FOREIGN DIRECT INVESTMENT AND THE MANUFACTURING SECTOR IN NIGERIA

FOREIGN DIRECT INVESTMENT AND THE MANUFACTURING SECTOR IN NIGERIA

ABSTRACT

The importance of the manufacturing sector in the economic growth cannot be overemphasized. This has led to interests in the determinants of its performance over the years. This study therefore, investigated the impact of foreign direct investment (FDI) on the performance of the manufacturing sector in Nigeria as well as the causal relationship between foreign direct investment and manufacturing capacity utilisation (MCU) from 1970-2012 under the framework of VAR. The result of co-integration revealed that there is no long-run relationship among the variables. In addition to this, findings show that FDI is significant at 5% and positively related to MCU. On the other hand, other variables are not significant and both EXR and INT exhibit wrong apriori signs. For causal relationship, the results show that there is a unidirectional causality running from MCU to DOP. There is also a unidirectional causality running from MCU to EXR. Also, causality flows from EXR to DOP without a feedback. It runs from INT to DOP as well as from INT to EXR, while it flows from FDI to MCU and from FDI to DOP. The results of the variance decomposition and that of the impulse response function further reveal the link between FDI and MCU. On grounds of these results, we recommend that policies that seek to achieve a realistic exchange rate of the country’s currency should be put in place. Our argument is that exchange rate policy in the country should not be restrictive in order not to hamper manufacturers’ quest to obtain raw materials for their production. We also recommend that the external sector be liberalized so that manufacturers in the country can easily import some of their inputs without some hiccups and that the authorities should make the cost of doing business in Nigeria to be cheap.  Finally, we pointed out that every effort should be devoted to attract foreign investment in the country.