Abstract

This paper examines the determinants and impact of FDI in Nigeria from 1970 through 2009. As a tool for
economic development and means of bridging the gaps between the rich and poor nations, emerging economies
grant special incentives to attract FDI, but the empirical literature is controversial about the effect of FDI on the
growth and development of emerging economies. This study utilizes the Vector Error Correction Model (VECM)
to examine this issue. Granger causality methodology was used to analyze and establish the nature of
relationship (if any) between FDI and its determinants on one side and economic development on the other. Our
empirical analysis reveals that macroeconomic variables (exchange rate, interest rate, inflation) and openness of
the economy are among the major and important factors that determine the inflow of FDI into Nigeria during
these periods. The GDP and government size exhibited positive but insignificant influence on FDI. The
analysis revealed the presence of a long-run equilibrium relationship between FDI and GDP, but FDI does not
have any significant effect on the growth as well as the development of Nigeria economy during this period. The
study therefore recommends that government should ensure stable macroeconomic policies (as motivating factor
for the attraction of FDI into Nigeria) and also increase its expenditure in the area of infrastructural development
as ways to accelerate the growth of Nigerian economy which will reduce the excessive dependence of Nigeria on
FDI.

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