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The Impact of Foreign Direct Investment on Economic Growth in Nigeria.

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Abstract

This study investigates the impact of FDI on economic growth. Quarterly data is used and covers the period 1980Q1-2009Q4. Endogenous growth model is employed for the study with emphases on the impact of FDI inflow into agriculture, manufacturing and telecommunication sectors in Nigeria. However, the study also examines the direction of causality between FDI inflow into these sectors and economic growth. In addition, the study further investigate the influence of business environment - political instability (PI), corruption (CRPINDX), institution/legal framework (LEGFRWK) proxied by FH, 2001, suggested by work of Sala-i-Martin (1997) and Barro and Lee (1994) and macroeconomic indicators such as inflation (INF), real interest rate (RINTR) and real exchange rate (RER) on the inflow of FDI. The empirical evidence shows that FDI into manufacturing and telecommunication sector has positive impact on economic growth in Nigeria while FDI into agricultural sector impacted on economic growth negatively. The findings on granger causality suggest that FDI into agriculture, manufacturing and telecommunication sector have a unidirectional relationship with economic growth in Nigeria. Institution or legal framework has positive and significant influence on the inflow of FDI, hence suggesting the need for strong legal framework for property right protection could serve as an incentive to attract more foreign investors. Political instability and real exchange rate significantly and negatively influences the inflow of FDI vis-a-vis signifying the importance of friendly business environment in the country.