Impact of Foreign Direct Investment on Economic Growth in Nigeria

Abstract

In most developing countries, Foreign Direct Investment (FDI) serves as a means of earning foreign reserves via investments, businesses and foreign aids from advanced countries. FDI is considered a valuable source of finance and capital formation, Technology-Transfer and know-how, as well as a viable medium for trade among countries. The Spillover effect also allows for the transfer of innovations and invention to the receiving countries, one of which Nigeria belongs. According to the requirement for accelerated growth in association with the Sustainable Development Goals is not completely clear, however, for economies to experience sustainable and inclusive development, cross-border trade is paramount. Presently, Nigeria is the first host economy of FDI in Sub-Saharan Africa, and the third in the continent. Recently, Nigeria has witnessed several trade policies which aim at diversifying the economy away from oil revenue. These policies are focused on improving the industrial sector, and of course, results in austerity. In 2018, the total FDI inflow to the country was around USD 1.9 billion, while in 2017, FDI inflow was around USD 3.5 billion, showing a decrease due to the consequence of the austerity measures imposed in 2018. At the third quarter of 2019, the FDI was only 3.37% (USD 200.08 million) of the total capital inflow for the period. Traditionally, FDI is designed to improve the recipient economies thereby enhancing economic growth and development, it is in this view that many developing countries attract foreign investors with the hope of strengthening their economy by increasing the foreign investment portfolio. However, most empirical analysis of the impact of FDI on economic growth advises otherwise, hence, a controversy. According to the existing literature, some empirical results found a negative relationship between FDI and economic growth, while others opined that as FDI increases, it results in a boost of output productivity, hence a positive relationship between the variables. Therefore, this study contributes to the existing literature by investigating the effects of FDI both on the owner, and the host country, using Nigeria as a case study.