AN INQUIRY INTO THE DETERMINANTS OF FOREIGN DIRECT INVESTMENT IN NIGERIA

Abstract

Nigeria strives to attract Foreign Direct Investment (FDI) because of its acknowledged advantage as a tool of economic development. This study investigates the determinants of FDI inflow into Nigeria by examining the influence of natural resources, market size, openness and inflation over the period 1981-2010. Series of econometric techniques were employed; unit root test, cointegration test and Granger causality test. The results of the Johansen cointegration test, suggest that availability of natural resources, market size, openness of the economy and macroeconomic stability do not attract FDI in the long run in Nigeria. While the results of the Granger causality test showed that market size and inflation positively affect FDI in the short run. Inflation increases the market size in the short run and availability of natural resources also leads to openness of the economy in the short run. The policy implication of this is that government should create an enabling environment or provide incentives for production activities as well as creating employment opportunities to boost market size and attract FDI in the short run. In addition proper monetary policies should be employed to achieve an optimum inflation rate that will attract FDI in the short run while reserves of natural resources should be explored and efficiently utilized to diversify the economy.