Determinants of Foreign Direct Investment: The Case of Nigeria

Nurudeen Abu and Elisha Menson Auta

The IUP Journal of Monetary Economics, 2011, vol. IX, issue 3, 50-67

Abstract: This paper examines the major determinants of Foreign Direct Investment (FDI) in Nigeria, analyzing the annual data over the period 1970-2008, using the ordinary least squares and error correction techniques. The regression results indicate that openness of the economy to trade (OP), privatization (PR), the level of infrastructural development (FR), and exchange rate depreciation (EXC) have significant positive effect on FDI inflows into Nigeria. In addition, the results reveal that the host country’s market size (GDP) has a significant negative effect on FDI, while inflation (IF) has an insignificant (but positive) influence on FDI inflows. Thus, the paper recommends the following: Firstly, government should employ policies to further open up the economy in a manner that the economy will be able to attract more FDI. Secondly, government should increase its investment in the development of the nation’s infrastructure (power supply, roads, telecommunication, etc.) in order to reduce the cost of doing business thereby wooing more FDI. Thirdly, government should encourage production activity via production incentives and/or subsidies in order to increase the economy’s GDP. Fourthly, the economy should be ready to accommodate further depreciation of the domestic currency (Naira) so as to encourage the inflows of FDI in the form of merger and/or acquisition. Furthermore, privatization should be done in a manner that is transparent, and all necessary and relevant information regarding the process should be made available to both existing and prospective investors. In addition, there is a need for an efficient and effective judicial system and crime fighting mechanism so as to assure foreign investors the safety of their investment.

Date: 2011
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