FDI and economic growth in Nigeria: an analysis of the role of financial development on linkages

Amadi, Chibuzo (2019) FDI and economic growth in Nigeria: an analysis of the role of financial development on linkages. Doctoral thesis (PhD), Manchester Metropolitan University.

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Abstract

Foreign direct investment (FDI) has become a key driver of economic growth and development especially in developing countries. However, the level of FDI attracted by Nigeria is unexceptional when compared with other developing middle and high-income countries. In addition, while FDI can convey greater knowledge spillovers (such as new technology, new processes, managerial skills, productivity gains, etc), the country’s capacity to take advantage of these externalities might be limited by local conditions. This thesis has examined the linkage between FDI and economic growth in Nigeria as well as the role of financial development in enhancing the benefits of FDI flows to Nigeria, which is a novel contribution to the literature. It also considered the impact of other determinants of growth in Nigeria's economic development process. Data on FDI, financial development, growth indicators and other relevant controls were obtained from various sources and covered the period between 1970-2014. The study uses a mix of methodologies (cointegration, Granger causality and OLS techniques). Empirical results from the Engle and Granger two step error correction model (ECM) show that no long run relationship exists between economic growth and FDI in either directions. However, the Granger causality test show that a bi-directional short run dynamic relationship exists between real FDI and economic growth. Thus, the relationship between growth and FDI is reinforcing and endogenous in the short run. Results from the OLS regression show that FDI is negatively and significantly related to economic growth even after controlling for the effect of capital account liberalisation. The interaction between FDI and banking development variables were not statistically significant, while the interaction between FDI and stock market development variables were statistically significant. This implies that only stock market development variables shape the relationship between FDI and growth in Nigeria. However, the interaction of FDI and stock market capitalisation positively and significantly explains growth, while the interaction of FDI and stock market liquidity has a negative and significant association with growth. This implies that the growth benefits or spillover effects of FDI inflows in Nigeria are enhanced by the size of the stock market rather than market liquidity. The Granger causality tests also show that market-based indicators of financial development (market capitalisation, value traded and market turnover) are more associated with FDI inflows and economic growth than bank-based indicators. In addition, the OLS regression results show that stock market liquidity is a positive driver of growth, while financial depth and stock market capitalisation are negatively correlated with growth. This study has important implications for public policy as well as managerial implications. In particular, the study proposes key measures to attract and sustain FDI inflows and improve absorptive capacity. These measures include economic diversification, infrastructural transformation, enhancing the contribution of financial markets, implementing favourable macroeconomic and investment policies, as well as entrenching political stability and institutional quality.