An Error Correction Model Analysis of the Determinant of Foreign Direct Investment: Evidence from Nigeria
AbstractThis study used Granger causality and then error correction model to investigate the determinants of foreign direct investment inflow to Nigeria during the period 1970 – 2009. The results show that causality runs from government policy, fiscal incentives, availability of natural resources and trade openness to FDI without reverse or feed back effect. The parsimonious result of the error correction model reveals that past foreign investment flows could significantly stimulate current investment inflows. Also, while inadequate natural resources reduce the inflow of FDI, fiscal incentives, favorable government policy, exchange rate and infrastructural development are found to be a positive and significant function of FDI in Nigeria. Market size (at lags 2 and 3) and trade openness are positively signed while political risk is negatively signed. These variables, however impact insignificantly on FDI. Thus, fiscal incentives, favorable government policy and infrastructural development are positive predictors of FDI inflows and should be used as policy instruments. In the light of these findings, recommendations such as government, improving on the country’s market size through its monetary and fiscal policy and revitalizing the agricultural sector for extraction of raw materials were made.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 36676.
Date of creation: 14 Feb 2012
Date of revision: 14 Feb 2012
foreign direct investment; error correction model; determinants of FDI; natural resources; fiscal incentives; trade openness;
Find related papers by JEL classification:
- P33 - Economic Systems - - Socialist Institutions and Their Transitions - - - International Trade, Finance, Investment, Relations, and Aid
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- O19 - Economic Development, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
- C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
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