EFFECTS OF FOREIGN INVESTMENT INFLOWS ON MACROECONOMIC PERFORMANCE IN NIGERIA (1987-2012)

EFFECTS OF FOREIGN INVESTMENT INFLOWS ON MACROECONOMIC PERFORMANCE IN NIGERIA (1987-2012)

ABSTRACT

This study investigated the causal relationship between foreign investment inflows disaggregated into foreign direct investment and foreign portfolio investment inflows and macroeconomic performance in Nigeria. Most emerging economies around the world strive to attract foreign investment inflows because of the gap between the domestic savings and investment especially into the real sectors of their economies. This is most probably because, foreign investment inflows are seen as an amalgamation of capital, technology, marketing and management of resources which are useful in harnessing host country resources. Since globalization, the flow of foreign investments into emerging economies has increased and the debate on the effect of these foreign investment inflows on macro economic performance has also intensified. Nigeria is one of the largest beneficiaries of foreign direct investment (FDI) and foreign portfolio investment (FPI) in sub-Saharan Africa. Yet their impact on macroeconomic performance has not been fully ascertained. It is, therefore, against the foregoing that this study sought to examine the effect of total foreign investment inflows on gross domestic product, exchange rate, inflation rate and interest rate in Nigeria. The study adopted the ex-post facto research design. Annual time series data for 26 years for the period, 1987 – 2012 were sourced from the Central Bank of Nigeria (CBN) statistical bulletin. Four hypotheses were formulated and tested using the ordinary least square (OLS) regression method. The results revealed that total foreign investment inflows had positive and significant effect on gross domestic product in Nigeria;foreign direct investment had negative impact on exchange rate while foreign portfolio investment had positive impact on exchange rate. Again, total foreign investment inflows have positive and insignificant impact on inflation whereas foreign direct investment had positive impact on interest rate and foreign portfolio investment had a negative impact on interest rate. The study recommends, among others, that incentives such as tax holidays should be used to direct foreign investment inflows towards non-oil real sectors of the economy in order to boost export. This will obviously lead to stronger exchange rate, lower inflation, and encourage competitive interest rate which will encourage savings and sustainable economic growth.