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Effects of Foreign Direct Investment in Nigeria

Info: 12329 words (49 pages) Dissertation
Published: 9th Mar 2021

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Tagged: International StudiesInvestment


The purpose of this paper is to investigate the effects of foreign direct investment of a developing country of my choice in which I chose Nigeria which is where I am from. I analyse the project question empirically by carrying out a multi linear regression using fixed effects time series data method over a period 0f 30 years from 1980-2010. Literature from previous papers suggests that there are positive effects of FDI on economic growth, however with the variables I take into consideration I find that FDI in fact has a negative effect on economic growth in Nigeria due to several reasons I will explore in this paper. This supports the theory that FDI can cause negative effects on the host country.





Literature Review

Summary of Literature Review


Economic Growth

Solow Growth Model

Population growth

Investment, Savings and Economic Growth


Data Sources and Variable Description

Model Specification



Inflation/Economic Stability


Trade Openness

Government expenditure

Exchange rate

Oil Revenue


Regression Results and Analysis

The effect of FDI on Economic Growth

The effect of government expenditure on economic growth.

The effects of population growth on economic growth

The effects of trade openness on economic growth

The effects of inflation on economic growth

The effects of the lagged FDI on economic growth

The effect of the exchange rate on economic growth

The effects of oil revenue on economic growth

Limitations of Data







According to the UNTACD world development report in 2006 FDI has had a substantial effect in the global economy generating as much as $1.4 trillion In FDI inflows. This also marked the sharp increase of FDI inflows into natural resources as opposed to services and the manufacturing sector. Africa attracted some of the highest FDI inflows globally as a result of its resource abundant lands and rapid growing population. Nigeria was the 3rd largest recipient of FDI inflows in Africa in 2005 when the world’s leading economies started to take interest in the developing continent. Although it is important to understand that FDI is useful in both the primary and secondary sectors of the economy, because in most African developing countries like Nigeria the most profit gain is in the oil sector specifically. This is due to the fact that oil is a natural resource that is needed globally to sustain economies, as well as the several by-products gotten from it. This is likely the reason that 90% of Nigeria’s FDI inflows are directed into the petroleum oil sector with global giants such as Mobil, Shell and Chevron making Nigeria one of their global headquarters.

Foreign Direct Investment (FDI) has impacted developed and developing economies globally in several ways. It is a method of providing less able economies with capital they would not be able to normally produce themselves and transfer technological advancements in order to promote self-sufficient growth. By promoting globalization and trade openness amongst nations, it has helped to increase growth, productivity and technological advancements. In light of the recent economic recession of 2008, FDI has helped to rebuild economies and transfer help from strong economies to those that are less able of accumulating capital themselves. For these reasons FDI has been seen as a most useful economic method for producing economic growth in a way that benefits both home and host country according to the theory of comparative advantage.

FDI is considered to be one of the most effective methods of producing economic growth in developing economies primarily because it provides two main sources of growth. Foreign direct investment creates a source of capital accumulation which is essential in any economy increasing output. This can come in the form of increased human capital in relation to more workers and more importantly and increased inflow of highly skilled workers. The second source of growth as a result of FDI is gotten from technological spill overs which are also essential for economic growth in developing economies. According to the UNTACD (2006) Sub-Saharan African countries and more specifically Nigeria, FDI is found to be the most effective in oil or natural resource producing economies with a growth rate in FDI inflows as high as 78% in African countries. In most cases these countries don’t have the technological advancements needed to self-sustain their natural resources and the infrastructure to manufacture goods from them. FDI provides a platform for multinational corporations to provide their services .In more recent years there has been a clear trend in the sharp increase in FDI inflows in Africa, even rising above the level of exports and GDP as shown below. As FDI is increasing at rapid rates in the developing economies of the world, this should eventually affect both GDP and exports in a positive manner as it should increase competitiveness amongst domestic firms, increase the standard of living and even increase human capital.

In the rest of the paper I will discuss about FDI further in 6 other sections. Section 2 will consist on my literature review of previous works on analysing the effects of FDI on GDP. Section 3 will be the framework of the essay in which I will take a brief look into economic growth and specifically the Solow growth theory. Section 4 will consist on the methodology and the descriptions of the variables. Section 5 will analyse the regression results and explain the outcome of my theory. Lastly I will end the paper with my concluding remarks and any recommendations if necessary.

Literature Review

There are various findings in literature regarding the relationship between foreign direct investment and economic growth. Over the years the literature in particular has varied from being less theoretical and more empirical in their findings. This is the case due to several technological advancements and the improvement in the processing and analysing of data. Because there are now advanced empirical ways to measure the effects of FDI by running a regression against macro-economic variables. These qualitative variables include ‘labour market flexibility, infrastructure

quality, judicial independence, legal system efficiency, and financial depth.’1 When put into an equation the empirical effects on FDI towards macroeconomic variables that effect economic growth then become more precise in their findings as growth is calculated as

Y = C+I+G+(X-M)                                                                  (1)

. Moreover due to globalization, which has made it possible for countries to openly engage in trade with one another? Advancements in ‘technology has led to a boom in foreign investment’2 Globalization has created more room for such advancements to reach several countries with the help of foreign direct investment. The effects of FD are analysed not only on economic growth but carry out a more in-depth analysis on its components i.e. its effects on government policy, investment, consumption and next exports in Nigeria.

Why do countries engage in foreign direct investment? Foreign direct investment is often used to contribute capital from developed to developing or less developed economies in order to distribute capital, increase employment and consumption.

According to Javorcik foreign direct investment is responsible for ‘increasing productivity and competitiveness of the domestic industry.’3 When there is FDI in a country, it essentially transfers components of one economy to another i.e. capital, labour, information, technological advances in which ‘externalities or spill over effects’11 are beneficial to the host country. Another key thing to remember is that if this is the case it is also possible for foreign direct investment to have negative effects on an economy as well as positive ceteris paribus. There is also the unpredictability with cross country research which is done through the ‘practice of estimating growth regressions over four-year periods’13 However this is hard to control as such research is affected by ‘cyclical factors.’13

Not to mention the importance of the unpredictability that can emerge when doing cross-country research amongst economies especially as foreign investment is not ‘necessarily offered to the least corrupt governments.’12 In this review I will analyse both the negative and positive effects of foreign direct investment on economic growth as previously that has been investigated in other studies and previous literature on the subject matter.

Firstly I will review the positive relationship between the two variables. It is important to point out that FDI in Nigeria in mainly extractive, meaning that it investment towards the output in Nigeria’s economy is focused on its natural resources. In Nigeria, foreign direct investment is mostly directed towards its oil industry as they have this natural resource in abundance. Moran did a similar study and explored this theory in Ghana which is also a sub-Saharan African country and found that Ghana’s output from the ‘largely foreign owned’4 industries in its industries that make profit from its natural resources rose by over 42% between 2003-2008. This shows that investment from multinational companies (MNCs) have positively contributed positively to the economic growth in other developing countries similar to the Nigerian economy. Whilst analysing literature on FDI and economic growth it is found that it can ‘raise efficiency, expand output and lead to higher economic growth.’ 4If this is the case then investment from foreign countries should surely positively affect Nigeria’s output overtime.

Moran argues that FDI is most influential toward increased output in developing economies as it increases the demand for labour which in turn should ‘bid up the wages of workers.’4When a foreign company decides to invest in a host country, there is the need for additional human capital which increases job opportunities. Increased job opportunities for individuals in that host country will drive up the wages for man-skilled labour, which will benefit the economy as a whole. If more individuals are working, they are gaining more skills increasing the labour in that output and creating a higher standard of living overall. Foreign investment in a developing economy should in turn balance out the distribution of income and hence reduce the output. However authors like Sachs argue that FDI benefits oil rich countries such as Nigeria not because of labour but instead because they use ‘vast oil revenues to finance diversified investment’5 instead. Adams believes that foreign investment is vital to the economic growth of an economy because he views FDI as being ‘the most stable and largest component of capital flows.’6 Although I do agree that capital stability is of high importance for a growing economy to sustain growth at relatively fast pace, one could argue that if a country solely depends on FDI as its main source of output that surely that economy must not be as strong as you’d think, as it is not self-sustainable. He also states that that foreign investment contributes to output specifically through the transfer of technology form developed to developing economies. This in itself is an interesting point because ‘most developing countries lack the necessary infrastructure’6 needed to sustain economic growth as a whole.

In regards to necessary infrastructure I am referring directly to factors such as a population that has been through the basic stages of education, economic and political stability and stability in markets also. Borensztein, De Gregorio and Lee also have the same views as Adams as they too have found that ‘technology diffusion plays a central role’7 to economic growth as a whole. Technological advancements play an important role in developing economies opening their barriers to foreign investment. This is because when a country/company decides to invest in a host country it must also build infrastructure in that country and essentially migrate themselves into its society.

On the other hand it is imperative that we also examine the inverse relationship between foreign direct investment and economic growth that also exists. Not all literature I’ve researched agrees that foreign investment actually has positive effects on developing economies such as Nigeria. Sachs indicates that there is a ‘negative association between resource abundance and growth in recent decades’5 in his vast research. My research into the negative effects on host countries has seen that several authors also agree with this point of view as it is thought the ‘resource-rich countries tend to suffer from lower growth rates’4 than countries that are less dependent or that are entirely independent of their natural resources. Although I agree with this view, it can also be pointed out that this is most likely dependent on the time period, as it is not all the time that resource rich countries suffer from low growth rates.

It is believed that reason that developing economies are not essentially ‘developed’ because they depend on their primary industries whilst a developed economy would lean more towards their secondary and tertiary industries for economic growth. Because of Nigeria’s high level of dependence on the oil sector of its economy it is believed that this ‘leaves the country vulnerable when oil production tails off.’4 Going back to basic ideas on Economics, in particular scarcity, it is known that eventually one day a countries natural resource will one day become depleted or run out. The worrying issue with this is that when that time eventually comes, what will a natural resource dependent country like Nigeria do to sustain itself. The common misuse and exploitation of natural assets and resources in developing economies like Nigeria ‘reduces the competitiveness of other domestic industries.’4 In Nigeria the government pours majority of its resources into the oil sector of the economy as this is what generates the most output in the country. However as this continues it renders other industries dormant, as they are not invested in. It could be argued that although this may be the case in Nigeria that other primary industry dependent economies have found a way to balance out this problem. Moran and Borensztein concluded that foreign investment ‘drive domestic producers out of business’4 This is easily believed as the government invest so much towards these foreign industries especially in the extractive industry in Nigeria, other sectors such as healthcare, education, agriculture, services are neglected as they are not seen as profitable causing the ‘displacement of domestic competitors’7 


Another downside to FDI in extractive industries is the burdens normally lay on the workers. Although globalisation and trade openness is recommended as it provides a source of both human capital and technological advancements this can be seen to be rather destructive to the morale of the workers in the host country. According to Kastrati FDI in extractive industries does not ‘significantly influence the employment in the country, neither in scope, nor in quality’16 She found that although FDI in theory does help to create more jobs, these jobs in most cases are below minimum wage paid jobs for lower skilled workers willing to take on the manual labour work. Foreign economies are known to exploit workers in developing economies because they are aware they can exploit cheap labour and get away with it. Aitken and Harisson found that whilst studying the Venezuelan labour market that FDI actually contributed to a lack of spill over effects in domestic firms as there is actually a very ‘limited hiring of domestic employees in higher- level positions’17 by foreign firms in domestic countries.

.The jobs that are created are normally highly skilled white collar jobs, in which workers in the host economy are not trained for. Hence the foreign investors bring their own highly trained staff from their home country to manage productions in one of their many headquarters. Although there is nothing specifically wrong with this, they do not encourage workers in the developing country as they do not have the skills to take on decent paid jobs. Similarly it increases competition amongst domestic workers as there are not many roes they can take on; it almost becomes a glass ceiling.


In regards to negative externalities, there are several problems associated with FDI in developing economies and specifically in Africa. In most cases it is likely that  multinational companies in host countries tend to create a ‘lack of positive externalities’5 especially in regards to extractive sectors .FDI in developing economies can be known to ‘generate negative externalities when foreign firms with superior technology force domestic firms to exit’19 Foreign firms sometimes create negative spill overs/externalities as they can be seen to crowd out domestic firms and workers with the power and size they hold over the presiding host country. They tend not to take into consideration the negative externalities they cause and also have no form to compensate or make sure the environment benefit positively from their production. This is particularly an issue because it is assumed that a domestic company would take environment effects into high consideration because it is their own home, and its positive or negative externalities directly effects them. Whilst weighing the effects of FDI on the poor, Sumner found that in extractive industries particular ‘Raw-material-seeking FDI create local spill overs’ 18 in the host country.

MNC’s are also infamous especially in the recent decades because they do not take into consideration and even go so far to ignore the ‘laws that constrain socially undesirable practices’5 in the host country. Another key thing to remember is that when foreign countries or companies invest in developing countries in most cases the actual ‘foreign investor is in the business for profit not development.’6 In most cases foreign investors and countries aren’t concerned with the social wellbeing of the host country as that does not coincide with their aims of profit-making. Leumann pointed out that it is important to remember that although developing countries are associated with being ‘abundantly rich in natural reasources’10 but due to several accompanying variables such as conflict, corruption, exploitation and so on these developing countries are also ‘trapped in poverty.’10 When foreign companies invest in developing nations, it is mainly with aim of setting the price at which marginal cost is equal to marginal revenue.

FDI’s are known to create an ‘industrial structure in which monopoly is predminant’6 they reduce competitiveness in developing economies, as competing firms know they cannot compete with the level of technological advances foreign companies are likely to have. They also create a monopoly like presence in that host country by acquiring a larger percentage of market shares in the host country, especially as so much is invested into it.  It is noted that ‘financial behaviour of MNEs in advanced countries sharply contrasts with their behaviour in LDCs’14 When a business becomes a monopoly in an industry it is likely to engage in consumer exploitation as it is able to set its price as high as it likes because the monopoly is the only one able to provide the product needed. Most researchers found that that ‘foreign-invested firms hold up to 70 per cent of the animal feed market’15 This is why in Nigeria, petrol prices are so high and is seen as prized commodity, especially with a government who adds and removes subsidies towards fuel prices when they wish, fuel prices become very volatile.


One of the most important factors hindering foreign investment on Nigerian grounds is the up rise of MEND. This is the Movement for the Emancipation of the Niger Delta that emerged around 2005-2006.They are local and armed groups in the Niger Delta area of Nigeria responsible for the kidnappings of oil workers, destruction of oil rigs and disruption of oil production by foreign multinational companies. They have claimed responsibility for these crimes in order to take back the oil regions which they claim to be their local heritage. So around the early 2000’s foreign investors would have been faced with major problems related to the offshore production of oil, and with 90% of Nigeria’s FDI inflows being in the extractive industry of oil this would have created a few problems. The MEND movement in Nigeria however highlighted the negative effects of FDI on economic growth in developing countries. The oil militants most vital claim for their crimes was linked to the Niger Delta indigenes wanting a ‘fairer share of the wealth invested in roads, schools and hospitals.’20 This further fortifies Sachs analysis of FDI being detrimental towards the growth of a developing economy as foreign investors are likely to be more interested to attain the money for themselves rather than invest in the wellbeing of the host country.

Summary of Literature Review

I’ve found that upon reviewing several pieces of literature associated with analysing the effects of foreign direct investment on economic growth, it is important to consider the approaches taken towards how they were researched. Whereas authors like Adams took a varied approach towards the topic through the wider scope of Sub-Saharan Africa, authors like Akinlo focused directly on Nigeria and took a more empirical approach towards researching FDI in Nigeria. In a country such as Nigeria it is important to take into consideration other factors that affect economic growth due to its particular type of government. Nigeria is a notoriously known for corruption and its ‘cascading levels of revenue diversion.’4 a high percentage of the revenue made in Nigeria does not actually contribute to its output. Over ‘$1billion has been lost each year’4 until recently, now that a new anti-corruption has been put into play.

However, even with this, it is impossible to completely eradicate and source out the billions in revenue that has been previously lost or uncounted for. It is difficult to measure exactly how much of it is accounted for and how much of it is going into a government official’s offshore account somewhere. Apart from this it is also important to consider that the indirect benefits of FDI in a developing country ‘may be less in extractive, especially oil industries.’8 As oil extraction normally takes part in the rural area of the country or even at sea, it is less likely that other benefits of foreign investment such as improved roads and better infrastructure may not necessary be the case. Adams and Akinlo both seem to agree that the extent to which FDI actually contributes towards economic growth is dependent on outside factors. Akinlo believes it is dependent on the ‘economic and social condition’8 whereas Adams believes that the overall effects of foreign investment whether positive or negative is ultimately ‘stronger in countries with highly educated workforce.’6Overall it is easy to see that although there definite positive and negative effects of foreign direct investment on economic growth in developing countries (Nigeria) The concluding remarks in most of the literature reviewed in fact shows that ‘FDI exerts an ambiguous effect on growth’9 as the degree to which FDI actually effects economic growth is difficult to tell.


Economic Growth

This section will focus mainly on Economic growth with the help of the Solow Growth model to explain economic growth particularly in regards to FDI as it models how output determined in the long run as a   result of productive inputs namely being capital and labour as well as the importance of technological progress. This is vital as the framework of the essay as are these are the fundamental factors needed to introduce foreign direct investment and globalisation and their effects on economic growth.

Solow Growth Model

This model explains production factors relevant for economic growth in the long run. It is an exogenous growth model that explains how an economy grows as a result of capital accumulation labour and technological advancements or transfer of knowledge. This model is important in regards to FDI as it of capital accumulation/transfer from one country to another as well as the transfer of technology in order to promote economic growth. The Solow growth model shows how these factors through the production function carry this out effectively.

In order to explain this model, I will start by building it up and explaining the steps to which this model is attained. To start with we must define the production function and also assume there are constant returns. To begin with, the function that most easily explains the Solow growth model and all its factors can be denoted as following

Y = F(K, AL)


Y= Output

K= Capital

A= Technology

L= Labour

AL=Effective Labour

It is important to note that in the model which we assume is exogenous, technological advancements are actually seen to improve the labour productivity of workers. In order to denote the effectiveness of workers and their output we will then divide both sides of the production function above by (AL)

Y = F (K, 1) (1)

AL      AL

Therefore let y=Y/AL and k=K/AL denoting output per effective worker and the capital per effective worker.

y=f(k) (2)

Assuming we are in a closed economy with no government intervention the national identity per worker consumption and investment becomes

y=c+I (3)



Which are components for determining the macroeconomic equilibrium.

In each period, we assume that whatever is left after output is consumed is then invested or saved in order to accumulate capital for the next period. Hence this introduces saving per effective worker denoted as S which is also the saving rate per worker. The part of their income which is then consumed is denoted as (1 – s).

Therefore as there is a constant amount of output y continuously saved (s) for investing in capital the production function for saving in each period becomes

S=sf(k) (4)

Therefore the new macroeconomic equilibrium according to the national identity is when saving equals investment. This is also a function of capital invested per effective worker.

sf(k)=I (5)

It is also important to then realize that consumption in each period is what would be left over from whatever is consumed (1-s) Therefore consumption will be denoted by,

C=(1 – s)f(k) (6)

In this model, there is a steady state of equilibrium in which we take into account the effects of a depreciation rate denoted dK and investment on capital. This is due to the fact that capital resources will eventually begin to deplete and hence depreciate at the level (d).

Therefore the change in capital in the steady state equilibrium is


When you substitute savings per worker for investment this becomes

K=sf(k)-dk (7)

At the point in which capital and output are constant k will start to converge to the point k*(steady equilibrium) where K= 0

At a time (t) the amount of investment (i) needed for constant capital (k) is known as break even investment denoted as

(n+g+d)kt  (8)

The steady state level equilibrium of capital is when investment is equal to break even investment and remains constant, which shows that no matter its initial state of capital the equilibrium eventually end up at the steady state equilibrium.

sf(kt)=(n+g+d)kt       (9)







Savings per worker,sf(k)





Reduction in capital-labour ratio


Population growth

The Solow growth analyses the effect of population growth on economic growth through its effect on consumption, productivity and capital per worker. As shown in the figure above it shows that as population increases in a developing economy, it increases the flow of workers into the labor market which are required to have a certain amount of capital per worker already according to the steady state capital-labor ratio which is represented as k*.Therefore as population growth is rising  the steady state investment line must also shift  and increase.to  account for the increase in population shifting from (n1+d) to (n2+d) This however creates a new shift in the steady state equilibrium which will reduce the initial capital per worker  and shift it to the left. k* to k**.This shows how a higher population rate can cause steady state investment to fall and therefore decrease living standards.

Investment, Savings and Economic Growth

The Solow growth model suggests that there is a link between investment, domestic savings and economic growth in an economy. Past literature has shown in particular that there is indeed a positive ‘long-run relationship between economic growth and the growth of domestic savings.’21

As shown In the figure below, If we increase domestic savings s*f(k) by shifting the curve to the left, this will then cause the slope of the investment function s*f(k)=dk* to also shift upwards which will then cause capital k to increase from its initial equilibrium for k* to k**.This will in turn lead a greater level of output (Y)

Source : https://www.economicsnetwork.ac.uk/slides/Macro3_Solow_Growth_Model_1.ppt

In the Solow growth model, it shows how an increase in the savings rate can lead to an increased standard of living in a steady state as shown in the figure above. If the economy increases its initial savings rate from s*f(k) to s**f(k) it will increase the savings rate at every level and the steady state capital-labour level will also increase at every level. This will lead to an increased level of output and consumption per individual in the economy.This shows how savings and investments (FDI) can lead to Increased Economic Growth in an economy however it will converge to a constant steady state of equilibrium.

In the following section I will focus on FDI and other control variables that can affect the level of GDP in Nigeria.




Data Sources and Variable Description

This section will focus on the empirical analysis of the relationship between FDI and economic growth. In order to carry this out I will focus of a set of variables that have a significant impact on economics growth in Nigeria. More importantly this will highlight the fact that the extent to which FDI contributes to economic growth (whether positively or negatively) is dependent on several contributing variables. The control variables being used in particular are focused on mainly because of the robust effects they have on GDP in Nigeria. The data I was able to research on these variables were measured over a 30 year period in order to get an accurate measure of the variables on economic growth. By doing this I hope it will be able to provide a suitable base for my framework to examine the effects of FDI on economic growth. The model I will use to conduct an empirical analysis on the research question will be a multi linear regression in which I will test the effect of variables such as trade openness, population growth, government expenditure, trade openness, inflation, FDI and finally the lagged FDI is included as a regressor against GDP in order to take into account that FDI may affect growth with delay. By doing this it will be possible to run a simple multi-linear regression of the control variables mentioned against our dependent variable (GDP per capita growth) and also evaluate the extent to which each component individually affects both GDP and FDI. I should then be able to generate results that will give me appropriate interpretation into the relationship between the two variables, primarily being represented my significant coefficients amongst the dependent and independent variables as well as an estimate of the standard error.

Majority of the data measured over the 30 year period (1980-2010) was gotten from the World Bank and IMF. Finally I will then examine the overall relationship between FDI, Oil and Economic growth as these are all vital towards determining the relationship between FDI and economic growth in Nigeria.

Model Specification

The relationship between foreign direct investment and economic growth, including 8 control variables can be expressed as:

lnGDPit= β0 + β1 (lnFDI)it + β2 (lnfdilag)it + β3 (Infla)it + β4(PopGrow)it + β5 (TradOp)it + β6(GovExp)it + β7 (ExRate)+ β8(OilRev) ai +  uit     (1)

These are the factors are considered to be robust determinants in influencing the level economic growth in Nigeria.


From past literature I’ve reviewed, the importance of foreign direct investment is to affect GDP in a way that promotes further trade openness in the country and by opening up trade barriers and encouraging foreign investment in sectors of the industry that could benefit from foreign technology and human capital. According to Alfaro FDI plays a very ‘important role in modernizing the national economy and promoting growth’22 This further highlights the importance in the underlying research question of what exactly the effect of FDI on economic growth is. The data I collected on FDI was taken as the total FDI inflows and a percentage of total gdp annually. As investment in general is a major component of GDP, ultimately I expect β1 to be positive although maybe only in the short run as I will discuss this later.


When you measure the lagged effect of a variable this is important I order to measure its exact effect on your independent variable over a period of time. Hence this measures not only how FDI affects today but also considers how it affected GDP yesterday, last year and so on. Lagged variables are important as they are a statistical representation on how represent how ‘attitude at time t is a function of that same attitude at t − 1 as modified by new information’22 In opposition to viewing time t as simply linear. As this is used to show that FDI may affect growth with delay, as growth may depend on FDI today but also on FDI yesterday in theory. For this reason I expect β2 to also be positive.

Inflation/Economic Stability

Inflation itself is used as a measure of economic stability in an economy hence we can see why this is an important variable to include whilst analysing effects one economic growth. The relationship between output, inflation and productivity is one of upmost importance in any developing economy especially an emerging one like Nigeria. The development indicator that was used in this case was the consumer price index as an annual percentage of GDP as I found this to be the most useful in getting the data that was needed in order to carry out the regression. As research has shown that ‘inflation has a negative impact on consumption’23 and this in turn has a negative impact on GDP per capita as consumption is one of its major components. Hence I expect its coefficient β3 to be negative.


The rate of population growth can have a number of effects on the host country. If the population of an economy is growing at a faster rate than its gdp growth per capita then this can be seen to be detrimental towards the economic growth of that country as there will not be enough resources to provide for the population. However it can also be said that a growing population will create a larger workforce and greater amount of human capital. For this reason I expect β4 to be negative.

Trade Openness

Trade openness measures the extent to which an economy is accepting of trade in regards to imports and exports. I found this measure by taking the sum of total imports and total exports as a percentage of total gdp. Trade is often associated with producing a positive effect on both gdp and globalisation in an economy. In examining the effects of foreign direct investment on economic growth this is a vital factor to be taken into consideration. As trade increases competitiveness amongst domestic and foreign producers, export led growth has become very popular for emerging economies in Africa. Trade is seen to create more effective methods for producing goods and services by ‘shifting production to countries that have comparative advantage in producing them.’24Therefore I expect β5 to be positive.

Government expenditure

Government expenditure plays a vital role in economic growth. Policies the government may decide to use can affect human capital through investment in the work force and also education. Similarly restrictions the government may use can affect trade openness and overall production. If the government borrows too much this can affect the balance of payments negatively which isn’t good for economic growth if a developing economy is in debt. Likewise too much taxation can reduce consumption which also has negative effects of economic growth as ‘government consumption is consistently detrimental to output growth.’25 So I expect the coefficient for β6 to be negative.

Exchange rate

The exchange rate is one of the most important variables to take into consideration whilst analysing the effect of FDI on economic growth in Nigeria. The exchange rate can exert positive effects on economic growth by increasing the efficiency of ‘technological progress via workers’ motivation, education and capital intensity.’26 The exchange rate is likely to have positive effects on trade openness and economic growth as it encourages technological advancements in the economy. Past study on the exchange rate by Adigwe and John (2016) has also concluded that exchange rate does in fact have positive effect on the Nigerian economy. Their studies showed that the positive exchange rate actually keeps Nigeria at a ‘competitive advantage due to the usage of new knowledge, experience, ways of production and management’27 in comparison to other developing economies in the world. I expect that that coefficient for this variable β7 will then be positive.

Oil Revenue

With Nigeria being one of Africa’s largest oil producing economies, oil revenue is as equally as important as the previous variables mentioned. Being an oil dependent economy with majority of the economies revenue coming from oil production and extraction it is important that we measure this as a control variable against economic growth. It has been discovered that in Nigeria, there is a positive relationship between oil revenue/dependency and increased ‘growth because of the high global oil prices’28This has been the case since 1961 as the oil industry has created an export-led growth in the economy which has also translated in a higher standard of living for consumers. Therefore I expect that the coefficient for oil revenue β8 to be positive when the regression is run.


Variables Symbols Description
GDP Lngdp The number of public officials (federal-state-local) convicted in a state for


abuse of public office is our measure of corruption

Annual percentage growth rate of GDP at market prices based on constant local currency

Foreign Direct Investment lnFDI  It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments
Population Growth PopGrow The population measured by total amount of citizens estimated
Inflation Inflation Inflation as measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services annually
Trade Openness TradeOp



This is the sum of both Imports and Exports (as a percentage of GDP) In order to measure the degree of openness towards trade.
Government Expenditure GovExp Government final total expenditure (% of GDP)



lnFDILAG The lagged FDI in order to take into account FDI over a period of time t-1.
Exchange Rate ExRate   This is the exchange rate in Nigeria as a percentage of GDP
Oil Revenue Oil Rev This is the oil revenue as a percentage of the gdp
Error term uit  Unknown factors that may affect GDP
Estimated state-specific intercept ai n-entity specific intercept


Regression number Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8
lnFDI (%GDP) -0.024214 -0.2024858 0.0526999 -0.1188863 -0.0363591 0.347751 -0.335048*** -0.4259214*
  0.220557 0.2224247 0.2063566 0.2702239 0.2074516 0.3812373 0.2356924 0.1007117
GovExp   -0.07005*** -0.07329*** -0.07447** -0.0622892* -0.0123391 -0.045755** -0.332051*
    0.0319985 0.0274878 0.0275305 0.021233 0.0367031 0.0196253 0.0085635
Inflation     -0.023036*   -0.02015** -0.014720** -0.01676 0.0053453 0.0042455
      0.0070634 0.007652 0.0059823 0.0128395 0.0078347  
Trade openness       0.0099495 0.015175*** -0.0009255   -0.006414 -0.000838
        0.0101079 0.0078206 0.0107262 0.0055003 0.0025144
Population growth         6.742598* 7.485845** 5.712557* 2.043942***
          1.555939 2.815325 1.458578 0.8849445
lnFDI LAG           -0.326610** -0.1047315 -0.013993
            0.1404748 0.0835025 0.0385908
Exchange Rate             0.0100333* 0.0053441*
              0.0020187 0.0011774
Oil Revenue               0.0001296*

Note: The coefficients are stated in bold and standard errors which all correct for heteroscedasticity are presented below each coefficient in the table. With the independent control variables being regressed against GDP (dependent variable).Significance to 1% level * Significance to 5% level ** Significance to 10% level ***.

Regression Results and Analysis

This section will analyse the results of the regression through the coefficients of the control variables and also their probability in regards to how this affects the null hypothesis.

Variable Coefficient Robust Std. Error t-statistic Prob.
lnFDI -0.4259214 0.1007117 -4,.23 0.006
GovExp -0.332051 0.0085635 -3.88 0.008
PopGrow 2.043942 0.8849445 2.31 0.060
TradeOp -0.0008388 0.0025144 -0.33 0.750
Inflation 0.0042455 0.0033121 1.28 0.247
lnFDILAG -0.0139928 0.0385908 -0.36 0.729
ExRate 0.0053441 0.0011774 4.54 0.004
Oil Rev 0.0001296 0.0000225 5.77 0.001
R – squared                              0.9945

The results as stated above were generated using a statistical software known as STATA in which the estimated coefficients, t -statistic, p-values and robust standard error as a result of heteroscedasticity were found. These results are important as they are able to explain the relationship and significance between each of the individual control variables and the dependent variable. The R-squared helps to explain the variance in the model; it is the percentage of the response variable variation that is explained by a linear model .The coefficient for it is represented by 0.9945 which suggests that 99.45% of the model explains the variability of the response data around its mean. This means that the model almost perfectly fits the data in the regression. I also regressed 8 models, starting with regressing FDI against GDP as model 1 and continuously adding the other variables until I got to the main model of regression (model8).This was done to take into consideration how the individual independent variables effect the other variables and hence economic growth. The significance of the results of the regression is to analyse the relationship between the dependent variable which is GDP (lngdp) and the independent variables FDI, government expenditure, population growth, trade openness, inflation, fdilag, exchange rate and oil revenue.

The null hypothesis for this regression will be that the independent variables previously mentioned will have no effect on economic growth (gdp) in Nigeria.

H0: βi  = 0

The alternative hypothesis for this regression will be that the independent variables have an effect whether positive or negative on economic growth in Nigeria.

Ha: βi = 0

The effect of FDI on Economic Growth

From the regression results we see that foreign direct actually has a negative effect on GDP which is in opposition to what I initially assumed (being positively correlated) The t-test shows that the coefficient is statistically significant at the 1% significant level (0.01) as the p value is 0.006 which is less than 0.01.This indicates that we have strong evidence against the null hypothesis, hence we can then reject the null hypothesis in favour of the alternative hypothesis. This signifies that the independent variable (lnfdi) definitely has an effect on economic growth. To what extent however is dependent on the coefficient of the variable which is -0.4259214.This indicates that when all other variables are held constant, a unit increase in FDI will lead to GDP reducing by 0.4259214 units. Although FDI has a statistically significant effect on economic growth in Nigeria, it has a significant negative effect on GDP.However it is important to take into consideration, that Model 6 shows that it is possible for FDI to be positively correlated against GDP when regressed again all other independent variables apart for the exchange rate and oil revenue. Nevertheless it does not create a statistically significant positive effect so it would not influence economic growth regardless.

The effect of government expenditure on economic growth.

As expected, the data from the regression shows that government expenditure indeed has a negative effect on economic growth in Nigeria. From the p-value (0.008) we can see that the t-test proves that government expenditure is statistically significant at the 1% significance level as 0.008<0.01.Therefore we can reject the null hypothesis in favour of the alternative hypothesis as government expenditure does have a statistically significant effect on economic growth. The coefficient of the variable is -0.332051 which suggests that when all other variables are held constant that an increase in government expenditure will decrease economic growth by 0.332051 units. Hence, form the regression results we can then conclude that government expenditure is significant in influencing economic growth in Nigeria negatively. Government regulations can have a negative on economic of growth due to ‘mandatory performance standards, forcing new procedures on entrepreneurs, environmental regulation’ 25these implications can slow down growth. These implications prove true through all 8 models that were regressed.

The effects of population growth on economic growth

From the results gotten from the regression, I can see that an increase in the annual rate of population growth in Nigeria will then lead to an increase to economic growth. From the t-test we can see that the p value is statistically significant at the 10% significant level as 0.060 is less than 0.10.Therefore we can reject the null hypothesis in favour of the alternative hypothesis. This means that population growth has a significant effect on economic growth as it is significantly different from zero. The coefficient of population growth shows that when all other control variables are held constant that an increase in population by 1 unit/person will increase the gdp in Nigeria by 2.043942 units. This is inconsistent with the theories presented by Kelley and Schmidt (1995) who believed that population actually has a negative effect on economic growth through ‘diminishing returns to capital and the environment’30 which would in turn have a negative effect on Economic growth. It is possible that the data found there to be a positive correlation and the increase in population could be a form of increase in human capital provided consumers finish the basic level of education. Population growth was found to have the same significant results in every model it was included in which is inconsistent with the Solow growth theories that were mentioned I the previous section which suggests that population growth should have a negative effect on growth in developing countries.

The effects of trade openness on economic growth

The data analysed shows that surprisingly a negative relationship between trade openness and economic growth in Nigeria. The t-test shows that the p value of the (TradOp) variable is statistically insignificant at the 10% significance level as it is 0.750 which is greater than 0.1.The coefficient of trade openness is -0.0008388 which means that when all other variables are held constant  an increase in trade openness will reduce economic growth in Nigeria by 0.0008388%.Due to the statistic insignificance of the variable and the coefficient  this suggests that trade openness is not an important factor in determining  economic growth in Nigeria. Therefore we must reject the alternative hypothesis in favour of the null hypothesis as the variable does not have a statistically significant effect on economic growth. The negative correlation between trade openness and economic growth appears to inconsistent with most past literature however Mkubwa found that trade openness in developing economies like Nigeria in Africa does not actually help to  ‘increase the economic freedom of the poor or the working class, and frequently makes them poorer.’31 However trade openness is seen to have the expected positive effect on economic growth in model 4 and 5.More importantly in Model 5 when lngdp is only regressed against FDI,government expenditure, Inflation and population growth, trade openness is post positively correlated and statistically significant at the 10% level to economic growth in Nigeria. Therefore this suggests that variables that effect economy directly such as inflation, government expenditure and even FDI effects trade openness positively. However when regressed against variables that narrow down trade openness to an industry i.e. exchange rate and oil revenue it then becomes negatively correlated with economic growth. It is possible that if FDI in Nigeria was in another sector such as manufacturing or services, then trade openness might have a positive effect on economic growth after all.

The effects of inflation on economic growth

The regression results show that there is in fact a positive relationship between inflation and economic growth. The t-test shows that inflation has a statistically insignificant p-value of 0.247 at the 5% significance level as 0.247 is greater than 0.05.Therefore we must reject the alternative in favour of the null hypothesis as inflation is statistically insignificant in influencing economic growth in Nigeria even if it does influence it positively .The coefficient of the variable suggests that an increase in  inflation by 1 unit will increase gdp by 0.0042455 units .This is consistent with beliefs that  below a certain rate of inflation it technically ‘ does not have a significant effect on growth, or it may even show a slightly positive effect’32which appears to be the case in the regression results. This is not the expected result inflation on economic growth, however as you can see models 3, 4, 5 and 6 do have the expected negative correlation between inflation and economic growth. In models 3, 4 and 5 we can see that inflation is both negatively correlated with GDP and is event statistically significant to at the 5% significance level indicating that inflation can have a substantial effect on economic growth in Nigeria. Be that as it may, it seems that once again the exchange rate and oil revenue are responsible inflation being positive and statistically insignificant in the main model (8).

The effects of the lagged FDI on economic growth

From the data I collated, the results show that the effects of the lagged FDI on economic growth are in line with the original effects of FDI on economic growth. This suggests that the lag of FDI is correlated with the current value of the FDI. The results show that there is a negative correlation between the lagged FDI and economic growth. .The t-test shows that the p value of the variable is statistically insignificant at the 10% significance level as it is 0.729 which is greater than 0.1. Therefore we must reject the alternative hypothesis in favour of the null hypothesis as the variable does not have a statistically significant effect on economic growth. The coefficient of the laggedFDI is -0.0139928 which means that when all other variables are held constant an increase in the lagged FDI by 1 unit will reduce economic growth in Nigeria by -0.0139928 units. Due to the statistic insignificance of the variable and the coefficient this suggests that the laggedFDI is not an important factor in determining economic growth in Nigeria. The results of the regression for the lagged FDI prove true throughout all the models it was regressed in.

The effect of the exchange rate on economic growth

From the regression results we see that the exchange rate in Nigeria has a positive effect on economic growth. From the t-test we can see that the p value is statistically significant at the 5% significance level as 0.004 is less than 0.05.Therefore we can reject the null hypothesis in favour of the alternative hypothesis. This means that the exchange rate has a significant effect on economic growth as it is significantly different from zero. The coefficient of the exchange rate shows that when all other control variables are held constant that an increase in exchange rate by 1 unit will increase the gdp in Nigeria by 0.0053441 units. This suggests the exchange rate is both statistically significant and influential in effect economic growth in Nigeria positively. This is consistent with the findings of Adigwe (2016) who also found similar findings of the exchange rate in Nigeria being positively correlated with economic growth. It is important to take into consideration that although the exchange rate does have a significant effect on economic growth, the absence of the variable however has led to other variables becoming more statistically significant and even differently correlated to the other models I regressed.

The effects of oil revenue on economic growth

As expected the regression results show a positive relationship between oil revenue and economic growth in Nigeria. The t-test results show that the oil revenue is statistically significant at the 5% significance level as 0.01 is less than 0.05.Therefore we can once again reject the null hypothesis in favour of the alternative hypothesis signifying that the oil revenue is influential on economic growth in Nigeria .The coefficient of the oil revenue is 0.0001296 which proves that the effect that it has on economic growth is indeed positive. It shows that when all other independent variables are held constant, and increase in the oil revenue by 1 unit will lead to an increase in economic growth by 0.0001296 units. This is inconsistent with some literature that suggest that ‘oil price spikes have a serious negative effect on the economies.’33 The results show that oil revenue promotes economic growth possibly as Nigeria depends majorly on its extractive industries as its main source of output .Oil revenue is also similar to the exchange rate with regards to its absence causing some other variables to become statistically significant and so on.

Limitations of Data

It is important to take into consideration areas that the data could not explore and hence the limitations to data in my regression. When measuring economic growth through GDP per capita in a developing country Nigeria there are several underlying implications of the development indicator. GDP per capita in theory is meant to measure out per head as the name suggests, however it does not take into consideration the way income is distributed in Nigeria therefore it can be seen as an inaccurate measure of living standard per individual. This is consistent with theories from authors that suggest that ’income inequality is harmful for growth’34.  Similarly GDP per capita does not consider the shadow economy in most developing economies in which profit made from illegal activities, political campaigns and black markets in which oil is sold are not included whilst using the GDP per capita data. It is also thought that most GDP data in African countries is inaccurate as they do not have updated technology and there is lack of sufficient equipment and official bodies to conduct data collection or surveys for measurement like inflation and populations. All of these are factors that are usually involved when a country is experiencing political instability which is usually the case in Nigeria.

There is also no sufficient data on corruption, which would have made a substantial impact on both economic growth and foreign direct investment.


In conclusion, from the regression results and the empirical analysis we can see that foreign direct investment can be seen to have a negative effect on economic growth in Nigeria. This is likely to be due to foreign companies reinvesting their profit into their own home country and also the negative impact on workers in multinational companies in extractive industries. However we must also take into account that FDI can be seen to have positive effects on GDP in Nigeria when the exchange rate and oil revenue variables are not included in the regression. This could indicate that FDI possibly has positive effects on economic growth when it is invested into other sectors and possible other industries. This could suggest that if FDI was possibly invested into manufacturing industries or even the services sector that there could be a more substantial positive effect on GDP.


I suggest that in future research of this topic that further investigation should be looked into how FDI effect not only economic growth but certain industries differently. Also take a look into this is the same over similar natural resource producing countries in Africa also to discover if there is a trend in regards to how FDI affects the extractive industries in these economies


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