Analysis of Foreign Direct Investment and Economic Growth in Nigeria: Application of Spatial Econometrics and Fully Modified Ordinary Least Square (FMOLS)
| Author | Olabode Philip Olofin,Abayomi Ayinla Adebayo,Oluwole Oladipo Aiyegbusi |
| Published date | 01 August 2019 |
| DOI | 10.1177/0015732519851631 |
| Date | 01 August 2019 |
| Subject Matter | Articles |
Analysis of Foreign
Direct Investment and
Economic Growth in
Nigeria: Application of
Spatial Econometrics
and Fully Modified
Ordinary Least
Square (FMOLS)
Olabode Philip Olofin1
Oluwole Oladipo Aiyegbusi2
Abayomi Ayinla Adebayo1
Abstract
Based on the controversy surrounding the determinants of foreign direct invest-
ment (FDI) inflow from one country to another and the suggestion that inflow
of FDI might be a result of countries’ locations, this study therefore revisits the
determinants of FDI and economic growth by testing for the roles of country’s
location in the determination of the inflow of FDI to Nigeria. Unlike other stud-
ies, this study finds that countries’ locations do not play any significant role in
determining FDI inflow to Nigeria. The study, therefore, employs fully modified
ordinary least square (FMOLS) to examine the determinants of FDI in Nigeria.
The FMOLS results show that FDI, manufacturing sector, tax revenue, finan-
cial development, health expenditure, net trade and human capital have a posi-
tive relationship with income growth. These results were statistically significant
except for tax revenue, net trade and human capital. These results support the
argument that these variables are important determinants of economic growth.
The article also finds a negative and statistically significant relationship among
FDI, income growth, import and capital formation. These results are in conformity
with economic theory in the sense that import of goods and services constitutes
Article
1 Department of Economics, Obafemi Awolowo University, Ile-Ife, Nigeria.
2 Department of Economics, Afe Babalola University, Ado-Ekiti, Ekiti, Nigeria.
Corresponding author:
Olabode Philip Olon, Department of Economics, Obafemi Awolowo University, Ile-Ife, Nigeria.
E-mail: opolon@oauife.edu.ng
Foreign Trade Review
54(3) 159–176, 2019
© 2019 Indian Institute of
Foreign Trade
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DOI: 10.1177/0015732519851631
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160 Foreign Trade Review 54(3)
a leakage in the economy. Negative impact of capital formation and security
could be associated with the prevailing high level of corruption, sharing of secu-
rity votes and misappropriation of funds among the public officials in Nigeria.
JEL Codes: F23, F26, F21, H24
Keywords
FDI, economic growth, spatial econometrics, FMOLS, Nigeria
Introduction
Almost all countries see foreign direct investment (FDI) as one of the unavoidable
major drivers of economic growth. This is due to its ability in augmenting domes-
tic savings, employment generation, transfer of modern technology as well as
increasing efficiency and promotion of the skills of local manpower (Anyanwu,
2006; Dupasquier & Osakwe, 2003). This therefore could be the major reason
why developing countries usually encourage FDI inflow by using various means,
ranging from granting tax holidays, tax exemption as well as pleading with for-
eign investors to direct their investment towards their countries. For example,
studies have shown that FDI inflow to West African countries in the past was very
low, but due to its attached importance in the host countries and the agitation for
its inflow recently, especially between 2007 and 2013, FDI projects in West Africa
have grown at a compound annual rate of 27.7 per cent, the highest in the African
continent (Anyanwu, 2012).
There are many studies on FDI inflow and economic growth in both developed
and developing countries with mixed results. Their focus was mainly on determi-
nants of FDI inflow or its effect on economic growth in sub-Saharan African
countries, Africa as a whole or country specific (Anyanwu, 2012). Most of these
studies have failed to verify the role of countries’ locations on FDI inflow. As
important as countries’ locations could be, it can discourage or encourage inves-
tors from moving their businesses from or to other countries. Recognizing the role
that countries’ locations can play when analysing the effect of FDI on economic
growth in most of these countries, especially in sub-Saharan countries, this study
suggests that the culprit behind the inconclusive results on determinants of FDI in
West African countries could be countries’ locations. Awareness of the importance
of countries’ locations in the determination of FDI inflow can serve as a policy
guide in the area of improving countries’ environment, thereby making it condu-
cive for business operations as well as FDI inflow. This seems more appropriate,
pleasing and acceptable than bribing and begging for FDI inflow.
Recently, it has been noted that the effect of economic activity in one country
can ‘spill over’ and affect growth rates in neighbouring countries. This spillo-
ver, when critically considered, may likely bias the results of earlier studies and
lead to invalid policy recommendations. On this note, this study intends to ver-
ify the hypothesis that the average income growth and FDI in neighbouring
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