Correlate of foreign direct investment and economic development evidence from Nigeria

Abstract

Foreign Direct Investment (FDI) and other macroeconomic variables such as the exchange rate, economic openness, and public sector investment are significant macroeconomic variables that drive economic growth and development. As a result, every government’s ability to sustain and maintain a balance among them is critical to long-term development. The study's goals were to establish the impact of foreign direct investment on Nigeria's economic development, as well as the impact of the exchange rate on Nigeria’s economic development. The ex-post facto research design was used in this study, as well as secondary data. The explanatory variable was Foreign Direct Investment, and the control variable was the exchange rate. The study spans the years 1981 through 2019. The explanatory variable was Gross Fixed Capital Formation (GFCF), which is a proxy for economic progress, and the model was estimated using the Auto Regressive Distributed (ARDL) Model. The data for this study came from the World Bank Data Base's World Development Indicators of 2019 and the Central Bank of Nigeria's Statistical Bulletin of 2019. According to the study, a 1.4 unit increase in foreign direct investment leads to a 1.4 unit increase in gross fixed capital creation. In addition, a unit increase in the exchange rate causes a 0.03-unit fall in gross fixed capital formation, and vice versa. According to the findings, there is a negligible positive link between FDI and GFCF, but a strong negative relationship between the exchange rates (EXR) and GFCF. As a result, the report suggests that FDI inflows be used to fund capital projects that are not for current consumption, such as good road networks, train lines across the country, and stable electricity supply. Without a doubt, this would lower the cost of doing business in Nigeria and boost profitability. According to our findings, while FDI alone cannot lead to economic growth and development, when other factors such as a favorable climate and simplified pre-investment procedures are available, more FDI will be drawn to key economic sectors, contributing to economic growth and development.