a sample of
68 developing countries in order to compare and contrast FDI determinants in LAC and non-
LAC countries. Data collected from these countries for the period between 1975 and 2005. The
results of this study suggest that the stock of infrastructure is a main attraction to LAC countries
unlike non-LAC countries. Moreover, high debt contributes negatively to FDI inflows in non-LAC
countries. Constraints on the executive also has negative impact on FDI inflows to non-LAC
countries. Therefore, this study noted differences between determinants of FDI inflow to LAC
and non-LAC countries in three main dimensions.
Sankaran (2015) analyzed the determinants of FDI in the Dominican Republic for the period
between 1993 and 2012. The empirical analysis of the study revealed a number of significant
factors that affects the FDI inflow. These factors are not limited to market size, infrastructure,
labor force, trade openness, secondary education, and natural resource extraction. Based on
these factors, the author stated a number of recommendations such as investing in
infrastructure, transportation, communication, and education. Moreover, policy makers should
implement trade policies which is outward-oriented. The author also included other variables in
the analysis. Although results showed that these variables are statistically insignificant;
however, they helped explain how FDI inflow into Dominican Republic is affected by other
factors. For instance, the credit variable shows that decreased loan availability can lead to led
FDI inflow into the country, and vice versa. Moreover, the debt service variable shows that FDI
inflow increases when budget policy is more conservative.
Villaverde & Maza (2015) studied the determinants of FDI in the EU regions for the period 2000-
2006. The findings of the study showed that technological progress and competitiveness are
considered as main FDI inflow determinants in the EU region. Beside technological progress,
labor market characteristics and economic potential have a positive impact on FDI location
patterns. On the other hand, market size and labor regulation doesn’t have neither positive nor
negative impact on FDI inflows to EU. The author discussed that factors like market size play
noteworthy roles in developing markets and not in developed ones. This study obtained
interesting results regarding FDI drivers. EU is one of the main recipient of FDI in the world; it’s
main FDI drivers completely differs from other main recipients (such as West Africa) of FDI. High
competitiveness, technological progress, and economic potential are main drivers of FDI in EU.

14 | P a g e
However, market size and infrastructure are considered as main determinants of FDI in a lot of
developing countries.
Armandei (2013) analyzed the impact of corruption on FDI inflow in 10 Central and Eastern
European countries. GDP was taken as control variable to examine this relation. The author
collected data for the period 2000-2012 from UNCTAD for FDI and from Transparency
International for Corruption Perception Index. The majority of literature on this subject shows a
negative impact of corruption on FDI; this was confirmed again in this study. However, the
negative significant relation is less than what is expected. This shows that foreign investors
conduct a complex systematic analysis for the business environment before they decide to invest
or not. The results of the study also showed a significant positive relation between GDP and FDI.
Therefore, it can be concluded that although market potential is high in Central and Eastern
European countries, this can be diminished by other critical factors related to stability of regulatory
system. In order to attract more FDI into countries under study, the author recommended reforms
of public administration which serves as a bridge to minimizesystematic corruption in the country.
Ivanova and Masarova (2013) discussed the importance of road infrastructure in the Slovak
Republic and its impact on FDI and GDP. Time series and correlation analysis were used in this
analysis and also to determine the competitiveness of the country. The period of study is from
2000 until 2011. Based on correlation analysis results, a strong significant positive relation exists
between infrastructure and GDP. Moreover, the study showed a downward tendency assigned to
the competitiveness of the Slovak Republic even when economic growth rate was at is highest
(the year 2007). Therefore, the relation between country’s competitiveness and economic growth
is paradoxical. This can be explained by the mono structural car production in the Slovak industry.
Therefore, Slovak government should provide required incentives to small and medium
enterprises as they play an important role in creating competitive advantage, increasing
employment rate level, and growth of economy. Such type of support has been acknowledged as
a crucial condition which contributes towards the diversification of the Slovak economy. Moreover,
a special attention should be given to road infrastructure in order to make Slovakia more
accessiblein Europe. Nevertheless, connecting eastern and western parts of Slovakia is vital; the
study showed how infrastructure is one of the most important determinants of FDI inflow into
Slovakia.
Abdulai (2007) investigated foreign direct investment determinants and the relation between FDI
and economic growth in sub-Saharan Africa. Most countries in sub-Saharan Africa has recovered
recently from long period of stagnation; therefore, they are in need of FDI not only to accelerate
economic growth and development, but also for bringing new skills and technology. The author
concluded his study that political and economic stability are main factors that contribute towards
attracting foreign investors. Moreover, all public resources should be managed in accountable
and transparent perspective. According to the author, inflation contributes negatively to FDI inflow
into sub-Saharan African countries. Therefore, policy makers should give special attention to this
factor and continuously implement policies that reduce inflation. Government budgetary deficits
is another macroeconomic factor that affects the level of FDI inflow. Therefore, reducing
government budgetary deficits is another major task for policy makers in order to reserve
additional resources which can be used in developing physical and financial infrastructures which
in turn reflects in more FDI inflow.
Sichei & Kinyondo (2012) tried to find out the major determinants of FDI in Africa using a data
sample of 45 African countries. The data collected from these countries is over the period 1980

15 | P a g e
to 2009. The study used panel data analysis instead of OLS as it provides more accurate results
when analyzing several countries in the same model. The results of the panel data analysis are
not limited to natural resources, investment agreements with international countries outside the
region, and agglomeration economies. The link of African economies generates improved
economic outcomes as well as increasing the wellbeing of the population. The important results
of this study show that FDI inflow to Africa is not attracted only by natural resources; this places
a responsibility on all African governments to reform its national and international institutions
which contributes in increasing the level of foreign capital in Africa. Kudaisi (2012) investigated
major determinants of FDI in 16 West African countries. In addition to the growth rate of GDP, the
author examined empirically other indicators which are not limited to openness of the economy to
regional & international trade, inflation rate, exchange rate stability, natural resources, availability
of labor, and government policy in attracting foreign capital. Empirical results of this study show
that natural resources and availability of labor (mainly cheap one) are the major determinants of
FDI inflow into West African countries. Another significant factors that contribute foreign capital
are market size and official exchange rate.
Adefeso & Agboola (2012) used Residual-Based Engle-Granger-Dickey-Fuller Co-integration test
in order to investigate the long-run determinants of FDI in Nigeria. The study revealed that the oil
sector and market size are the main two variables that attract FDI inflow into Nigeria. Each 1%
change in oil sectorand market sizewill determine respectively 79% and 67% change in the mean
of inflows of FDI in the long run. Other important variables attracting FDI inflow were revealed in
this study; these are not limited to degree of openness and tax. The findings of this study will be
confirmed or denied when concluding this paper.
Umoh, Jacob, & Chuku (2012) also discussed some of the most important factors attracting FDI
inflow into Nigeria. They implied that openness to regional and international trade is very
essential to increase FDI inflow to the country. This can be achieved through policies
development which ensure greater private participation in the economy. Both domestic private
participation and foreign private participation contributes towards a higher level of openness in
the economy. The authors also discussed that privatization is a very important factor that
encourages FDI. Therefore, it is advised to down-size government enterprises. In addition,
authors give a special attention to the importance of political stability in attracting FDI capital into
the country. The authors explained that political stability and GDP are interconnected. In other
words, in periods where Nigeria had unstable political situations; economic development which
is assigned to investment was reduced. Moreover, a poor economic performance may lead to
unstable political situation (such as government collapse).
Abubakar & Abdullahi (2013) also inquired about the determinants of FDI into Nigeria between
1981 and 2010. They analyzed several factors that may contribute to FDI inflow such as natural
resources, openness of trade, and inflation. On the ground level, it is supposed that these
variables contributes positively to FDI inflow; however, it is shown that market size, openness of
trade, and natural resources do not attract FDI into Nigeria in the long run according to the
results of Johansen cointegration test. On the other hand, market size and inflation affect
positively FDI in the short run according to the results of Granger causality test. These results
confirmed the findings of Adefeso & Agboola(2012) on the determinants of FDI inflow.
Rachdi & Saidi (2011) suggests a set of policy implications to attract FDI. These implications are
not limited to reducing level of corruption and enhancing political stability. Onwunmi (2012) tried

16 | P a g e
to find out the major determinants of FDI in Nigeria. The author found that laws and regulations
is a main driver for FDI inflow increase. Such laws offer foreign investors the required
protection. The authors also stated that political stability is the one of the major drivers of FDI
inflow into Nigeria. The study also showed that bad infrastructure available affects negatively of
FDI inflow. The author concentrated on two main factors (political stability & laws and
regulations) as major determinants for FDI in Nigeria; this is to be confirmed in this study as
these two factors are also taken into consideration as major drivers of FDI inflow into Nigeria.
Oregwu & Onuoha (2013) also analyzed some of the barriers that may slow FDI inflow. The
authors showed that high level of inflation drives away foreign investors because when inflation
and overhead costs are summed together, it will prevent high return on investment. Beside
inflation, other factors were considered in the study such as real GDP and electricity
consumption. These variables has negative values of parameters in the equation model. Based
on that, the authors recommended some actions that are not limited to improving electricity
supply hours in the country. Moreover, policies in the country should be reconsidered, and
incentives for foreign investors should be expanded. The authors added that the cost of doing
business is generally high in Nigeria. Thus, reducing the cost of doing business is one of the
main concerns.
Nurudeen, Wafure, & Auta (2011) investigated also the determinants of FDI in Nigeria. Based
on the results of the study, the authors revealed four main determinants of FDI in Nigeria:
market size, political stability, laws & regulations, and exchange rate depreciation. Based on
this, the authors stated several recommendations that contribute towards more attraction of FDI
inflows into Nigeria; these recommendations are not limited to employing policies by
government to further open the economy, investing more in the country’s infrastructure by
government which will contribute towards less cost in doing business, encouraging production
activity. Nevertheless, the authors recommended that the Nigerian economy should be ready for
further depreciation of the Nigerian Naira currency which will attract more FDI inflow in the form
of merger and acquisition. Privatization in a transparent manner is also essential towards the
growth of the economy.
Ugochukwu, Okore, & Onoh (2013) also analyzed the relation between FDI and economic
growth in Nigeria for the period between 1981 and 2009. The analysis of the results showed that
FDI has a positive and insignificant effect on Nigerian economic growth for the period under
study. Unlike the other studies above, this one added Gross Fixed Capital Formation (GFCF) in
order to check how domestic investments contribute toward the growth of the Nigerian
economy. The results of the analysis showed that GFCF contributed positively and significantly
on economic growth for the period under study. Also, it was found that exchange rate positively
and significantly affects the growth of the economy. On the other hand, it was found that interest
has a positive but insignificant effect on economic growth for the period under study. Therefore,
this study matches with the findings of other studies such as Orgerwu & Onuoha (2013) and
Olusanya (2013) regarding the significant positive relation between FDI and GDP.
The second research question of this dissertation is related to the major determinants of foreign
direct investment. According to the above studies, major determinants of FDI can change
between countries. Some countries may attract foreign capital because of market size and
cheap labor, other countries attract foreign capital because of natural resources it gets.
Moreover, there are some determinants of FDI which are not assigned to a specific country;
these are not limited to political stability, laws & regulations, and openness of trade.

17 | P a g e
The purpose of this review was to find the impact of FDI on economic growth in addition to the
major determinants of FDI; mainly the case of Nigeria. Different periods and different statistical
methods were observed to find out how these characteristics may affect the findings of each
research. It is clear from the researches reviewed that most of them concluded a positive impact
of FDI inflow on economic growth. Along with this, it is also clear that political stability and
openness of trade are major determinants that contribute towards attracting FDI into a specific
country. The relation between FDI inflow and GDP is still being debated, and continues to be
problematic subject in most countries around the globe including Nigeria.
3. Methodologyand Data
The study ismainlyquantitative andbuildsonexistingresearchtodetermine the impactof FDIinflowon
Nigerianeconomicgrowth. Thissectiondescribesmethodologiesusedinordertodetermine the
relationshipbetweenFDIandeconomicgrowth(GDP) inNigeriaoverthe 1970-2011 period.Other
variableswere addedtothe empirical formulaunderstudy; thesevariablesare interestrate,exchange
rate,and inflation.The annual dataof GDP, interestrate,andinflationrate were obtainedfromAnnual
Statistical Bulletinpublishedonthe Central Bankof Nigeriawebsite.Asof FDIand exchange rate data,
theywere collectedfromFCMBbankheadquarter. In orderto testthe hypothesisondifferent
relationshipsbetweenFDIinflowandeconomicgrowthinNigeria,the researcherusedtwostatistical
methods:unitroottestand ordinaryleastsquaresmethod(OLS).Thesemethodswere usedbecause
mostfinancial andeconomictime seriesare assignedtoanon-stationaryinthe meanor a trend;this
makesthe data unreliableforeconometricanalysis. The researcherusedtwostatistical packagesin
orderto applythe methods:XLSTATand E-viewssoftwaresystems.
3.1. The Linear RegressionModel:
The author proceededthe studybyspecifyingthe variablesof the empirical modelwhichexpressesthe
hypothesisunderstudy:apositive andsignificantimpactof FDIinflow onNigerianeconomicgrowth
representedbyGDP. The basicequationforthe model is providedbelow:
GDP= f(FDI,EXR,INF,INTR) (equation1)
Where:
GDP: Gross DomesticProduct
FDI: ForeignDirectInvestment
EXR: Exchange Rate
INF:Inflation
INTR: InterestRate
In reference tothe proposedrelationshipinequation1,some of the above literature provided
substantial supportforthe positiveandsignificantimpactof FDIinflow oneconomicgrowth;however,
some otherliterature providedmore supporttothe opposite argument.Inthisregard,some
researchersargue thatFDI affectsdomesticfirmsinthe shorttermonly(Suliman&Elian,2014).
Financial local conditionsof ahost countrysuch as capital and bankmarketsisa majordeterminantfor

18 | P a g e
the relationbetweenFDIinflowandeconomicgrowth.Inotherwords,adevelopedhostcountry’s
financial systemmightbe amustfor a positive relationbetweenFDIandeconomicgrowth.The lackof
financial developmentinfrastructure have manynegative effectsthatare not limited toincreasing
informationacquisitioncosts,slowingdownthe adaptationof new technology,lessliquidity, and
makingtradingtransactionsmore difficultandmore time consuming(Hermes&Lensink,2003; citedin
Suliman&Elian,2014). All these difficultiescanbe easedwithawell-developedfinancial infrastructure.
Basedon thisperspective,FDIhasinsignificantimpactoneconomicgrowthif the hostcountryis not
ready for the investmentintermsof financial structure andespeciallythe bankingsector.
The expectationof thisstudyis notlimitedtoapositive impactof FDIinflow onthe Nigerianeconomyas
discussedbysome of the existingtheories;thiswill eitherbe acceptedorrejectedlaterinthe study
afterthe statistical evaluationof the analytical modelthroughordinaryleastsquare regressions.
Economicgrowth is measuredbygrossdomesticproduct(GDP). The whole dataassignedtothisvariable
issecondaryand iscollectedform the Statistical Bulletinof the Central bankof Nigeria. Afterthe
Nigerianpresidential electionin2015, lotof economicshocksaffectedthe growthinthe country.For
instance,the price of oil droppedbelow 50USD/barrel inAug 2015. It is worthmentioningagainthat
90% of the Nigerianeconomydependsonthe oil sector.The dropinoil price isnot onlyaffecting
Nigeria,butall oil producingcountries.The projectedgrowthforAfricais2014 was 5%; however,this
figure hasbeenrevisedbythe International MonetaryFund(IMF) andadjustedat4.5% in2015 due to
the shrinkinoil prices. The slowdowninNigerianeconomicgrowthisgoingtocontinue in2015 until
there’sclarityinpolicydirectionafterthe electionof the new government.
FDI ismeasuredona net basis (FDIinflow minusFDIoutflow) of the Nigerianeconomy. Mostcountries
identifyforeigndirectinvestmentasinvestorswhoown10% ownershipof anenterprise.However,
some countriesuse differentcriterionintheireconomytoidentifydirectinvestment(IMF,2001).
Accordingto the same reportpublishedbyInternational MonetaryFundconcerninghow countries
measure FDI,some countriesincludeenterprisesinwhichthe investorownslessthan10% but hasan
effectivevoice inmanagement.
Inflationisincludedinthe regressionanalysisdue toitseffectonforeigninvestors.Intermsof
justification,interestratesare usuallylow inperiodsof low inflation;thismake itmore appealingfor
foreigninvestorstoborrowmoneyatlow interestratesandinvestinthe hostcountry.Therefore,
governmentsalwaysstrive foralowinflationlevel inordertoboosteconomicgrowth.Highlevelsof
inflationmake itlessappealingforbothdomesticandforeigninvestors toinvestin.Therefore,high
levelsof inflationisoftenanegative contributionforeconomicgrowth.Empirically,thereisamix in
researchresultsregardingthe relationbetweeninflationandeconomicgrowth. Ajilore (2006) found
that wheninflationlevel isbelow6%,there existsasignificantpositive relationshipbetweeninflation
and FDI inNigeriaforthe period1970-2003. Thus,6% representsthe inflationthresholdlevel forthis
period.Anyinflationlevelabove the thresholdlevelslowsdownthe Nigerianeconomicgrowth
accordingto the study. Omoke (2010) discussedthatthere isnoco-integratingrelationshipbetween
inflationandNigerianeconomicgrowth. Osuala(2013) analyzedthe relationbetweeninflationand
economicgrowthinNigeriaforthe period1970-2011 and concludedthe researchwithasignificant
positive impactforinflationoneconomicgrowth;thatis,a 1 % increase ininflationleadsto0.01%
growthfor Nigerianeconomy.

19 | P a g e
The author measuredinterestrate withprime lendingrate collectedfromthe Central Bankof Nigeria
statistical bulletin.The prime lendingrate isthe one bankappliesonthe mostcredit-worthycustomers.
Basedon thisdefinition,one wouldexpectaninverse relationbetweeninterestrate andGDP.In terms
of justification,wheninterestrate islow,foreigninvestorsare more attractedtocollectloansandinvest
inthe hostcountry whichin turncontributespositivelytothe growthof the economy. However,notall
empirical studiesagree withthisstatement. Obamuyi (2009) founda significantrelationshipbetween
interestrate andeconomicgrowthinNigeriaforthe period1970-2006. Ikechukwu(2011) analyzedthe
relationbetweeninterestrate andeconomicgrowthinNigeriaforthe period1970-2005 and found
interestrate tobe a poor determinantof economicgrowth.The authorconsideredthatmostloans
giveninNigeriaare usedinun-productive purposes(suchasbuyinghosues,cars,etc.); he addedthat
loansshouldbe re-directedtoproductive purposesforinterestrate toresume itsrole inboostingthe
Nigerianeconomicgrowth.
Opennessof the economyisnotincludedinthe regressionanalysis;however,itisdiscussedinthe
qualitative section of the thesis(the surveypart).Trade opennessindicatorismeasuredbythe ratioof
total trade to GDP (ZenithBank,2015). The debate oneffectof trade opennessoneconomicgrowthis
increasingamonggovernmentsof lessdevelopedcountrieslike Nigeria(Nduka,2013). Empirical
evidence onthe relationbetweentrade opennessandeconomicgrowthhasbeenmixedalthoughthere
isa commonthinkingthattrade opennessaccelerateseconomicgrowth.Nduka(2013) analyzedthe
relationbetweentrade opennessandeconomicgrowth.He foundthata 1 % increase intrade openness
leadsto5% increase ineconomicgrowth(holdingothervariablesconstant).There are several
constraintsassignedtoNigeria’spotential ininternational trade suchashighcost of doingbusiness,
poor infrastructure,andmostimportantthe lackof favorable internationaltrade practices(Oduh,2012).
In orderto overcome these problemsandmanyothers,Nigeriadecidedtoreformitsinternational trade
policiesandpracticesthrougheconomicpartnershiparrangementssuchasECOWAS-CETandEU-ACP.
Such economicagreementswillopenthe Nigerianeconomytoexternal shockandboostthe economic
growthof the country.
Equation1 can’t be estimatedinitscurrentform, itneedsto be writteninitseconometricformas
showninequation2 below:
GDP= β0 + β1FDI + β2EXR + β3INF + β4INTR + µ (equation2)
Where:
β0: intercept
βt: coefficientof regression
µ: error term
The regressioncoefficient(βt) showshow the rate of change of the dependentvariable (GDP) isaffected
by a unitchange in independentvariables(FDI,EXR,INF,&INTR).Althoughthe researcherincluded
some importantfactorsthat mayaffectGDP; however some otherfactorsmaystill have influence on
GDP. Thisis the reasonwhynoise orerror term(µ) isincorporatedinthe equation.

20 | P a g e
3.2.UnitRoot Analysis
Before estimatingthe regressionmodel,itisimportanttodeterminewhetherthe time seriesis
stationaryor not. Most time seriesare characterizedbynon-stationarityinthe meanwhichreflectsa
trendingbehavior.Typicalexamplesof non-stationarytime seriesare exchange rate andother
macroeconomicfactorslike real GDP. A non-stationarytime series isunreliable foreconometricanalysis
as it mayindicate a relationshipbetweentwovariablesforanon-existingone.Insuchcase,a non-
stationarydata needstobe transformedintostationary fortrendremoval.The stationarytime seriesis
characterizedbyconstantmeanand constantvariance overtime;however,non-stationarytime seriesis
characterizedbyvariable variance andmean. Firstdifferencingandtime-trendregressionare onesof
the most commonmethodsusedforde-trending. Firstdifferencingmethodisusefulwhenthe time
seriesisintegratedof orderone I(1).One the otherhand,time-trendregressionis useful onstationary
time seriesI(0). SaidandDickey(1984) augmentedamethodthattestfor unitroot inautoregressive-
movingaverage. The methodisknownasAugmentedDickey-FullerTest(ADF).
XLSTAT software isused todetermine whetherthe time seriesof variablesbeinganalyzedisstationary
or not. The procedure involvedchoosingbetweentwoapproachestoverifywhetheraseriesis
stationaryor not.The firstapproachisKPSSwhichconsidersthe null hypothesisH0as stationary.The
secondapproachis unitroot testsuchas AugmentedDickey-Fullertestforwhichthe null Hypothesis
considersthe datatestedasnon-stationary.The researcherusedthe ADF testinorderto verifyif data
beinganalyzedisstationary. The authoralsousedE-viewssoftwaretoverifywhetherdataisstationary
or not where the same ADFtestapproach wasused.
3.3.Ordinary Least Squares Regression
OrdinaryLeastSquares(OLS) regressionisatechnique usedtomodel the relationbetweenadependent
variable andexplanatoryvariable(s).The model canbe appliedonsingleormultipleexplanatory
variables. Thistype of relationshipbetweendependentvariable (Y) andexplanatoryvariable(X) canbe
explainedonthe basiclevel throughline of best-fit(leastsquaresregressionline)where the valueof Y
can be predictedbyX. Mathematically,the straightline equationis:
Y=α + βx
Where:
α: intercept
β: regressioncoefficient(slope)
Thisequationisappliedassumingthatthe relationshipbetweendependentvariableandexplanatory
variable(s) islinear.
Belowisa graphical representationexample forthe leastsquaresregressionof twovariables:GDP
(dependentvariable)andFDI(explanatoryvariable):

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OLS estimatorcanbe usedonlyif certainassumptionsare considered.The reliabilitylevel of the OLS
estimationoutputdependsonthe accuracyof these assumptions.The researcherusedGauss-Markov
assumptionswhichincludesfive majorassumptions discussedbelow (Christensen&Lin,2013):
Assumption1:the dependentvariable isalinearfunctionof asetof independentvariablesinadditionto
the error component.
Assumption2:itis assumedthatthe error termvaluesof all observationsisequal tozero(i.e.E(µi)=0).
Assumption3:The thirdassumptionisknownashomoscedasticity.Thisassumptionimpliesthat
uncertaintyinthe model is identicalacrossobservationswhere variance isthe same forall error terms.
Assumption4:error termisnot correlated;thismeansthatthe observationsof dependentvariableare
not correlated.
Assumption5:The last assumptioninGauss-Markovtheoremisthatindependentvariablesare
uncorrelatedwiththe errorterm. Giventhe valuesof independentvariables,errortermsare expected
to have zeroconditional mean.Mathematically,thisassumptioncanbe writtenas:
E(U)= 0
Where:
y = 30.374x + 1E+10
R² = 0.7316
-50,000,000,000.00
0.00
50,000,000,000.00
100,000,000,000.00
150,000,000,000.00
200,000,000,000.00
250,000,000,000.00
300,000,000,000.00
350,000,000,000.00
400,000,000,000.00
450,000,000,000.00
-2,000,000,000 0 2,000,000,000 4,000,000,000 6,000,000,000 8,000,000,000 10,000,000,000
GDPDependentVariable
FDI Explanatory Variable
Least Squares Regression Line

22 | P a g e
E: expectationoperator
U: matrix of error terms
OLS isconsideredone of the bestlinearunbiasedestimatorsunderthe condition thatabove
assumptionsare met. OLSmethodisappliedonE-viewseconometricsandstatistical package.The first
stepisto identifydependentvariable andindependentvariables.Inthiscase,GDPisthe dependent
variable,while FDI,EXR,INF,&INTR are the independentvariables.The dataforall the variableswere
importedintothe software andthe OLStestwas applied.The valuesof slope (β0),constant,errorterm,
and coefficientsof regressionwereobtained. The slopedescribesthe change inthe dependentvariable
perunitof independentvariable.The outputof OLStestshowedt-statisticsandp-valueforthe
coefficientsof all independentvariables.If p-value islessthanorequal the critical value,thenthe null
hypothesisisrejected.The outputalsoshowsR-squaredvalue.Thisisthe coefficientof determination
whichisthe fractionof variationindependentvariable thatisexplainedbythe regressionmodel.R-
squaredisconsideredasa secondaryimportance inthisstudybecause the maingoal of this researchis
not to make accurate predictions;however,itistoidentifyhow eachof the independentvariablesaffect
the dependentvariable whichcanbe knownthroughp-value.
4. Discussion of Results:
The procedure to testthe relationbetweendifferentvariablesinvolvedtwo steps.The authorbeginsby
testingthe existence of unitrootforall variablesfollowedbyregressionanalysis.
4.1. UnitRoot Test Analysis:
Table 1(a): Summary Statistics:
Variable Minimum Maximum Mean Std. deviation
GDP (US$) 9181769911.500 411743801711.600 66569649550.574 86316393557.778
Exch.Rate 0.550 151.050 45.187 57.662
Inflation(%) 3.500 72.800 19.531 16.734
Interest
Rate (%) 6.000 31.650 15.071 6.698
FDI (US$) 189164800.000 8841953000.000 1844951082.927 2427586461.521
Table 1(a) presents abasicdescriptive statisticsforall the variablesunderstudy.Duringthe periodof
study,the GDP value recorded aminimumvalue of USD9,181,769911.50 in1971 and a maximumvalue
of USD 411,743,801,711.60 in 2011 while FDIvalue rangedbetweenUSD189,164,800 in1984 and
maximumof 8,841,953,000 in 2011. Exchange rate currencyhad a minimumvalue of 0.550 NGN perone
USD in1880 and a maximumof 151.050 in 2011. Inflationrate rangedbetweenaminimumof 3.5%in
1972 and 72.8% in1992. Moreover,interestrate value fluctuatedbetweenaminimumof 6% in1977
and a maximumof 31.65 in 1993.

23 | P a g e
Table 1(b): Dickey-Fullertest(ADF-Stationary- k:3)
FDI
Exch.
Rate GDP Inflation Int.Rate
Tau (Observed
value) -0.610 -1.774 3.769 -2.575 -1.957
Tau (Critical value) -0.636 -0.626 -0.625 -0.625 -0.625
p-value (one-
tailed) 0.952 0.677 1.000 0.280 0.591
Alpha 0.05 0.05 0.05 0.05 0.05
TestInterpretation:
H0: There isa unit rootfor the series.
Ha: There is nounit rootfor the series.The seriesisstationary.
In table 1(b) below,if p-value (one-tailed) isgreaterthanthe significance level alpha=0.05,thenthe null
hypothesis(unitrootexists)can’tbe rejected. The computedp-valueforall the variablesisgreaterthan
the significance levelalpha=0.05,one cannotrejectthe null hypothesisH0for all the variablesunder
study.Therefore,differencingmethodisappliedusingalsoXLSTATsoftware inordertoobtaina
stationarytime series. Belowtable showsDickey-Fullertestresultsafterthe transformationof data:
Table 2: Dickey-Fullertest(ADF(stationary) / k: 3 / Box-Cox(Random
component)):
GDP Inflation Int.Rate FDI
Tau (Observedvalue) -3.620 -3.689 -1.218 -2.616
Tau (Critical value) -0.508 -0.508 -0.508 -0.454
p-value (one-tailed) 0.043 0.038 0.84 0.259
Alpha 0.05 0.05 0.05 0.05
As we can see fromtable 2 above,twovariables(GDP& inflation) have passedthe differencingmethod
on XLSTATand time serieswasconfirmedstationary. Thismeansthatbothtime seriesassignedforGDP
and Inflationare integratedof order1, I (1). The twoothervariables(InterestRate andFDI) are still
reflectingnon-stationarytime seriesevenafterapplyingthe differencingmethodthroughXLSTAT
software.Moreover,differencingmethodthroughXLSTATisnotappliedonexchange rate variable.For
thisreason,Eviews software version9isusedinorderto obtaina stationarydata for the remaining
variables.

24 | P a g e
Table 3: ADF Test through EVIEWS9 Software (Exchange Rate variable):
Null Hypothesis:D(EXCHANGE_RATE) has a unit root
Exogenous:Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -5.116188 0.0002
Test critical values: 1% level -3.615588
5% level -2.941145
10% level -2.609066
*MacKinnon (1996) one-sided p-values.
The absolute value of t-Statisticshownintable 3above isgreaterthanall testcritical values;therefore,
one shouldrejectthe null hypothesis.Exchange Rate dataisstationaryat the firstdifference level.
Table 4: ADF Test through EVIEWS9 Software (InterestRate variable):
Null Hypothesis:D(PRIME_LENDING_RATE____) has a unit root
Exogenous:Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -7.027059 0.0000
Test critical values: 1% level -3.605593
5% level -2.936942
10% level -2.606857
*MacKinnon (1996) one-sided p-values.
Table 4 above showsthatthe absolute value of t-Statisticisgreaterthanall test critical values;
therefore,one shouldrejectthe null hypothesis.Interestrate dataisstationaryat the firstdifference
level.
At thisstage,itis confirmedthatall variablesare stationaryatthe firstdifference level.Regression
model cannow be estimated.
4.2.Hypothesis
Belowisthe hypothesistobe testedinthismodel:
H0: FDI inflowhasnosignificantimpactonthe growthof the Nigerianeconomy.
H1: FDI inflowhaspositive andsignificantimpactonthe growthof Nigerianeconomy.
4.3.OLS Test Analysis
Before applyingOLStest,equation2shouldbe linearizedbyapplyinglogarithmtobothsidesof the
equation:

25 | P a g e
LogGDP= β0 + β1*LogFDI + β2*LogEXR + β3*LogINF + β4*LogINTR + µ (equation3)
Table 5: OLS Regression
Variable Coefficient Std. Error t-Statistic Prob.
C 1.115521 0.048136 23.17436 0
LOG(EXCH__RATE) -0.064314 0.019035 -3.378779 0.0025
LOG(FDI) 0.269636 0.083807 3.217324 0.0037
LOG(INFLATION) -0.203955 0.066421 -3.070643 0.0052
LOG(INT_RATE) -0.119833 0.342019 -0.35037 0.7291
R-squared 0.600353 Mean dependent var 1.006389
Adjusted R-squared 0.533745 S.D. dependent var 0.232763
S.E. ofregression 0.158937 Akaike info criterion -0.685028
Sum squared resid 0.606265 Schwarz criterion -0.449288
Log likelihood 14.93291 Hannan-Quinn criter. -0.611197
F-statistic 9.013249 Durbin-Watson stat 1.707018
Prob(F-statistic) 0.000136
LogGDP= β0 + β1*LogFDI + β2*LogEXR + β3*LogINF + β4*LogINTR + µ (equation 3)
Therefore,equation 3can be writtenas:
LogGDP= 1.115 + 0.269*LogFDI – 0.064*LogEXR – 0.203*LogINF – 0.119*LogINTR
Table (5) showsthe summaryoutputof the linearregressionmodel.The coefficientshowsthe
relationshipbetweenexplanatoryvariables andthe dependentvariable.The higherthe coefficient,the
more is the strengthof explanatoryvariable hasto the dependentvariable (GDP).The coefficientβ1is
equal to0.269 accordingto above table.Thismeansthat 1% increase inFDIleadsto0.27 percent
increase inGDP (consideringall othervariablesare constant).
β2 coefficient(EXR) is -0.064.This showsthatNaira exchange rate between1970 and 2011 has
insignificantandnegativeeffectonFDIinflow toNigeria. Inotherwords,a1% increase inNaira
exchange rate leadsto0.06% decrease inGDPof Nigeria(consideringall othervariablesare
constant).Althoughthere isnostrongdirectrelationbetweenthe independentvariable (exchangerate)
and the dependentvariable (GDP) accordingtothe study,itisnecessarytoplanfor an improvementin
exchange rate managementinthe verynearfuture due toshrinkingoil prices. The continuousreduction
inoil priceswill putmore pressure onthe NigerianNairacurrency.Highdependenceonoil sectorwil l
continue topreventNigeriafromhavingarealisticexchange rate bymatchingforeignexchange demand
withsupply(Gabriel,2014).

26 | P a g e
β3 coefficient(inflation) isequal to-0.2. Thisreflectsthata 1% increase ininflationrate leadsto0.2%
decrease in NigerianGDP(holdingothervariablesfixed). Therefore,inflationhassignificantandnegative
impacton FDI inflowtoNigeria. The Nigeriangovernmentsstrivetokeepinflationrate atan acceptable
level throughdifferentmonetaryandfiscal policies.Unfortunately,these policiesfailedto keepinflation
rate at desiredlevels.Thisfailure isdue tomanyfactors suchas bad management,corruption,and
policyinconsistencytomentionfew. Governmentshouldexertadditional efforttoincrease the level of
outputinNigeriaasit isthe bestpositive contributiontowardsreducinginflationrate.Economy’s
outputisa variable thathasstrong impacton inflationrate. Pricesof goodsandservicesare highly
assignedtoproductivitylevelwhichcanbe increasedthroughgoodmanagementalongwiththe
requiredmonetaryandfiscal policies.
Finally,β4isequal to -0.1. Thisshowsthat interestrate between 1970 and 2011 has insignificantbut
negative impactonFDIinflow. Therefore,a1% increase inprime lendingrate leadsto0.1% decrease in
GDP of Nigeria. The inverserelationbetweeninterestrate andeconomicgrowthinNigeriashowsthat
Nigerianauthoritiesshouldevolveastrongmonetarypolicythatwill grantlendingtothe real sector
economytoboost growth. Thus,the growthof the real sectoris a must forthe growth of the whole
economyasit will increase the outputlevel of the economy. Interestrate islinkedsomehow toinflation
rate.Wheninterestrate increases,the level of savingwill decrease andconsumersspendlesswhich
reflectsaslowdownof the economyanddrivesinflationrate todecrease. Inthe previouschapter,it
was discussedthatthe large portionof loansisbeingprovidedtothe private sectorwhere itisnotused
inproductive projectsthatwill helpincreasingthe outputlevel inNigeria.Therefore,itisessential for
Nigeriangovernmentalongwithfinancialinstitutionstoprovide incentivesforproductive projectsinthe
country. Thiswill contribute towardmore diversificationof the Nigerianeconomy.AccordingtoAfrican
EconomicReport(AOE) releasedin2015, there are some sectorsgrabbingthe attentionof foreign
investors;these sectorsare notlimitedtoenergy&water,transport, and telecommunicationsectors.
Banksare providingloansforenergyandwaterprojectsatgood ratesas these projectsare normallyco-
financedbydevelopmentinstitutionsaccordingtothe same report.Banksare more comfortable dealing
withsuchinstitutionsthanwiththe private sector;thisexplainswhylonger-tenorloansare assignedto
such projects.
The p-value of the coefficientof the variable LOG(FDI) is0.0037 whichislessthanthe critical value 5%.
Therefore,null hypothesisthatFDIinflow hasnosignificantimpactonthe Nigerianeconomicgrowthis
rejected.Byimplication,thisshowsthatFDIinflow hasapositive andsignificantimpactoneconomic
growthof NigeriaasstatedinhypothesisH1.The mostimportantresultobtainedfromthe above
analysisisthatthere isa positive relationbetweenFDIandGDP.Thismeanthat foreigndirect
investmentaffectspositivelyonthe growthof the Nigerianeconomy.
Model performance ismeasuredbybothR-squaredandAdjustedR-squaredvalue. However, the latter
isalwaysa bit lowerthanR-squaredvalue asitrepresentsamore accurate measure formodel
performance because itisrelateddirectlytothe numberof data.Moreover,the AdjustedR-squared
value decreasesasthe numberof explanatoryvariablesincreases. FromTable (5),AdjustedR-squaredis
equal to0.53, thismeansthat the model explainsapproximately53% of the variationinGDP (the
dependentvariable),whilethe remaining47% isexplainedbyexogenousvariableswhichare not
includedin the empirical model understudy.

27 | P a g e
The Durbin-Watsonstatisticstestsforautocorrelationinthe residualsanditsvalue isbetween0and 4.
A value towards0 meansthere ispositive correlationwhileavalue approaching4reflectsa negative
autocorrelation.A value of 2indicatesthatthere isno autocorrelation.Accordingtotable 5 above,the
Durbin-Watsonstatisticsvalueis1.7 whichmeansthere isnoautocorrelationinthe sample asthe value
isapproaching2. This confirmsthatthe data analyzedinthe sample isstationary.
4.4.FDI DeterminantsAnalysis
The most commoneconomicproblemindevelopingcountriesisrelatedtoa verylow level of national
savingswhichmake theminconstantneedof foreigncapital tofinance theirinvestments.Most
developingcountriesusedtodependonloansfrominternationalbank;however,the 1980s debtcrisis
forcedmanycountriestoreformits investmentpoliciesinordertoattract more foreigncapital
(Khachoo& Khan,2012). Foreigncapital isnotlimitedto FDI,portfolioinvestments,andcurrency
deposits.Mostcountriesgive aspecial attentiontoFDIas it isconsideredone of the moststable forms
of foreigncapital due tothe fact thatit is notassignedtodebtrisks.Inorder to determinethe factors
that affectFDIin Nigeria,asurveywassubmittedto50 seniormanagersinNigeriatostopon their
opinion.
The firstquestionof the surveydiscussedthe mostimportantfactorsthataffectFDIinNigeria.Among
11 factors,financial laws&regulations, political stability,andGDPrecordedhigherresponse
percentagesthanotherfactorsas showninbelow table:
Please choose the five most important factors that affect FDI inflow into Nigeria:
Answer Options
Response
Percent
Response
Count
Political Stability 88.0% 44
Financial Laws and Regulations 90.0% 45
Country's Infrastructure 42.0% 21
Interest Rates 48.0% 24
Openness to Regional and International Trade 48.0% 24
Taxation 44.0% 22
Economic Status(GDP Growth) 58.0% 29
Access to Capital 22.0% 11
Size of Domestic Market 20.0% 10
Quality of Labor Force 16.0% 8
Proximity to Export Markets 12.0% 6
answered question 50
skipped question 0
90% of respondersbelieve thatfinanciallawsandregulationisthe mostimportantdeterminantof
foreigndirectinvestment;thisresultconfirmedsomeof the studiesreviewedabove inchapter2 suchas
Rachdi & Saidi (2011) and Umoh,Jacob, & Chukwu(2012). This showsthe importance of lawsand
regulationsespeciallyfinancial onesincontributingtowardsbotheconomygrowthandattracting
foreigncapital. Accordingtothe survey,political stabilityoccupiedthe secondplace with88% response
rate formost importantdeterminantsof FDIinflow toNigeria. Itisarguedthat evenwhencountries
have attractive factorscontributingforforeigninvestment(suchasnatural resourcesandmarketsize),

28 | P a g e
the absence of political stabilitywill definitelyaffectnegativelythe level of foreigncapital inaspecific
country(Shahzadetal, 2012). GDP growthholdthe third highestrate with58% of respondersbelieve
that a growingeconomyattractsforeigncapital tothe country regardlesswhetherthe foreigncapital
affectspositivelyornegativelythe economicgrowth. AfricanEconomicReport(AEO) releasedrecentlya
reportabout FDIin Africaand pointedoutthatthere isa trendtoward diversifyingFDIinNigeriaand
otherAfricancountriesin2015. Thistrendis a reflectionof new financial lawsandregulationsreleased
by differentAfricancountriesespeciallyafterthe shrinkingof oil pricesglobally.
44% of responderschose opennesstoregional andinternational trade asa maindeterminantof FDI.
Thiscan be explainedbyNigeria’ssituationwhichisdependingmainlyonoil initsexports.Accordingto
ForeignTrade Statisticsof the National Bureauof Statistics(NBS),Nigeria’sexportsincreasedfrom2013
to 2014 by 20.8%; however,Nigeria’sexportsisstill dominatedby crude oil.Therefore,Nigerian
governmentshouldconcentrate ondifferentsectorswhichcanbe veryprofitable forthe economyif
giventhe requiredattention.
The secondquestionof the surveytriedtoanalyze the mostimportantfactorthat is causingcapital
outflowfromthe country.Outof 7 factors presented,unstablepolitical situationoccupiedthe largest
portionwith70% response rate followedbycorruptionwith20% response only.Additional detailsare
showninthe table below:
What is the most important factor that causes capital outflow of the country or at least limits
its inflow?
Answer Options
Response
Percent
Response
Count
Corruption 20.0% 10
Unstable Political Situation 70.0% 35
Crumbling of Infrastructure 0.0% 0
Wrong Laws and Policies Followed by Authorities 8.0% 4
In-access to Proximate Markets for Exports or
Consumption
2.0% 1
Consistent Reductionin Opportunity for Market Entry 0.0% 0
Emergence of Highly Competitive Market Environment 0.0% 0
skipped question 0
It isclear bynow thatpolitical stabilityisone of the mostimportantfactorsto be consideredbya
countrytryingto attract foreigncapital. However, itisarguedthatincountrieslike Nigeriawhere big
portionof foreigninvestmentisdominatedbyoil sector,politicalinstability maynothave a significant
negative effectonattractingforeigndirectinvestment. Infact,some studiesshowedapositiverelation
betweenpoliticalinstabilityandFDI inNigeria(Wafure &Nurudeen,2010). Thisshowsthe importance
of oil sectorinattractingforeigncapital tothe country. However,the highdependence of Nigerian
economyonoil sectorleadrecentlytothe depreciationof Nairacurrencyby31.3% inlessthana year
afteroil price recordeda six-yearlowbelow 42$/barrel (Bloomberg,2015).Thisshowsthat diversifying
the Nigerianeconomyalongwithensuringpolitical stabilityisamust to attract foreigninvestorsto
investinsectorsdifferentthanthe oil one. .For instance,agriculture wasthe mainsectorinthe 1960’s
contributingforforeignexchange earningsandalsoemployment.Thissectorwasneglectedlaterbythe
governmentandthisaffectedclearlyitscontributionshare toGDP.In 1960, agriculture share of GDP

29 | P a g e
was around60%, it declinedto48.8% in1970, and 22.2% in 1980 (NBS,n.d.).In2014, the contribution
of agriculture sectortoGDP is 23% whichisalmostthe same figure recordedin1980. This figure isa
resultof bad managementof thissector.Between1980 and 2011, agriculture’sshare of banks’credit
was belowthan1%(NBS,2014). The governmentthenincreasedthispercentage to5% ina trial to boost
thissectorand reduce foodimport.Foodandlive animalsimportationoccupiedthe secondposition
with15.5 percentof total importtrade inNigeriain2014 where machineryandtransportequipment
constitutedthe largestportionof total importtrade with35.4 percentaccordingto Standard
International Trade Classification(Zenithbank,2015). Therefore,additional financial supportshouldbe
giventothissector to grab a biggershare portionof NigerianGDP.
The third questionconsideredfivefactorsandwhethereachhasa positive ornegative effectonFDI
inflowtoNigeria.The five factorsconsideredare:lackof governmentincentivesforforeigninvestors,
corruption,economicdownturninthe country,highlycompetitivemarket,andcountryenvironment
(infrastructure,political stability,etc..).The resultsare showninthe table below:
Please identify whether the below variables affect positively or negatively the current FDI in Nigeria:
Effect
Answer Options Affect Positively Affect Negatively Response Count
Lack of Government
Incentives for Foreign
Investors
2(4.26%) 45(95.74%) 47
Corrurption 17(34%) 33(66%) 50
Economic Downturn in the
Country
3(6.12%) 46(93.88%) 49
Highly Competitive Market 26(53.06%) 23(46.94%) 49
Market and Country
Environment(Infrastructure,
political stability)
33(70.21%) 14(29.79%) 47
Question T otals
skipped question 0
As shownabove,95.74% of the respondentsseethatlackof governmentincentivesforforeigninvestors
negativelyaffectthe currentFDIinNigeria.Thisisnota surprise.However,whatwasnotexpectedis
that 34% of the respondersbelievethatcorruptionisapositive factorforcurrentFDI in Nigeria.In
general,there istwotypesof corruptioninNigeria:governmentcorruption andprivate-sector
corruption.Withregardto government-corruption,there is usually ageneral government’sreputation
aroundthe world.Unfortunately,the Nigeriangovernment’sreputationregardingcorruptionis
negative.InNigeria,government’sinvolvementinaparticularsectormay leadtoverypossible
implications.Forinstance,the directinvolvementof apresidentora ministermayreduce company’s
riskto pay bribe or completelythe opposite. Tryingtofightcorruptioninthe country,the newlyelected
Nigerianpresident,MuhammaduBuhari,gave anorderthroughthe Federal Governmentof Nigeriafor

30 | P a g e
immediate implementationof TreasurySingleAccount(TSA) accordingtoweeklyeconomicreportand
analysispublishedbyZenithBankPLC (2015). Thismeansthat bothfullyfundedorgans(ministries,
agencies,andforeignmissions) andpartiallyfundedones(federal tertiaryinstitutions,medicalcenters
and agencieslike CBN,FIRS,NDIC,NPA,etc..) are obligedtomake paymentsintothissingleaccount.
Benefitsof thisimplementationare notlimitedto:
a- Reductionof liquidityinthe bankingsystemasall fundsrelatedtogovernmentare notallowed
to stay incommercial bankaccounts.
b- Lendingratesre-pricing:thiswill be aresultof the decline inbanks’loanable funds.
c- Increasingdepositrates:due tothe pressure onloanable funds,commercialbanksmayincrease
bothdepositandlendingratestoattract funds.
d- Boostingforeignexchangereserve:indirectbenefitsof TSA implementationare notlimitedto
supportingbothNairacurrencyand nation’sforeignexchange reserve plusactive cash
managementinthe economy.
e- Government’sborrowingreduction:thismaybe a resultof effective managementof
government’srevenue.
As expected,93.88% of respondentsbelievethatdownturninNigerianeconomywill affectnegatively
on currentFDI. Thisisbecause economicdownturnleadstomanyfactorsthat are not limitedto
customerscarcity,increase incostof utilities,dwindlingcashflow,andlow staff morale.53.06% of
surveyrespondersbelievethathighlycompetitive marketaffectspositivelythe currentFDIinNigeria
while 46.94% believe itaffectsnegatively.Nigeriaisacountrythat has a large numberof competitors
whocompete inorderto satisfythe large numberof consumersavailable.The lastfactoranalyzedin
thissectionisrelatedtomarketand countryenvironmentsuchasinfrastructure andpolitical stability;
70.21 % believe thatthe currentFDIis affectedpositivelybythe Nigerianenvironment.Thiscanbe
explainedbythe stable political situationsince 1999. Moreover,the Nigerianinfrastructure developed
greatlyduringthe lasttwo decadesalthoughitdidn’tmeetthe requiredlevelsforsmoothandsimple
businessoperationenvironment.
The final questioninthe surveytriedtoanalyze how markettype affectsFDI.The responsesonthis
questionare showninthe belowtable:
Which type of market do you think will have higher FDI inflow?
Answer Options
Response
Percent
Response
Count
High Risk Market Environment with High Return on
Investment
68.0% 34
Low Risk with Low Returns 22.0% 11
Risk Doesn'tAffect Decisionon FDI 10.0% 5
Other (please specify) 0
skipped question 0

31 | P a g e
As showninthe above table,the majorityof the responders(68%) believe thathighriskmarketwith
highreturnon investmentwillattractmore FDI inflow thanothertypesof markets.Thiscanbe
explainedbyhumannature whoalwayslookforhighreturninvestmenteventhoughwhenitisassigned
withhighrisks. Nigeria,asmanyotherAfricancountries,isahighriskmarketalthoughisassignedto
highreturns. Nigeriaisconsideredahighriskmarketdue to challengesalreadydiscussedabove suchas
corruptionandpoor infrastructure. Securityisalsoamajorchallenge inNigeriawhere itshouldbe
addressedthoroughlybythe governmenttoattractforeigncapital.Infact,securityissuesisbecoming
worsenwithtime andthisiscausingthe reductionof investor’ssatisfactionlevel. Manycompanies
sufferedfromthisandhadto relocate toanotherstateswhere securitysituationismore stable.North
part of Nigeriaisburdenedwithhighinsecurity,manycompaniestherefore are losingportionof market
share as theydon’thave access to populationlocatedinthisregionof the country. The existing
operationenvironmentis alsoverydifficultdue topoorinfrastructure whichisaffectingnegatively the
profitmarginsandreturnon investments. Itisthe job of Nigerianstoaddressthe challengesrelatedto
operatingbusinessinNigeria;foreigninvestorshave aprioritywhichismaximizingtheirreturnon
investments.
5. Conclusionand Recommendations:
One of the mainchallengesfacingNigeriacurrentlyishow toattract foreigndirectinvestment;itisof
significantimportance notonlybecause of the transferof capital, butalsoof technology. The author
expressed the researchaim,questionsandobjectivesinthe firstchapter of the dissertationstudy.
Throughthisdissertation,the authortriestoanswertworesearchquestionsrelatedtothe impactof FDI
on Nigerianeconomicgrowthandthe maindeterminantsof FDIinflow intoNigeria. The author
examinedempiricallythe impactof foreigndirectinvestment onNigeria’seconomicgrowth byusing
unitroot and ordinaryleastsquares(OLS) testsforthe period1970-2009.
The secondchapter of the dissertationreviewedthe literaturerelatedtothe topic.The author found
contradictingresearchresultswheresome showedapositive impactof FDI inflow oneconomicgrowth
while othersreflectedaneutral orevennegative relationbetweenFDIinflow andeconomicgrowth.
Therefore,thisdissertationisanadditiontothe literature.
Methodologyanddatawere discussedinchapter3. Inthischapter,linearregressionmodel isdesigned
where variable basisof the empirical modelare specified. The empirical model assessintestingthe
hypothesisunderstudy.Time seriesforall the variablesneedtobe testedforitsstationarity.The author
usedAugmented-Dickey-Fullermethod(ADF) totestforunitroot.OrdinaryLeastSquare (OLS) isthe last
methodusedwhere itmodelsthe relationbetweendependentvariable (GDP) andotherexplanatory
variables(FDI,EXR,INF,&INTR).
The resultsof the methodsandtechniquesusedwere discussedinchapter4. The unitroot testshowed
that all variables(dependentandindependent) were non-stationary.Differencingmethodwasapplied
to transformthe studieddataintoa stationaryone.However,onlytwovariables(GDPandInflation)
passedthe transformationtestanda stationarydatawas obtained. E-viewsstatistical package isused
for the othervariablesinordertoobtainthe stationarydata. Afterdatawas transferredtostationaryfor
all variables,OLSmethodwasappliedtofindthe relationbetweenFDIandeconomicgrowthinNigeria.
The coefficientforthe independentvariableFDIisequal to0.269. This meansthat1 % increase inFDI
inflowreflectso.269%growthinGDP. The findingsalsoshowedanegative impactforinterestrate,

32 | P a g e
inflationrate,andexchange rate.Moreover,the resultsshowedthatthe impactof interestrate and
exchange rate issignificantwhile thatof inflationrate issignificant.
The other part of the studywas qualitative where asurveyof fourquestions onthe determinantsof FDI
intoNigeriawassharedwith50 MD’s andCEO’s. Most of the responderstothe surveyhave experience
inthe domainastheyrun foreigncompaniesthatoperate inNigeria.The resultof the surveyshowed
that political stability,financial lawsandregulations,GDPgrowth,opennesstoregional and
international trade,andinterestratesare the maindeterminantsof FDIinNigeria.Unstable political
situationisthe mainfactorthat causesFDI outflow of the countryaccordingto 70% of the responders.
Interestingly,only20%of respondersbelievethatcorruptioncausesFDIoutflow fromNigeria. This
meansthat some investorslookatcorruptionasa positive factorwheninvestingabroad.Usually,large
companiestake advantage of corruptiontosettle issuesrelatedtotaxesandotherfinancial ornon-
financial issuestheymayface. Therefore,thisdissertation confirmssome of the already-existing
literature regardingthe significantpositiveimpactof FDIinflow onthe growthof Nigerianeconomy.
However,the authorfindsthatcorruptiondoesn’thave significantimpactonFDIoutflow fromNigeria
accordingto surveyconducted;thisfindingmaybe acceptedorrejectedinrecommended future
empirical studies.
Basedon the above findings,below are some recommendations toattractmore FDI intoNigeria:
a- Nigeriangovernmentshouldsustainpolitical stabilitytoattractadditional foreigncapital into
the country.
b- Diversifyingthe economywillhedge the Nairacurrencyagainstshrinkingoil prices;thismeans
that governmentshouldconcentrate onincreasingthe portionof non-oilexports.
c- Stable andfavorable monetaryandfiscal policies (suchasbettermanagementof Naira
currency) are highlyneededalongwithgovernmentincentivestoattractforeigninvestors.
d- Regional andinternational opennessof the economy ismore requiredforadditional FDI.
6. References:
Abdulai,D.(2007), ‘AttractingFDIfor Growth andDevelopmentinsub-SaharanAfrica:PolicyOptions
and StrategicAlternatives,AfricaDevelopment,Vol.32,Issue 2,pp. 1-23, [Online] Available from
http://www.ajol.info/index.php/ad/article/view/57170/45558 (Accessed:15 July,2015).
Abubakar,M. & Abdullahi,F.A.(2013),‘AnInquiryintothe Determinantsof FDIinNigeria’,European
ScientificJournal,Vol.9,Issue (25),pp.293-308
Adams,S.(2009), ‘Can FDIHelpto Promote Growthin Africa’, African Journalof BusinessManagement,
Vol.3, Issue 5, pp.178-183, [Online] Availablefrom
http://www.academicjournals.org/article/article1380534921_Adams.pdf (Accessed:24April,2014).
Adamu,O.(2013), ‘The Impact of FDI on EconomicGrowth inthe EconomicCommunityof WestAfrican
States’, African JournalsOnline,Vol.20,Issue 2, pp. 1283-1315, [Online] Available from
http://www.ajol.info/index.php/ajep/article/view/101523 (Accessed:29July,2015).

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Adefeso,H.A.&Agboola,A.A.(2012),‘Determinantsof FDIInflow inNigeria:AnImperical Investigation’,
InternationalBusinessManagement,Vol.6,Issue (1),pp.83-89, [Online]Available from
http://www.medwelljournals.com/abstract/?doi=ibm.2012.83.89 (Accessed:17May, 2015).
Adelegan,J.O.(2000),‘FDIand EconomicGrowthin Nigeria:A SeeminglyUnrelatedModel’, African
Review of Money,Financeand Banking,SupplementaryIssueof SavingsandDevelopment,2000,pp. 5-
25, Milan,Italy
Ajilore,O.T.(2006),‘Inflation:HowMuchis Too Much for EconomicGrowthin Nigeria’, Indian Economic
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An Analysis of Incentives for Foreign Direct Investment (FDI) and its Effects on Economic Growth: The Case of Nigeria.

An Analysis of Incentives for Foreign Direct Investment (FDI) and its Effects on Economic Growth: The Case of Nigeria.

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