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Impact of Foreign Direct Investment on Gross Domestic Product in Nigeria


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PROJECT TOPIC AND MATERIAL ON impact-of-foreign-direct-investment-on-gross-domestic-product-in-Nigeria

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  • Name: impact-of-foreign-direct-investment-on-gross-domestic-product-in-Nigeria
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This paper empirically investigate the impact of financial liberalisation on the Nigeria economic between the periods 1981 to 2015 using secondary time series data sourced from the CBN statistical bulletin. This empirical research capitalised on the Nigeria  financial system not only because it is one of the most transition economies in Africa, but also considering the fact that the Nigeria financial sector has undergone so many phases of changes during the pre and post era. Study employ unit root test, Johansen co-integration test, error correction model and granger causality test to ascertain the direction of causality. Findings reveals that The effect of financial liberalization on the rate of economic growth in the medium term can be calculated indirectly from the effects of real deposit rates on saving rates and on investment efficiency. Estimate shows the existence of positive and significant relationship between incremental foreign direct investment, Aggregate savings and growth in the long run. On this premises, study thus conclude that to a reasonable extent, financial liberalisation has contributed to growth of the Nigeria economy in the long run although the positive effect of its contribution as not been felt to a large extent due to macro-economic instability. Study recommends that Government should aim at creating conditions which make private investment attractive. The conditions can range from general- establishing a stable macroeconomic environment, provision of adequate property right- to more specifics ones, such as adequate access to credit, imported inputs by investors, stable power supply, good road network, telecommunication and provision of adequate security. Policies that promote private investment would generally have significant benefits for long- run growth, and thus standard of living.


Keywords: Aggregate Savings, Investment, Financial Liberalisation, Nigerian Economy.                                


                                    Background to the Study

1.0 Introduction

Financial liberalization has become an important economic policy package in both advanced and advancing countries. Due to the widely spread benefits attainable from financial liberalisation as proposed by MacKinnon (1973) and Shaw (1973), many developing countries have experienced the gradual but apparent liberalisation of their financial sectors.

Emphatically, there has not been a consensus in the literature as to the implication of financial liberalisation on the growth on an economy. some school of thought exert that financial liberalisation induces risk-taking behaviour and may cause banking crises Demirgüç-Kunt and Detragiache, (1998)  as cited in Mehrez and Kaufmann, (2000). Furthermore, there explains that the impact of financial liberalization on a fragile banking sector is weaker where the institutional environment is strong and thus concludes that it increases the risk of speculative attacks and increases a country’s exposure to international shocks and capital flight which is harmful to economic growth.

Conversely, Both McKinnon and Shaw (1973) advocated that financial liberalisation was needed as a remedy to the problems caused by the financial repressive policies of developing countries. Also other proponents of financial liberalisation support that it generates economic growth. Advocates for financial liberalisation argue that it leads to unlimited international capital flows thereby lowering the cost of capital, which allows for risk diversification. This in turn encourages investments in projects with higher returns, hence sustainable economic growth.

Aaron Tornell, et al (2004) articulated that in countries with severe credit market imperfections, financial liberalization leads to more rapid growth, but also to a higher incidence of crises. In fact, most of the fastest-growing countries of the developing world have experienced boom-bust cycles. Hence, study argue that liberalization leads to faster growth because it eases financial constraints. Most developing countries consider financial liberalisation as a key to sustainable economic growth following the postulation of mackinnon and shaw (1973) whose study highlighted that a low or negative real rate of interest discourages savings and hence reduces the availability of loanable funds, constrains investment, and in turn lowers the rate of economic growth. They posited further that on the contrary, an increase in the real interest may induce savers to save more, which will enable investment to take place.

From the Nigerian context, financial sector liberalisation was embarked upon in 1999. Consequently, interest rates were liberalized by switching from an administered interest rate setting to a market-based interest rate determination; credit controls were also removed by eliminating directed and subsidized credit schemes. In fact, use of credit ceiling was replaced with open market operation; prudential regulations were also put in place; government owned-banks were also privatized just as entry and exit from the financial sector were liberalized.

Since the introduction of SAP into the Nigerian economy in July 1986, a great deal of interest has been shown in the activities and developments which the banking system. A central component of the SAP reform was the restructuring of the national financial system by relaxing some regulations considered inhibitive to orderly growth and development within the system.


1.2 Statement of Problem

One of the prevailing issues in this context is that financial liberalization may trigger financial instability and banking crises, as pointed out by Aizenmann, (2001) and this may harm the ability of a financial system to provide the economy with credit. As a consequence, both investments in physical capital and innovation can be expected to slow down.

The aim of financial liberalization is to improve economic performance through increased competitive efficiency within financial markets thereby indirectly benefiting nonfinancial sectors of the economy. After the prescribed financial liberalization, the domestic economy has failed to experience impressive performance such as attraction of foreign investment or halt capital flight. Evidence in Nigeria suggests that neither the domestic savings nor investment have appreciably increased since the introduction of the reform programme. More so, the banking sector has remained largely oligopolistic and uncompetitive. Few large banks control the greater segment of the market in terms of total assets, total liabilities and total credit in the banking system. based on this backdrop, this study tends to examine the impact of financial liberalisation on growth of the Nigeria economy and to identify its contributive quadrant to the growth of the Nigerian economy between the periods 1981 to 2015 using more sophisticated econometrics tools like unit root test to ascertain the stationality trend of the times series data, Johansen co-integration test to identify the long run relationship amongst employed variables, error correction model     and granger causality test to determine the extent to which liberalisation of the financial sector has contributed to growth in Nigeria.


  • Aims and Objectives of the study

The eclectic objective of this study is to examine the causal impact of financial liberalisation on growth of the Nigerian economy while the specific objectives is stated thus

  1. To examine the impact of foreign direct investment on gross    domestic product in Nigeria
  2. To determine the influence of interest rate on gross domestic      product in Nigeria
  • To examine the relationship between trade openness and output level of gross domestic product in Nigeria
  1. To identified the influence of savings on economic growth in Nigeria
  2. To evaluate the influence of Currency Exchange Rate on Economic Output in Nigeria.


1.4 Research question

In order to actualise the gross objective of this study, the following research question were formulated thus;


  1. To what extent does foreign direct investment promote gross domestic product in Nigeria?
  2. To what extent does interest rate promote gross domestic product in Nigeria?
  • To what extent does trade openness influence gross domestic product in Nigeria?
  1. To what extent does aggregate saving stimulate gross domestic product in Nigeria?
  2. To what extent does Currency Exchange Rate influence Economic Output in Nigeria?


 1.5 Research hypotheses

From the statement of problem, objective of study and research questions of the study, the following hypothesis are formulated as a guide to the study:

Ho1: There is no significant relationship between foreign direct investment and gross domestic product in Nigeria


Ho2: There is no significant relationship between interest rate and gross domestic product in Nigeria

Ho3: There is no significant relationship between trade openness and gross domestic product in Nigeria


Ho4: There is no significant relationship between aggregate saving and gross domestic product in Nigeria


H05:           There is no significant relationship between Currency Exchange Rate and Economic Output in Nigeria



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