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ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.3, No.10, 2012

Foreign Direct Investments and Economic Growth in Nigeria: A

Disaggregated Sector Analysis
Adegbemi Babatunde Onakoya
Department of Economics, College of Social and Management Sciences,
Tai Solarin University of Education, Ijagun, Ijebu Ode, Nigeria
Tel: +234-803 5550124 E-mail [email protected]
Abstract
This paper attempts to investigate the impact of Foreign Direct Investment (FDI) on economic growth in Nigeria. The
research developed a structural macroeconometric model consisting of four blocks made up of supply, private demand,
government and external sectors. The model deploys 18 simultaneous equations and 100 variables to capture the required
proxies. The research adopted a three-stage least squares (3SLS) technique and macroeconometric model of simultaneous
equations to capture the disaggregated impact of FDI on the different sectors of the economy and the inter-linkages amongst
the sectors in order to give better insight into the variations inherent therein. The finding shows that FDI has a significant
impact on output of the economy but that the growth effects of FDI differ across sectors. The paper recommends sector-
specific policies, enhanced trade openness, import substitution development strategy incentives to existing investors, and
potential overseas investors so as to enhance the development of the country.
Keywords: Foreign Direct Investment, Economic Growth, Simultaneous Equation, Macroeconometric Model

1.0 Introduction
Economists are inclined to support the free flow of capital across national borders because it allows capital to seek out the
highest rate of return since international ventures seek higher profit as per the Capital Arbitrage theory propounded by
Samuelson (1948). Nigeria is believed to be a high-risk market for investment although blessed with enormous mineral and
human resources. The co-existence of vast wealth in natural resources and extreme personal poverty referred to as the
“resource curse” or 'Dutch disease' (Auty, 1993) appears to bedevil the country. In 2011, the country ranked 170 out of 213
countries with respect to the Gross National Income Per Capita which is put at US$1,200 (The World Bank, 2011). Many
analysts and experts have suggested the use of Foreign Direct Investment (FDI) as a veritable injection to kick-start the
Nigerian economy. This is because FDI is not only the transfer of ownership from domestic to foreign companies but also a
device for improved corporate governance and attendant transparency in business practice. Nigeria however, has one of the
highest rates of investment returns in the emerging markets, presently estimated to be 30 percent (Schoeman, Robinson, &
de-Wet, 2000).
Feldstein (2000) identified the provision of diversification opportunities in other climes through the international flow of
capital to reduce the risk faced by owners of capital in their home countries, as one of the advantages of FDI. International
investment also provides opportunities for the global transfer of technology and human capacity development in addition to
the promotion of competition in the domestic input market. Despite the contributions to corporate tax revenues in the host
country from profits generated by FDI, the highly capital intensive technology engendered can exacerbate the
unemployment situations in labour surplus host countries. In addition, the creation of monopolies in areas where the entry
barriers have been raised in some cases, my crowd out domestic operators.
The importance of FDI in the growth dynamics of countries has created much interest amongst scholars and lots of
researchers have been focused on the impact of FDI on the economy. Most of the works on the role of FDI on economic
growth in Nigeria have examined various aspects. However, the nature and impact of FDI especially at sub-national and
sector levels have been largely ignored. Therefore, capturing the disaggregated impact of FDI on the different sectors of the
economy would give better insight into the variations inherent therein. Also, there is the need to address the spill-over
effects and externalities generated by FDI which is transmitted throughout the economy by examining the inter-sectoral
linkages. Theoretically, ignoring these multiplier effects, when in fact they exist, may lead to biased and inefficient results.
The impact of FDI may be therefore be underestimated if these externalities are not factored into the estimation process
which is a case of omitted variable bias (Onakoya, Tella & Osoba).This study is an attempt to remove such biases and
examine the impact of the disaggregated FDI on the real sectors of the economy.
The choice of the study period covering 1970 to 2010 and spanning an assortment of economic cycles for about 77 percent
of the life of the country, since attaining political independence in 1960 provides an opportunity for a comprehensive

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ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online)
Vol.3, No.10, 2012

assessment of the effect of FDI on Nigeria's economy. The remaining part of this paper is structured as follows: Section 2
focuses on the relevant literature while section 3 is on the methodology and model specification. Section 4 covers data
analysis and discussion of the results. Section 5 summarizes the paper and offers some recommendations. In the next
section, the review of relevant literature is presented

2. Literature Review
There have been several studies on the relationship between FDI and economic growth with conflicting findings. Türkcan,
Duman, and Yetkiner (2008) test the endogenous relationship between the two variables using a panel dataset for 23
OECD countries for the period 1975-2004. They treat economic growth and FDI as endogenous variables and estimate a
two-equation simultaneous equation system with the generalized methods of moments (GMM). They found that FDI and
growth are important determinants of each other and in addition, that export growth rate is a statistically significant
determinant of both variables. Their results indicate that there is an endogenous relationship between FDI and economic
growth. The examination of the causal relationship between FDI and economic growth by Karimi and Zulkornain (2009)
was based on the Toda-Yamamoto test for causality. This test which is sometimes preferred to the standard Granger
causality tests does not rely so heavily on pre-testing evaluations. The assessment which is from 1970 to 2005 found no
strong evidence of bi- directional causality but a long run relationship suggesting that FDI has indirect effect on Malaysia's
economic growth. Chakraborty and Nunnenkamp (2008) assess the proposition that the FDI boom recorded in post-reform
India is widely believed to promote economic growth. The study subject industry-specific FDI and output data to Granger
causality tests within a panel cointegration framework. The result show that growth effects of FDI vary extensively across
sectors. Although there is no causal relationship in the primary sector and only transitory effects of FDI on output in the
services sector, FDI stocks and output are found to be mutually reinforcing in the manufacturing sector. In the services
sector however, FDI appears to have caused rapid growth in the manufacturing sector through cross-sector spillovers and
externalities.
In a survey of African countries Dupasquier, and Osakwe (2006) identified poor corporate governance, unstable political
and economic policies, weak infrastructure, unwelcoming regulatory environments and global competition for FDI flows as
impediments standing in the way of attracting significant FDI flows. This corroborates the findings of Jerome and
Ogunkola (2004) which assessed the magnitude, direction and prospect of FDI in Nigeria. The authors ascribed the low
level of FDI in Nigeria to deficiency in the country's legal framework concerning corporate law, bankruptcy and labour law,
in addition to institutional uncertainty. The investigation of the empirical relationship between non-extractive FDI and
economic growth in Nigeria was the focus of Ayanwale (2007) who reported that the determinants of FDI in Nigeria are
market size, infrastructure development and stable macroeconomic policy. The contributions of Ekpo (1995)'s study which
made use of time series data is that the variability of FDI into Nigeria can be explained by the political regime, real income
per capita, rate of inflation, world interest rate, credit rating and debt service. In his study of the determinants of FDI in
Nigeria, Anyanwu (2011) identified change in domestic investment, change in domestic output or market size,
indigenization policy and change in openness of the economy as major determinants of the FDI. He further noted that the
abrogation of the indigenization policy in 1995 encouraged FDI inflow into Nigerian and that efforts must be made to raise
the nation's economic growth so as to be able to attract more FDI.

The review by Endozien (1998) of the linkage effects of FDI on the Nigeria economy show that the broad linkage-effects
were lower than the Chenery-Watanable average (Chenery-Watanable, 1958) and was not substantial. The study of the
investment trend by Ariyo (1998) and of its impact on Nigeria's economic growth over thirty five years (1970-2005) reveal
that only private domestic investment consistently contributed to raising the GDP growth rates during the period. Indeed,
FDI played an insignificant role. Using the Chenery and Stout two-gap model (Chenery and Stout, 1966), Oyinlola (1995)
modeled foreign capital to include foreign loans, direct investments and export earnings and concludes that FDI has a
negative effect on economic development in Nigeria. Adelegan (2000) apply the seemingly un related regression (SURE)
model to examine the impact of FDI on economic growth in Nigeria and found out the FDI is pro-consumption and pro-
import and negatively related to gross domestic investment. Akinlo (2003) submits that foreign capital was not statistically
related to economic growth in Nigeria. This is corroborates the study of Ogiogio (1995) which identified the negative
contributions of public investment as accounting for distortions to GDP growth in the country. Bello and Adeniyi (2010)
conducted an investigation into on the causal relationship among FDI, economic growth and environment using the
Autoregressive Distributed Lag (ARDL) approach by applying the annual time series data for the period spanning 1970-
2006. The findings show that there was no existence of a long run relationship between FDI and growth on the one hand
while there exists a long run causal link between environmental quality and FDI inflows on the other hand. The exploration
of the possibility of the existence of causality between FDI and economic growth in Nigeria in the pre and post
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Vol.3, No.10, 2012

deregulation era was conducted by Ogundipe and Aworinde, O. B. (2011) using Granger causality analysis. The result
shows one-way causality relationship from economic growth (GDP) to FDI in the pre deregulation era (1970-1985) and the
absence of casual relationship during the post-deregulation era (1986-2007).
Oseeghale and Amonkhienan (1987) and Brown and Obinna (2006) report that FDI is positively associated with economic
growth in Nigeria. They recommend that the government should encourage greater inflow of FDI into the country in order
to enhance its economic performance. Oyatoye, Arogundade, Adebisi, and Oluwakayode (2011) reviewed the effect and
relationship between FDI and economic growth in Nigeria for 20 years (1987 – 2006) using Ordinary Least Square
regression analysis and report a positive relationship between the two variables. The result further showed that one Naira
increase in the value of FDI will lead to N104.749 increase in GDP. On the micro economic level, the review of Ayanwale
and Bamire (2001) at the firm level show that productivity positive spill-over of foreign firms on domestic firm's
productivity.
From the literature surveyed, the findings on the FDI–growth nexus is far from being conclusive. It is opined by Carkovic &
Levine (2005) and Chakraborty and Nunnenkamp (2008) that the causal relationship between FDI and economic growth
which is typified by a considerable degree of heterogeneity calls for country-specific studies. Having reviewed the
literature, the next focus is on the methodological issues that captures the disaggregated impact of FDI on the different
sectors of the economy.

3. Methodology and Model Specifications

3.1 Methodology
The study deploys simultaneous equation regression model as recommended by many scholars including Roller &
Waverman (2001) and Belaid (2004). This is particularly critical when a dependent variable in one equation appears as
explanatory variable in another equation which may lead to a feedback relationship between the variables. The paper also
employs the three stage least squares (3SLS) an estimator which by its design, takes care of any probable occurrence of non-
stationarity and consequential possibility of spurious regressions. Thus, there is no need to test for stationarity. It also
addresses the correction of contemporaneous correlation of error terms (Zellner and Theil, 1962). In using the 3SLS
estimator technique however, it is necessary to establish if the sample data actually contain sufficient information to provide
estimates of the parameters (identification ). In estimating the model of this study, the equations are confirmed as being
over all over-identified which is the pre condition for the use of 3SLS. A number of post estimation tests to ascertain the
reliability of the results obtained were conducted. These are the normality and serial correlation tests. The normality test is
used to examine whether the disturbances are normally distributed or not (Jarque, & Bera, 1980). The serial correlation test
examines whether the present value of the residuals depends on its past value. It is worth emphasizing that if the
disturbances are either not normally distributed or serially correlated or both, the results obtained from the estimation
process will be spurious and policy implications drawn from such results will be invalid. The estimation of the model was
carried out with the use of E- ViewsTM (version 6.1).

3.2 The Empirical Model

There is the need to address the spill-over effects and externalities generated by FDI which are transmitted throughout the
economy is addressed through the use of a macroeconometric model. This is a system of simultaneous equations that seeks
to explain the behaviour of key economic variables at the aggregate level, based on the received theories of economics (see
Akanbi & Du Toit, 2010; Annicchiarico, 2011; Brunnermeier & Sannikov, 2011 and Krishnamurty & Pandit, 1985). The
model consists of 18 behavioural equations and is made up of four major blocks: supply (output), private demand
(household consumption and investment by firms), government expenditure and the external sectors. The model is stated
below in equations 3.17 to 3.34 starting with the supply block. The description of the variables are available as Appendix1.

Supply Block
The supply block given by equations (3.17) to (3.31) describes the output basic macroeconomic components of the
economy. In this case, the inter-sector linkages among five identified economic sectors namely agriculture infrastructure,
manufacturing, oil and services sectors are described.
YIF = a1+ a2GCRIF + a3FDIIF + a4KIF + a5PIF +e1 (3.17)
YMFG = a6+ a7 GCRMFG + a8 YIF + a9 YOIF +a10 FDIMFG +a11 KMFG+a12 PMFG + e2 (3.18)
YAGRIC = a13+ a14GCRAGRIC +a15YIF +a16 YOIF + a17FDIAGRIC + a18KAGRIC + a19RAIN +a20PAGRIC +e3 (3.19)
YOIL = a21 + a22GCROIL + a23Y IF +a24FDIOIL+ a25KOIL + a 27POIL + a27OPEC + e4 (3.20)
YSERV = a28 +a29Y IF +a30FDISERV +a31KSERV + a32PSERV + e5 (3.21)
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Vol.3, No.10, 2012

Demand Block
In the demand (expenditure) block consists of private and government demand. Equations (3.22) to (3.28) give the
description of flows of interactions among variables for the private demand.
Private
CF = a33Demand Block
+ a34 PF +a 35YDc+a36IR + e6 (3.22)
CNF = a37 +a38PNF +a39YDc + a40W +e7 (3.23)
INVIF =a41+ a42YIF+a43FDI IF +a44GCR IF +a45PTIF + e8 (3.24)
INVMFG = a46 + a47YMFG +a48INVIF + a49 IR+a50 FDIMFG +a51 GCRMFG + a52PMFG +e9 (3.25)
INVAGRIC = a53+ a54YAGRIC +a55INVIF+a56IR+ a57YD + a58GCRAGRIC + a59PAGRIC + e10 (3.26)
INV OIL = a60 + a61YOIL+a62 INVIF+a63 FDIOIL +a64GCROIL + a65 POIL +e11 (3.27)
INVSERV = a66 +a67YSERV +a68INVIF +a69FDISERV + a70GCRSERV +a71 PSERV + e12 (3.28)
Government Block: The government demand is given by equations (3.29) to (3.31).
GE = a71 +a73GRV +a74(CG) + a75EDS+a76DDS+a77 Y+a78 FD+e13 (3.29)
GRV = a79+ a80YIF + a81YOIF + a82FDI +a83 NX +e14 (3.30)
FDF =a84+a85FD+a86NFA +a87EXR +e15 (3.31)

External Block: The external sector block, showing equilibrium between exports and imports, is given by equations (3.32)

to (3.34).

X =a88 + a89Y +a90TOT + a91EXR +e16 (3.32)

M = a92 = a93TAR +a94Y+ a95 TOT+a96EXR + +e17 (3.33)
RES =a97 +a98Y + a99NFA +a100EXR + a101 FDI + e18 (3.34)
The conceptual framework of the macroeconometric model depicting the inter-linkages between the different economic
sector and blocks of the economy is presented in Figure 1

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Vol.3, No.10, 2012

where:
YTIF = Output of telecommunications infrastructure
YOIF = Output of other infrastructure
YMFG = Output of manufacturing
YAGRIC = Output of Agriculture
YSERV = Output of Service
YOIL = Output of Oil

There are three demand blocks made up of the private demand (consumption and investment), government expenditure and
the external sector. In the private demand block, the consumption is made up of both food and non-food elements. The
components of the government block are government revenue, its expenditure and the fiscal deficit. The external block
consists of the export, import and the reserves. Investment is composed of the foreign and local investments. The schematic
diagram simplifies the complex algebraic relationships hitherto represented in the system of simultaneous equations 3.17
through 3.34.
The supply block which is the aggregate output of the real sector of the economy, consists of the output of infrastructure
(YIF), manufacturing (YMFG), agriculture (YAGRIC), oil (YOIL) and services (YSERV). Within the supply block, the FDIIF, FDIMFG,
FDIAGRIC, FDIOIL and FDISERV are the relevant explanatory variables to the output of infrastructure, manufacturing,
agriculture, oil and services respectively. The output of infrastructure (YIF) hitherto identified as dependent variables
however also serve an explanatory role to the other output components of the supply block (YMFG, YAGRIC, YOIL and YSERV).
The annual rainfall (Rain) and the annual output of the Organisation of Petroleum Exporting Countries (OPEC) are
additional regressors of the output of agriculture (YAGRIC) and the output of oil (YOIL) respectively.
4. Data Analysis and Discussion
The results are presented in four parts. First, the impact of FDI on the composite sectors of the supply block, on relevant
sectors in the private demand block, in the government block and thereafter in the external block. The result of the
relationship between the output infrastructural investment (YIF) as the dependent variable and the four explanatory variables
(eqn. 3.17) in Table 1 shows that the four explanatory variables (Government Capital Exponential Ratio in
telecommunications infrastructure -GCR IF, Foreign Direct Investment in telecommunications infrastructure (FDI IF), Capital
2
Stock of infrastructure (K IF), Average Price of telecommunications infrastructure (PIF) account for 97 percent ( R =
0.97) of the output of telecommunications infrastructure (YTIF). In the same vein the regressors in the equations (3.18),
(3.19), (3.20) and (3.21) account for 97 percent and 98 percent , 99 percent and 99 percent respectively in explaining the
variation in the output of manufacturing, agriculture, oil and services sectors.
Table 1: Results of Relevant Supply Block

Dependent FDI Durbin-

Variables as Explanatory Variable R2 Watson
Statistics
YIF 0.10255
(2.1005) 0.97 1.925
YMFG -0.2373
-(2.3658)a 0.97 1.09
YAGRIC -0.1659
-(3.5168)a 0.98 1.65
YOIL 1.8927
(4.1651)a 99 1.76
YSERV 0.1123
(2.0702) 99 1.34
Note: a, imply 1 percent significance level. t-statistic in parenthesis
2
Although the adjusted coefficients of determination ( R ) are rather high, the Durbin-Watson Statistics (DW) test results
are higher in each of the cases. Therefore, the results can be accepted as valid.
The results show that there exist positive but insignificant relationships between FDI and the output of the infrastructural
sector. This can be explained by the fact that the provision of infrastructure including road transportation, rail, pipelines,
water, air, electricity telecommunications, post, broadcasting and water which are public non excludable goods have been in
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Vol.3, No.10, 2012

the purview of the government. There is no case of private sector, market mediated investment during the scope of this
study. FDI is also not significantly related to the output of the services sector. The provision of insurance, real estate,
business services, public administration, education, health , private non-profit organisation social and community services
have been dominated by Nigerians. Indeed the privatization law of 1988 in the main, put paid to the involvement of foreign
companies in this sector.
The relationship between the output of manufacturing sector (YMFG) and the FDI in the sector is negative and statistically
significant with a t-value of (2.37) at 1 percent level. In effect, with a coefficient value of (2.37), a percentage increase in
would result in about 0.24 percent reduction in the growth of in manufacturing output. Although the privatization law of
1988 curtailed the involvement of foreign companies in primary industries, it allowed such companies to operate in heavy
duty industries. FDI in the agricultural sector is also negatively related to the output of agriculture (Y AGRIC) although it is
statistically significant at 1 percent level. A percentage increase in the FDI in the agricultural sector of the economy would
cause a reduction of about 0.17 percent. The result shows that foreign intrusion into this sector has had deleterious impact
because the introduction of foreign goods and tastes has led to the abandonment of local farming. For example, the
consumption of the local rice has been neglected.
With respect to the outputs of oil (YOIL), FDI is positive and significantly related at 1 percent. It has a coefficient value of
(1.9) which indicates that a percentage increase in foreign investment in the oil sector would yield an increase of about 2
percent in the output of oil sector. The upstream segment of the oil and gas sector including crude, petroleum, natural gas
and oil refining is dominated by foreign multinational companies. The various independent variables in the equations (3.24),
(3.25), ( 3.27) and (3.28) of the private demand block account for between 97 percent and 99 percent of the variations in
investment in the infrastructure, manufacturing, oil and services. This high value of adjusted R2 signifies high goodness of
fit.
Table 2: Result of Relevant Variables in Demand Block
Dependent FDI Durbin-
Variables as Explanatory Watson
Variable R2 Statistics
INVIF 0.1188
(7.2089) 0.97 1.34
INVMFG -0.0002
-(8.4438)a 0.99 1.33
INVOIL 8.0808
(4.7579)a 0.99 1.70
INVSERV 0.8332
(3.281)a 0.97 1. 36

Note: a imply 1 percent significance level respectively. t-statistic in parenthesis

The results show that there exist positive and significant relationships between FDI and investment in the oil and service
sectors at 1 percent level. An increase in FDI complemented with increase in the ratio of government expenditure on
infrastructure would in the long run, lead to 8 percent increased investment in the oil sector. This is due to the facilitating
role of government in the sector. Also, a percentage increase in FDI would lead to a rise 0.1 percent in the investment in
infrastructure. However, the impact of FDI on investment in the manufacturing sector is negative but significant at 1
percent. This result reveals the true picture of the Nigerian economy since the economy lack basic infrastructure that can
enhance the growth of the economic. In addition, the foreign firms with the advantage of technology and finance seem to be
crowding out domestic producers. This result is in conformity with the work of Akanbi and Du Toit (2010).
Table 3: Result of Relevant Variable in Government Block

Dependent FDI Durbin-

Variables as Explanatory Watson
Variable R2 Statistics
GRV 0.0642
(2.0307)b 0.98 2.41

Note: b, imply 5 percent significance level. t-statistic in parenthesis

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Vol.3, No.10, 2012

The independent variables in the equations (3.30) of the government block account for 98 percent of the variations in
government revenue. The higher level Durbin-Watson Statistics (DW) value indicates that the model has no serial
autocorrelation problem, thus implying that the model is significant. The coefficient of FDI is statistically significant to
government revenue at 5 percent level which implies that, a percentage increase in FDI would increase government revenue
relative to the overall output of the economy by 0.06 percent. The increase revenue to the government accrues from
contributions to corporate and other tax revenues from profits generated by FDI. The independent variables in the equations
(3.30) of the external block account for 97 percent of the variations in external reserves. The Durbin-Watson Statistics
(DW) value being higher than the adjusted coefficient of determination signifies no positive serial autocorrelation problem
which can still be controlled.
Table 4:Result of Relevant Variable in External Block
Dependent FDI Durbin-
Variables as Explanatory Watson
Variable R2 Statistics
RES 0.1253
(1.0902)b 0.97 1.37

Note: b, imply 5 percent significance level. t-statistic in

parenthesis
The FDI is statistically significant to external reserves at 5 percent level. In essence, a percentage increase in FDI would
increase external reserves by 0.13 percent. The increased external reserves may be due to net capital inflow and improved
average balance of payment position during the period.

4.1 Post Estimation Tests

The results of the post-estimation tests conducted to ascertain the reliability of the estimates show that the disturbances are
normally distributed (see Table 3). The probability value (0.99) of the joint estimation of Jarque-Bera test obtained shows
that the Null hypothesis cannot be rejected.
Table 5: System Normality Tests (Joint Result)
Component Jarque-Bera df Prob.

Joint 659.2963 10395 0.9917

Source: E- ViewsTM (version 6.1) and Author's computations.

Note: df is degrees of freedom for (approximate) chi-square distribution.
Null Hypothesis: Residuals are multivariate normal.
The serial correlation test shows that the present value of the residuals do not depend on their past values. The research
found no serial correlation problem up to lag 4 for the system variable models. Specifically, the probability values for lag 1,
2, 3 and 4 in Table 4 are (0.1), (0.18), (0.13) and (0.22) respectively which are far greater than the conventional level of
significance of 5 percent (0.05). As a consequence, the study does not reject the Null hypothesis, implying that there is no
serial correlation.

Table 6: System Portmanteau Tests for Autocorrelations

lags Q-Stat Prob. Adj Q- Prob. df

Stat
1 426.4443 0.1740 437.3787 0.0958 400
2 804.9607 0.4442 835.8170 0.1843 800
3 1193.362 0.5486 1255.711 0.1285 1200
4 1542.235 0.8466 1643.347 0.2203 1600

Source: E- ViewsTM (version 6.1) and Author's computation.

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Note: df is degrees of freedom for (approximate) chi-square distribution.

Null Hypothesis: No residual autocorrelations up to lag h.

Journal of Economics and Sustainable Development www.iiste.org
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Vol.3, No.10, 2012

In the next section, the conclusion and recommendations are presented.

5. Conclusion and Recommendations

The conclusion of this study is that foreign direct investment contributes positively to economic growth in Nigeria.
However, the relationships with the different sectors are different. Whereas, FDI is positively related to the oil sector, it is
negatively related to agriculture and manufacturing. Also, although FDI significantly explains investment in the oil and
service sectors at 1 percent level, it is only significant at 5 percent for government revenue and external block, and
insignificant to the output of services sector. This means that policy makers armed with exact knowledge of the type of FDI
projects and the disparate consequences on the different sectors of the local economy, can more accurately fashion out
selective FDI policies with the view to attracting growth-promoting foreign investments. FDI determinant factors vary from
sector to sector and across industries. Therefore policies based solely on aggregate foreign investments impact may lead to
distortions in policy formulation and deployment.
The second plank of findings is the confirmation of inter connectivity across the sectors. The various economic blocks and
sectors are linked as consequence of externalities and spill-over effects of the FDI on the economy which is hitherto largely
omitted in the literature. This supports the Romer’s endogenous growth theory and the Vintage capital theory. The result of
this research is consistent with similar findings in both the developing and developed nations.
The negative relationship between both the investment in and output of manufacturing sector (YMFG) and the FDI in the
manufacturing sector can be addressed by enhancing trade openness so as to reinforce linkages between foreign and
domestic companies especially in the manufacturing sector. In addition, the government can revisit the import substitution
development strategy earlier deployed shortly after political independence.
Although no country is in autarky, regional integration and globalization have resulted in large increase in foreign direct
investment due to deeper integration of world economies. This has intensified the competition for FDI among developing
countries and therefore makes it imperative for policy makers to devise strategies for attracting major investment flows to
the country. In addition, the government should pay more attention to the enhancement of dealings with existing investors
and offer them inducements to assist in marketing local investment opportunities to prospective overseas investors.
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Appendix1: Description of Variables

Notation Definition Type Unit
CNF Non –food Consumption Endogenous N/million
CF Food Consumption Endogenous N/million
EXR Exchange rate Endogenous Index
FDF Fiscal deficit financed by the CBN Endogenous N/million
INVAGRIC Investment in Agriculture Endogenous N/million
INVIF Investment in infrastructure Endogenous N/million
INVMFG Investment in manufacturing Endogenous N/million
INVOIL Investment in Oil Endogenous N/million
INVSERV Investment in Service Endogenous N/million
M Import Endogenous N/million
NX Net Export Endogenous N/million
RES Reserves Endogenous N/million
X Export Endogenous N/million
Y Overall Output Endogenous N/million
YAGRIC Output of Agriculture Endogenous N/million
YMFG Output of manufacturing Endogenous N/million
YIF Output of infrastructure Endogenous N/million
YOIL Output of Oil Endogenous N/million
YSERV Output of Service Endogenous N/million
CG Credit to the government Exogenous N/million
EDS External Debt Service Exogenous N/million
DDS Domestic Debt Service Exogenous N/million
Notation Definition Type Unit
FD Fiscal Deficit Exogenous N/million
FDIAGRIC Foreign Direct Investment in agriculture Exogenous N/million
FDIMFG Foreign Direct Investment in manufacturing Exogenous N/million
FDI OIL Foreign Direct Investment in oil Exogenous N/million
FDISERV Foreign Direct Investment in service Exogenous N/million
FDIIF Foreign Direct Investment in infrastructure Exogenous N/million
GE Total Government Expenditure Exogenous N/million
GCRAGRIC Government Capital Expenditure ratio in agriculture Exogenous Ratio
GCRMFG Government capital expenditure ratio in manufacturing Exogenous Ratio
GCROIL Government capital expenditure ratio in oil Exogenous Ratio
GCRSERV Government capital expenditure ratio in agriculture Exogenous Ratio
GRV Government Revenue Exogenous N/million
IR Interest rate Exogenous Rate
KAGRIC Capital Stock in Agriculture Exogenous N/million
KMFG Capital Stock in manufacturing Exogenous N/million
KIF Capital Stock in infrastructure Exogenous N/million
KOIL Capital Stock in oil Exogenous N/million
KSERV Capital stock in service Exogenous N/million
NFA Net Foreign Assets Exogenous N/million
OPEC OPEC output Exogenous M/Barrels
PAGRIC Price of agriculture Exogenous N/million
PMFG Price of manufacturing Exogenous N/million
PNF Price of non- food items Exogenous N/million
POIF Price of other infrastructure Exogenous N/million
POIL Price of oil Exogenous N/million
PSERV Average price of services Exogenous N/million
PIF Average price of infrastructure Exogenous N/million
PF Food price Exogenous N/million
RAIN Annual Rainfall Exogenous Millimetre
TAR Implicit Tariff Exogenous Rate
TOT Terms of Trade Exogenous Index
YDc Income per capita Exogenous N/million
W Wealth Exogenous N/million

PROFILE Onakoya, Adegbemi Babatunde obtained his first degree in Economics in 1979 (Second Class Upper Division)
from the then University of Ife (now Obafemi Awolowo). He also holds Master of Business Administration (Marketing
Management) degree from Olabisi Onabanjo University and the M.Sc. degree of the Lagos State University in the
distinction class. He is currently a doctoral student in applied economics at the Olabisi Onabanjo University, Ago Iwoye,
Nigeria. He is a Fellow of the Institute of Chartered Accountants of Nigeria and the Chartered Institute of Taxation of
Nigeria. His other professional affiliations include the Chartered Marketing Institute of Nigeria and the Quality Society of
Nigeria. He is the immediate past Secretary to Ogun State Government, Nigeria. Mr. Onakoya has acquired varied
experience from the major sectors of the economy including banking, manufacturing, Oil & Gas services, multi-national
corporation, telecommunications and education.He currently lectures at Tai Solarin University of Education, Ijebu Ode,
Nigeria with specialization in public sector economics.

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