Foreign Direct Investment and the Effect on a Developing Economy

Abstract

This study examined the effect of foreign direct investment on a developing economy. The study employed multiple regression models to estimate the relationship that exists between sectorial inflow of foreign direct investment and Nigeria economic growth. Augmented Dickey Fuller Test, Johansen Co-integration test, normalized co-integrating equations, parsimonious vector error correction model and pair-wise causality tests were used to conduct the investigations and analysis. The findings of the result reveal that foreign direct investment in the agricultural sector have positive but no significant effect, foreign direct investment in the manufacturing sector have positive and significant effect, foreign direct investment in the mining and querying sector have negative but no significant effect, foreign direct investment in the transport and communication sector have positive and significant effect while foreign direct investment in the oil and gas sector have positive and significant effect on Nigeria real gross domestic products. The study concludes that the oil and gas sector have the greatest impact on Nigeria economic growth followed by manufacturing, agricultural, transport and communication sectors while mining and quarrying reduces gross domestic product. Nigerian policy makers should design sectoral policy reforms with the intention of creating an enabling business environment, improve infrastructure, address issues of insecurity in the north and south that hinder foreign direct investment in mining and quarrying sectors. Furthermore, there is the need to strengthen policy cohesion with regards to foreign direct investments to ensure that mining and quarrying sectors perform as well as the oil and gas sector.