Impact of Fiscal Prudence and Financial Development on Foreign Direct Investment Inflow: Nigerian Evidence

Mukhtar Shuaibu

doi:10.33094/26410249.2021.34.87.100

Abstract

Foreign direct investment in a globalized and information technology driven environment, as we have today in the 21st century, acted as a driver of growth. This paper provides further evidences on macroeconomic management of FDI in emergent economies especially in Africa. The paper empirically measures the effects of fiscal prudence and financial development on foreign direct investment inflow in Nigeria. It tested the importance of household consumption, domestic credit to the private sector, fixed capital formation, domestic savings, external debt, foreign reserve and financial development for the purpose of ensuring FDI inflow in Nigeria. It findings show that domestic credit to private sector, fixed capital formation, foreign reserve and financial development are statistically significant in the case of Nigeria. The econometric methodologies followed for the study are log-linear regressions and ARDL bound testing. Data was sourced from National Bureau of statistics and World Bank’s World Development Index for the period ranging from 1985 to 2018.

Highlights

The Covid 19 pandemic that ravage the global economy, brought into focus the issue of fiscal sustainability in the face of declining revenue as a result of unprecedented recession in the world economy since the Second World War
The results from this paper show the importance of the provision of domestically sourced credit to the private sector of the Nigerian economy
The federal government shall avoid policies that result in crowding out private sector borrowers and ensure provision of long term development capital to the industrial sector of the economy

Summary

Introduction

The Covid 19 pandemic that ravage the global economy, brought into focus the issue of fiscal sustainability in the face of declining revenue as a result of unprecedented recession in the world economy since the Second World War. Shah (2016), tried to gauge the importance of prudent macro-economic management in the decision of foreign direct investors, using annual data from 1990 to 2015.The results show that better infrastructure, trade and investment liberalisation have significant effects on FDI inflows in Africa He found that prudent management of macro-economy and healthy business policies manifested through stable macroeconomic indicators increased the ability of African countries to receive additional Foreign Direct Investment. This paper measures how macroeconomic variables such as household consumption (HC), fixed capital formation (FCF), domestic credit to the private sector (DCP), domestic savings (DS), external debt (ED), financial development (FD) and foreign reserve (FR) affect foreign direct investment (FDI) in Nigeria. The order of integration of each variable should be determined before any inference can be made

Results and Discussion

Conclusion and Policy Implications

Discussion