AN EMPIRICAL ANALYSIS OF THE DETERMINANTS OF NIGERIA’S INWARD FOREIGN DIRECT INVESTMENT (FDI) FLOWS: A COINTEGRATION ANALYSIS
Despite a myriad of studies related to inward foreign direct investment (FDI) determinants, studies on how such determinants may differ in developing versus developed countries have produced mixed results from which it is difficult to discern a conventional wisdom. Moreover, only relatively few studies have specifically investigated inward FDI determinants in Nigeria (Adelegan, 2009; Ekpo, 1997; Ajakaiye, 2010; Ajayi, 2006; Anyanwu, 1998; Olatunji, 2011; Ariyo, 2009; Okpara,et al., 2012), leaving a glaring gap on the key factors influencing inward FDI in Nigeria. Aiming to address this gap, the present PhD thesis intends to investigate the determinants of inward FDI in Nigeria. To address this primary aim, the specific research objectives are: (i) To critically review past literature, both theoretical and empirical, on the key determinant factors affecting Nigeria’s inward FDI; (ii) To collect relevant data, formulate an adequate model specification and choose the most suitable econometric technique to undertake the empirical analysis using a state-of-the-art cointegration technique (the ARLD bounds testing approach to cointegration); (iii)To interpret and discuss the results, identifying the main findings, and draw out key policy implications. The study uses annual data from 1970 to 2014 and employs the Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration, a testing procedure for level relationshipsdeveloped by Pesaran and Shin (1999) and Pesaran et al. (2001). The major advantage of the ARDL approach to cointegration compared to other methods employed in previous studies is that it can be applied even if the regressors have different orders of integration, I(0) or I(1). This feature provides flexibility and also helps to avoid a potential “pre-test bias”, i.e., the specification of a long-run model on the basis of I(1) variables only (Pesaran et al., 2001). In addition, and being based on a single equation, the ARDL methodology performs better in small samples compared to alternative multivariate cointegration procedures, for example the Johansen ML method (Romilly et al., 2001). A comprehensive theory-based model is developed accounting for many variables, such as the interest rate, external debt, oil rents, the Gross Domestic Product (GDP) growth rate, trade and exchange rate volatility. The analysis of FDI determinants in the Nigerian economy yielded reliable, robust and economically meaningful results thereby offering an insight into the driving factors of inward FDI.The empirical results indicate that the interest rate, external debt, oil rents, and the GDP growth rate have a statistically significant long-run effect on FDI, while trade and exchange rate volatility are found to be statistically insignificant. With the exception of the GDP growth rate, which presents a negative estimated coefficient, the signs of the statistically significant variables are consistent with theory. From a policy point of view, regarding the GDP growth rate, there should be concerted efforts to boost the performance of the non-oil sector in Nigeria through more investments in the agricultural and industrial sectors which will make the growth of the economy spread across other sectors and, in turn, encourage inward FDI in such areas. The findings also indicate that trade is statistically insignificant. This can be attributed to the fact that FDI flowing to Nigeria is mostly resource-oriented due to the Nigerian government being more focused on policies that attract FDI to the oil sector and neglected others such as agriculture and manufacturing. Finally, the findings suggest that exchange rate volatility has a negative, yet statistically insignificant impact on FDI. This result may be explained by the fact that Nigeria’s inward FDI is so oil-dependent that exchange rate volatility, albeit likely to deter investment, appears to have an insignificant effect statistically. The study makes both theoretical and methodological contributions to knowledge by providing vital information on FDI determinants in Nigeria thus guiding Nigerian leaders in government in decision making as well as other researchers interested in the study of FDI in Nigeria. Several policy implications flow from the findings. Countries such as Nigeria, endowed with natural resources, should pursue policies targeted at full deregulation (privatisation) of their natural resource sector to better utilise the abundance of their natural resources and to attract additional FDI. Nigeria should also pursue better debt management practices. When debts are acquired, they should be targeted towards future consumption and longer term investments. Most importantly, as an import-dependent economy, the Nigerian government should also formulate export-driven and appropriate fiscal policies that will stabilise and balance Nigeria’s trade relationship with other world economies. The Nigerian government should create the necessary environment that will regulate macroeconomic and specifically monetary policy (interest rate) which is essential for the attraction of FDI inflows into the economy. Finally, Nigeria should ensure that the quality of exportable commodities is improved to enhance international competitiveness.
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