The Effect of Foreign Direct Investment on Domestic Investment in Nigeria: Any Role for Financial Development and Human Capital
Oziengbe Scott Aigheyisi
Abstract
The paper employs the DOLS estimation technique to investigate the effect of FDI on domestic investment in Nigeria. The effects of interactions between FDI and financial system development and, FDI and secondary school enrolment (proxy for human capital) are also investigated. The empirical evidence indicates that the effect of FDI on domestic investment is positive, but not statistically significant. It however finds that when interacted with financial system development, FDI positively and significantly affects domestic investment. The study also finds that the effect of interaction between FDI and secondary school enrolment on domestic investment is negative. This is indicative of existence of a threshold level of human capital development required for FDI to positively affect domestic investment. Further evidence from the study are that low rate of inflation is favourable to domestic investment whereas high rate of inflation adversely affects domestic investment. Trade openness is also observed to negatively affect domestic investment in the country. Policy recommendations emanating from the study include proper regulation of the financial system to enhance its development, efforts by the government to improve the quality and functionality of secondary education in the country, targeting low inflation rate and infant industry protection.
Keywords: Foreign Direct Investment, Financial System Development, Human Capital, Inflation, Trade Openness, Domestic Investment, DOLS
JEL Classification Codes: E22, E24, E31, E44, F21, F43, I26, P33, P45.