The Impact Of Foreign Direct Investment And Financial Sector Development On Economic Growth Of Nigeria

ABSTRACT

This study empirically examined the impact of foreign direct investment and financial sector development on economic growth of Nigeria. The study modified the standard endogenous growth model to incorporate the interactions of foreign direct investment and financial sector development as having complementary impact on growth. Using time series analysis from 1970-2011, the study tested for the time series property of the variables used and adopted Ordinary Least Squares (OLS), Co-integration and Granger causality techniques to estimate the models. The result showed that foreign direct investment and financial sector development had separate negative impacts on growth. Interestingly, the interactions of foreign direct investment and financial sector development had positive complementary impact on growth in the short as well as in the long run. The complementary role was enhanced further by government consumption expenditures, gross capital formation and level of human capital development while, trade openness was found to be detrimental to growth in the study period. The causality relationship revealed a bi-directional causality between foreign direct investment, financial sector development and economic growth. These confirm that the complementary role of foreign direct investment and financial sector development is important and very significant to Nigeria’s economic growth. The study also affirms the views exposed from studies in most developed countries, that the spill-over benefits of foreign direct investment to a recipient country crucially depends on the extent of development of the domestic financial system. Therefore, policies that strengthen foreign direct investment and financial sector development should be formulated and implemented strictly and simultaneously. Government should formulate polices that discourage importation, promote local production, promote capital formation and invest more on human capital development without which the much talked about technological diffusion that is associated with foreign direct investment will be a mirage.