An Error Correction Model Analysis of the Determinant of Foreign Direct Investment: Evidence from Nigeria.

This study used Granger causality and then error correction model to investigate the determinants of foreign direct investment inflow to Nigeria during the period 1970 – 2009. The results show that causality runs from government policy, fiscal incentives, availability of natural resources and trade openness to FDI without reverse or feed back effect. The parsimonious result of the error correction model reveals that past foreign investment flows could significantly stimulate current investment inflows. Also, while inadequate natural resources reduce the inflow of FDI, fiscal incentives, favorable government policy, exchange rate and infrastructural development are found to be a positive and significant function of FDI in Nigeria. Market size (at lags 2 and 3) and trade openness are positively signed while political risk is negatively signed. These variables, however impact insignificantly on FDI. Thus, fiscal incentives, favorable government policy and infrastructural development are positive predictors of FDI inflows and should be used as policy instruments. In the light of these findings, recommendations such as government, improving on the country’s market size through its monetary and fiscal policy and revitalizing the agricultural sector for extraction of raw materials were made.