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An Error Correction Model Analysis of the Determinant of Foreign Direct Investment: Evidence from Nigeria


  • Okpara, Godwin Chigozie


This 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.

Suggested Citation

  • Okpara, Godwin Chigozie, 2012. "An Error Correction Model Analysis of the Determinant of Foreign Direct Investment: Evidence from Nigeria," MPRA Paper 36676, University Library of Munich, Germany, revised 14 Feb 2012.
  • Handle: RePEc:pra:mprapa:36676

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    References listed on IDEAS

    1. Yuko Kinoshita & Nauro F. Campos, 2003. "Why Does Fdi Go Where it Goes? New Evidence From the Transition Economies," IMF Working Papers 03/228, International Monetary Fund.
    2. ibrahim, waheed & Omoniyi, Benjamin, 2011. "Determinants of Foreign Direct Investment in Nigeria: Political Factor Effects Revisited," MPRA Paper 59429, University Library of Munich, Germany, revised 2012.
    3. Ashoka Mody & Krishna Srinivasan, 1998. "Japanese and United States Firms as Foreign Investors: Do they march to the same tune?," Canadian Journal of Economics, Canadian Economics Association, vol. 31(4), pages 778-799, November.
    4. Dinda, Soumyananda, 2008. "Factors Determining FDI to Nigeria: An Empirical Investigation," MPRA Paper 28097, University Library of Munich, Germany, revised Nov 2010.
    5. Goldberg, Linda S & Kolstad, Charles D, 1995. "Foreign Direct Investment, Exchange Rate Variability and Demand Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 855-873, November.
    6. Chakrabarti, Avik, 2001. "The Determinants of Foreign Direct Investment: Sensitivity Analyses of Cross-Country Regressions," Kyklos, Wiley Blackwell, vol. 54(1), pages 89-113.
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    More about this item


    foreign direct investment; error correction model; determinants of FDI; natural resources; fiscal incentives; trade openness;

    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; State Space Models
    • O19 - Economic Development, Innovation, 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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