Foreign Direct Investment (FDI): Determinants and Growth Effects in a Small Open Economy

Abstract:     
In an attempt to attract foreign direct investment, many African countries embarked on various reforms. Nigeria, like many African countries, took some steps towards trade reforms and macroeconomic regime and introduced measures aimed at improving the FDI regulatory framework. In the form of stocktaking, this study examines the determinants of FDI, the causal relationship among factors affecting economic growth in Nigeria, including the formal investigation of the export-led and FDI-led growth hypotheses in Nigeria for the period between 1970 and 2005. We found that Nigeria’s potential market size, the degree of export orientation, human capital, providing enabling environment through the provision of infrastructural facilities, and macroeconomic stability are important determinants of FDI flows. Further, our results confirms that foreign direct investment leads to economic growth and that government consumption expenditure, openness to international trade and human capital are complementary to economic growth. Controlling for domestic investment growth as well as other factors, causality tests show support for both the export-led growth and FDI-led growth hypotheses for Nigeria.

Number of Pages in PDF File: 14

Keywords: Foreign Direct Investment, Exports, Growth

JEL Classification: F21, F23, O55

Accepted Paper Series