An Empirical Investigation on Foreign Capital Inflows and Economic Development in Nigeria

Abstract

In an attempt to attained sustainable level of economic development in a nation, empirical studies as well as financial theories posit that foreign capital inflows play a lead role. As such, this study set out to empirically investigate the extent to which foreign capital flows promotes economic development in Nigeria. Time series data between the periods 1986 to 2018 were sourced from the central bank of Nigeria statistical bulletin and world bank data based. The study proxied foreign capital flows using foreign direct investment, foreign portfolio investment, foreign aids and external borrowings which is decomposed into multilateral and bilateral loans while Human development index is used as proxy for economic development. The study further employed unit root test, co-integration test, error correction model and granger causality test to ascertain the direction of relationship. Findings reveal that of the five indices of foreign capital inflows, three (foreign portfolio investment, foreign aids and bilateral loan) prove to be significant in promoting economic development in Nigeria, while foreign direct investment and multilateral loan are negatively related to economic development in Nigeria. As such, the study conclude that foreign capital inflows in the form of foreign portfolio investment, foreign aids and bilateral loans are significant in boosting economic development in Nigeria. Therefore, we recommend that managers of the Nigerian economic should create an enabling financial environment as this will help in accelerating further inflows of portfolio investment and thus boost economic development in Nigeria.