Foreign Direct Investments and Its Determinants in Developing Economies: A Case Study of Nigeria Using VAR Approach

Abstract

Policy makers believe that foreign direct investment (FDI) produces positive effects which can facilitate the realisation of sustainable development in host economies. Some of these benefits are in the form of externalities and the adoption of foreign technology. However, while the explosion of FDI flow is high in emerging-market economies, it is highly limited in developing countries and on this ground, the study analyzed the contributory factors to FDI inflows into Nigeria with the motive of evolving sound policy suggestions capable of increasing the FDI inflows into Nigeria. We utilized data spanning from 1970 to 2017 and employed correlation and the vector autoregressive (VAR) models in which variance was decomposed and impulse-response function was interpreted. We found that the local demand condition, infrastructure availability, the degree of openness of the economy to the external sector and macroeconomic stability are the major drivers of foreign direct investments in Nigeria. For Nigeria and other developing countries to move towards achieving sustainable development via FDI inflows, we recommend the stimulation of local demand condition via fiscal incentives, continuous investments in infrastructural development, provision of economic stability, sound macroeconomic management and encouragement of a stable political structure among others.