Skip to main content

Advertisement

SpringerLink
Log in

The moderating effect of institutions in foreign direct investment led growth hypothesis in Nigeria

  • Published:
Economic Change and Restructuring Aims and scope Submit manuscript

Abstract

This paper investigates the moderating role institutional quality plays in foreign direct investment led growth hypothesis in Nigeria from 1984 to 2018 using autoregressive distributed lag estimation technique. Specifically, the study contributes to the literature by using seven different institutional indicators to moderate the effect of foreign direct investment on economic growth. The findings reveal that foreign direct investment has no direct (positive) effect on economic growth in Nigeria. However, the interactive effect of institutional indicators with foreign direct investment has significant impact on economic growth in most of the models. This implies that institutions serve as important absorptive capacity that needs to be strengthened for the country to benefit maximally from the growth effect of foreign direct investment. This study therefore concludes that good institutional quality matters for foreign direct investment and growth in Nigeria.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Source: World Development Indicator (2018, Edition)

Similar content being viewed by others

References

  • Abubakar S (2020) Institutional quality and economic growth: evidence from Nigeria. Afr J Econ Rev Afr J Econ Rev 8(1):48–64

    Google Scholar 

  • Acemoglu D, Johnson S (2005) Unbundling institutions. J Polit Econ 113(5):949–995

    Article  Google Scholar 

  • Acemoglu D, Johnson S, Robinson JA (2005) Institutions as a fundamental cause of long-run growth. Handb Econ Growth 1:385–472

    Article  Google Scholar 

  • Adams S (2009) Foreign direct investment, domestic investment, and economic growth in Sub-Saharan Africa. J Policy Model 31:939–949

    Article  Google Scholar 

  • Adelegan JO (2000) Foreign Direct Investment and Economic Growth in Nigeria: A seemingly unrelated model. African Review of Money, Finance and Banking, Supplementary issue of “Savings and Development” 2000, 5–25. Millan, Italy

  • Aghion P, Howitt P, Howitt PW, Brant-Collett M, García-Peñalosa C (1998) Endogenous growth theory. MIT Press, Cambridge

    Google Scholar 

  • Adigwe PK, Ezeagba CE, Udeh FNP (2015) Effect of foreign direct investment in Nigerian economic growth. Eur J Res Reflect Manag Sci 3(5):28–34

    Google Scholar 

  • Adjasi CKD, Abor J, Osei KA, Nyavor-Foli EE (2012) FDI and economic activity in Africa: the role of local financial markets. Thunderbird Int Bus Rev 54(4):429–439

    Article  Google Scholar 

  • Adofu I (2010) Accelerating economic growth in Nigeria, the role of foreign direct investment. Curr Res J Econ Theory 2(1):12–15

    Google Scholar 

  • Agbloyor EK, Gyeke-Dako A, Kuipo R, Abor JY (2016) Foreign direct investment and economic growth in SSA: the role of institutions. Thunderbird Int Bus Rev. https://doi.org/10.1002/tie.21791

    Article  Google Scholar 

  • Agbloyor EK, Abor JY, Adjasi CKD, Yawson A (2014) Private capital flows and economic growth in Africa: the role of domestic financial markets. J Int Financ Markets Inst Money 30(1):137–152. https://doi.org/10.1016/j.intfin.2014.02.003

    Article  Google Scholar 

  • Ahmad MH, Ahmed QM (2014) Does the institutional quality matter to attract the foreign direct investment? an empirical investigation for Pakistan. South Asia Econ J 15(1):55–70

    Article  Google Scholar 

  • Ahmed EM (2012) Are the FDI inflow spillover effects on Malaysia’s economic growth input driven? Econ Model 29:1498–1504

    Article  Google Scholar 

  • Ajide FM, Dada JT (2021) Poverty, entrepreneurship and economic growth in Africa. J Poverty Public Policy

  • Ajide FM, Dada JT, Olowookere JK (2021) Shadow economy and foreign direct investment in Nigerian manufacturing industry. Int J Econ Bus Res. https://doi.org/10.1504/IJEBR.2021.10035378

    Article  Google Scholar 

  • Akinlo AE (2004) Foreign direct investment and growth in Nigeria: an empirical investigation. J Policy Model 26:627–639

    Article  Google Scholar 

  • Akinlo T, Dada JT (2021) The moderating effect of foreign direct investment on environmental degradation -poverty reduction nexus: evidence from sub-sharan African countries. Environ Dev Sustain. https://doi.org/10.1007/s10668-021-01315-1

    Article  Google Scholar 

  • Alfaro L (2003) Foreign direct investment & growth: does the sector matter? Harvard Business School, Boston

    Google Scholar 

  • Alguacil M, Cuadros A, Orts V (2011) Inward FDI and growth: the role of macroeconomic and institutional environment. J Policy Model 33(3):481–496. https://doi.org/10.1016/j.jpolmod.2010.12.004

    Article  Google Scholar 

  • Alguacil M, Cuadros A, Orts V (2008) EU enlargement and inward FDI. Rev Dev Econ 12(3):594–604

    Article  Google Scholar 

  • Asiedu E, Lien D (2011) Democracy, foreign direct investment and natural resources. J Int Econ 84(1):99–111

    Article  Google Scholar 

  • Azad A, Crawford E, Kaila H (2018) Conflict and Violence in Nigeria. The World Bank Publication, 1–46

  • Azman-Saini NW, Baharumshah AZ, Law SH (2010) Foreign direct investment, economic freedom and economic growth: international evidence. Econ Model 27(5):1079–1089

    Article  Google Scholar 

  • Balasubramanyam VN, Salisu M, Sapsford D (1996) Foreign direct investment and growth in EP and IS countries. Econ J 106(434):92–105

    Article  Google Scholar 

  • Basu P, Guariglia A (2007) Foreign Direct Investment, inequality, and growth. J Macroecon 29(4):824–839

    Article  Google Scholar 

  • Bollen K, Jackman R (1989) Democracy, stability, and dichotomies. Am Soc Rev 54(4):612–621

    Article  Google Scholar 

  • Blomstrom M, Kokko A (1998) Multinational corporations and spillovers. J Econ Surv 12:247–277

    Article  Google Scholar 

  • Blomstrom M, Lipsey R, Zejan M (1994) What explains developing country growth? convergence and productivity: gross-national studies and historical evidence. Oxford University Press, Oxford, UK

    Google Scholar 

  • Bosworth BP, Collins SM (1999) Capital flows to developing economies: implications for saving and investment. In: Brookings papers on economic activity no. 1. Brookings Institution., pp 146–169

  • Brahim M, Rachdi H (2014) Foreign direct investment, institutions and economic growth: evidence from the MENA region. J Rev Global Econ 3:328–339

    Article  Google Scholar 

  • Buchanan BG, Le QV, Rishi M (2012) Foreign direct investment and institutional quality: some empirical evidence. Int Rev Financ Anal 21:81–89

    Article  Google Scholar 

  • Buckley P, Clegg J, Wang C (2002) The impact of inward FDI on the performance of Chinese manufacturing firms. J Int Bus Stud 33:637–655. https://doi.org/10.1057/palgrave.jibs.8491037

    Article  Google Scholar 

  • Busse M, Hefeker C (2007) Political risk, Institutions, and foreign direct investment. Eur J Polit Econ 23(2):397–415

    Article  Google Scholar 

  • Cass D (1965) Optimum growth in an aggregate model of capital accumulation. Rev Econ Stud 32(3):233–240

    Article  Google Scholar 

  • Castellani D, Zanfei A (2006) Multinational firms, innovation and productivity. Edward Elgar, Cheltenham

    Book  Google Scholar 

  • Dada JT, Akinlo T (2021) Foreign direct investment and poverty reduction in sub-saharan Africa: does environmental degradation matter? Future Bus J, 7

  • Dada JT, Olomola P, Adedokun A (2021) Does non-linearity in exchange rate hold in Nigeria? evidence from smooth transition autoregressive (STAR) model. Int J Monet Econ Finance 14(2):152–165. https://doi.org/10.1504/IJMEF.2020.10034068

    Article  Google Scholar 

  • Dada JT, Fanowopo O (2020) Economic growth and poverty reduction: the role of institutions. Ilorin J Econ Policy 7(1):1–15

    Google Scholar 

  • Dada JT (2019) Energy Generation and industrial output in Nigeria. Indian J Econ 100(396):33–44

    Google Scholar 

  • Dada JT, Abanikanda EO (2019) How important is oil revenue in Nigerian growth process? Evidence from a threshold regression. Int J Sustain Econ 11(4):364–377. https://doi.org/10.1504/IJSE.2019.10025140

    Article  Google Scholar 

  • Dada JT, Awoleye EO (2018) Financial deregulation and economic growth in Nigeria: evidence from error correction model. J Acad Res Econ 10(3):378–388

    Google Scholar 

  • Dunning JH (1980) Toward an eclectic theory of international production: some empirical test. J Inter Bus 11(1):9–31

    Article  Google Scholar 

  • Dunning JH (1993) Multinational enterprises and the global economy, Addison-Wesley Publishing Company

  • Durham JB (2004) Absorptive capacity and the effects of foreign direct investment and equity foreign portfolio investment on economic growth. Eur Econ Rev 48(2):285–306

    Article  Google Scholar 

  • Ejuvbekpokpo SA (2012) Cost of Governance on Economic Development in Nigeria. Global J Manag Bus Res, 12.

  • Emmanuel IJ (2016) Effect of foreign direct investment on economic growth in Nigeria. Eur Bus Manag 2(2):40–46

    Google Scholar 

  • Ericsson J, Manuchehr I (2001) On the causality between foreign direct investment and output: a comparative study. Int Trade J 15(1):1–26. https://doi.org/10.1080/088539001300005431

    Article  Google Scholar 

  • Esew NG, Yaroson EV (2014) Institutional quality and foreign direct investment (FDI) In Nigeria: a prognosis. IOSR J Humanit Soc Sci 19:37–45

    Article  Google Scholar 

  • Ewubare DB, Ekwe EI (2018) Effect of institutional factors on foreign direct investment in Nigeria. Econ Finance Lett Conscientia Beam 5(1):12–27

    Article  Google Scholar 

  • Fabiyi RO, Dada JT (2017) Fiscal deficit and sectoral output in Nigeria. Am J Soc Sci 5(6):41–46

    Google Scholar 

  • Falvey R, Foster N, Greenaway D (2012) Trade liberalization, economic crises, and growth. World Dev 40(11):2177–2193

    Article  Google Scholar 

  • Forte R, Moura R (2013) The effects of foreign direct investment on the host country’s economic growth: theory and empirical evidence. Singap Econ Rev 58(3):1–28

    Google Scholar 

  • Fosu OAE, Magnus FJ (2006) Bounds testing approach to cointegration: an examination of foreign direct investment trade and growth relationships. Am J Appl Sci. https://doi.org/10.3844/ajassp.2006.2079.2085

    Article  Google Scholar 

  • Gonel F, Aksory T (2016) Revisiting FDI-led growth hypothesis: the role of sector characteristics. J Int Trade Econ Dev 25(8):1144–1166

    Article  Google Scholar 

  • Hall RE, Jones CI (1997) Levels of economic activity across countries. Am Econ Rev 87(2):173–177

    Google Scholar 

  • Hassan MKH, Masron TA (2011) Inward FDI from ASEAN and Its implication on Malaysian manufacturing sector. Jurnal Ekonomi Malaysia 45:33–39

    Google Scholar 

  • Hayat A (2019) Foreign direct investments, institutional quality, and economic growth. J Int Trade Econ Dev. https://doi.org/10.1080/09638199.2018.1564064

    Article  Google Scholar 

  • Herzer D (2012) How does foreign direct investment really affect developing countries’ growth? Rev Int Econ 20(2):396–414

    Article  Google Scholar 

  • Herzer D, Klasen S, Nowak-Lehmann DF (2008) In search of FDI-led growth in developing countries: the way forward. Econ Model 25(5):793–810

    Article  Google Scholar 

  • Hussain ME, Haque M (2016) Foreign direct investment, trade, and economic growth: an empirical analysis of Bangladesh. Economies 4:1–14

    Article  Google Scholar 

  • Iamsiraroj S (2016) The foreign direct investment–economic growth nexus. Int Rev Econ Finance 42(C):116–133

    Article  Google Scholar 

  • Iamsiraroj S, Ulubasoglu MA (2015) Foreign direct investment and economic growth: a real relationship or wishful thinking? Econ Model 51:200–213

    Article  Google Scholar 

  • Imoughele LE, Ismaila M (2014) The nature of foreign direct investment and its impact on sustainable economic growth in Nigeria. J Econ Dev Stud 2(1):201–232

    Google Scholar 

  • Iwasaki I, Tokunaga M (2014) Macroeconomic impacts of FDI in transition economies: a meta-analysis. World Dev 61:53–69

    Article  Google Scholar 

  • Jemiluyi OO, Dada JT (2018) Market Size and Foreign Direct Investment in Sub-Saharan Africa: The Role of Education. Jurnal Perspektif Pembiayaan dan Pembangunan Daerah (J Perspect Financ Reg Dev), 6(1): 21–30, https://doi.org/10.22437/ppd.v6i1.5140

  • Jorge BC, Richard AW (2018) Does foreign direct investment generate economic growth? A New Empir Approach Appl Spain Econ Geogr 94(4):425–456

    Google Scholar 

  • Jude C, Levieuge G (2015) Growth effect of FDI in developing economies: the role of institutional quality. Banque de France Working Paper, 559.

  • Jutting J (2003) Institutions and development: a critical review. OECD Development Centre. Working Paper No. 210

  • Jyun-Yi W, Hsu C (2008) Does foreign direct investment promote economic growth? evidence from a threshold regression analysis. Econ Bull 15(12S):1–8

    Google Scholar 

  • Karimi M, Gohari H (2014) The study of the relationship between good governance and foreign direct investment in countries with middle income. Indian J Sci Res 4(6):742–752

    Google Scholar 

  • Kemeny T (2010) Does foreign direct investment drive technological upgrading? World Dev 38(11):1543–1554

    Article  Google Scholar 

  • Khan M (2012) The political economy of inclusive growth. In Promoting Inclusive Growth: Challenges and Policies. OECD, Paris

    Google Scholar 

  • Koopmans T (1965) On the concept of optimal economic growth in the econometric approach to development planning. Amsterdam

  • Kose MA, Prasad ES, Taylor AD (2011) Thresholds in the process of financial integration. J Int Money Finance 30:147–149

    Article  Google Scholar 

  • La Porta R, Lopez-de-Silanes F, Shleifer A, Vishny R (1999) The quality of government. J Law Econ Organ 15(1):222–279

    Article  Google Scholar 

  • Li Q (2009) Democracy, autocracy, and expropriation of foreign direct investment. Comp Polit Stud 42(8):1098–1127

    Article  Google Scholar 

  • Li X, Liu X (2005) Foreign direct investment and economic growth: an increasingly endogenous relationship. World Dev 33(3):393–407

    Article  Google Scholar 

  • Liu X, Luo Y, Qiu Z, Zhang R (2014) FDI and economic development: evidence from China’s regional growth. Emerg Mark Financ Trade 50(sup6):87–106. https://doi.org/10.1080/1540496X.2014.1013852

    Article  Google Scholar 

  • Louzi BM, Abadi A (2011) The impact of foreign direct investment on economic growth in Jordan. IJRRAS 8:253–258

    Google Scholar 

  • Mahmood N, Shakil MH, Akinlaso IM, Tasnia M (2019) Foreign direct investment and institutional stability: who drives whom? J Econ Finance Adm Sci 24(47):145–156. https://doi.org/10.1108/JEFAS-05-2018-0048

    Article  Google Scholar 

  • Maji A, Odoba A (2011) An investigation of the impact of foreign direct investment on economic growth in Nigeria. Int Bus Manag 3:232–238

    Google Scholar 

  • Masron TA, Nor E (2013) FDI in ASEAN-8: Does institutional quality matter? Appl Econ Lett 20(4):186–189

    Article  Google Scholar 

  • Meah DO, Onono PA, Ocharo KN (2016) Foreign direct investment, institutional quality and economic growth in Kenya. Int J Dev Sci 5(7):295–307

    Google Scholar 

  • Mencinger J (2003) Does foreign direct investment always enhance economic growth? Kyklos Int Rev Soc Sci 56(4):491–508

    Google Scholar 

  • Meyer DF, Habanabakize T (2018) An analysis of the relationship between foreign direct investment (FDI), political risk and economic growth in South Africa. Bus Econ Horizons (BEH), Prague Development Center, 14(4):777–788

  • Moran TH (1998) Foreign direct investment and development: the new policy agenda for developing countries and economies in transition. Washington D.C, Institute of International Economics

    Google Scholar 

  • Muntah S, Khan M, Haider N, Ahmad A (2015) Impact of foreign direct on economic growth of Pakistan. Am Res J Bus Manag, 1.

  • Narayan PK (2004) Reformulating critical values for the bounds F- statistics approach to cointegration: an application to the tourism demand model for Fiji. Working paper 02/04, Monarch University

  • North DC (1990) Institution, institutional change and economic development. Cambridge University Press, Cambridge

    Google Scholar 

  • North DC, Weingast BR (1989) Constitutions and commitment: the evolution of institutions governing public choice in seventeenth-century England. J Econ History 49(4):803–832

    Article  Google Scholar 

  • Olagbaju IO, Akinlo AE (2018) FDI And economic growth relationship in sub-saharan Africa: is the domestic financial system a significant intermediator? Arch Bus Res 6(5):90–112

    Article  Google Scholar 

  • Olaniyi CO, Oladeji SI (2020) Moderating the effect of institutional quality on the finance–growth nexus: insights from West African countries. Econ Change Restruct. https://doi.org/10.1007/s10644-020-09275-8

    Article  Google Scholar 

  • Opoku EEO, Ibrahim M, Sare YA (2019) Foreign direct investment, sectoral effects and economic growth in Africa. Int Econ J 33(3):473–492. https://doi.org/10.1080/10168737.2019.1613440

    Article  Google Scholar 

  • Osuji E (2015) Foreign direct investment and economic growth in Nigeria: evidence from bounds testing and ARDL models. J Econ Sustain 6(13):205–211

    Google Scholar 

  • Raheem I, Oyinlola MA (2012) Foreign direct investment - economic growth nexus: the role of the level of financial sector development in Africa. J Econ Int Finance 5(9):327–337

    Article  Google Scholar 

  • Ramsey F (1928) A mathematical theory of saving. Econ J 38:534–559

    Article  Google Scholar 

  • Rother B, Pierre G, Lombardo D, Herrala R, Toffano P, Roos E, Auclair G., Manasseh K (2016) The economic impact of refugee crisis in the middle east and north Africa. IMF Staff Discussion Note, pp 1–43

  • Romer PM (1986) Increasing returns and long run growth. J Polit Econ 94(5):1002–1037

    Article  Google Scholar 

  • Romer P (1990) Endogenous technological change. J Polit Econ 98(5):71–103

    Article  Google Scholar 

  • Sirag A, SidAhmed S, Ali HS (2018) Financial development, FDI and economic growth: evidence from Sudan. Int J Soc Econ 45:1236–1249

    Article  Google Scholar 

  • Stanisic N (2008) Do foreign direct investments increase the economic growth of southeastern european transition economies? South-Eastern Eur J Econ Assoc Econ Univ South Eastern Eur Black Sea Region 6(1):29–38

    Google Scholar 

  • Solow R (1956) A contribution to the theory of economic growth. Quart J Econ 70:65–94

    Article  Google Scholar 

  • Swan T (1956) Economic growth and capital accumulation. Econ Rec 32:334–361

    Article  Google Scholar 

  • Tang D (2015) Has the foreign direct investment boosted economic growth in the european union countries? J Int Glob Econ Stud 8:21–50

    Google Scholar 

  • Tang CF, Tan EC (2018) Does the source of foreign direct investment matter to economic growth in Malaysia? Glob Econ Rev 47(2):174–181. https://doi.org/10.1080/1226508X.2017.1406815

    Article  Google Scholar 

  • United Nation Conference on Trade and Development (UNCTAD) World Investment Report 2019.

  • Uwubanmwen AE, Ogiemudia OA (2016) Foreign direct investment and economic growth: evidence from Nigeria. Int J Bus Soc Sci 7(3):89–103

    Google Scholar 

  • Vissak T, Roolaht T (2005) The negative impact of foreign direct investment on the Estonian economy. Probl Econ Transit 48(2):43–66

    Google Scholar 

  • Yanikkaya H (2003) Trade openness and economic growth: a cross-country empirical investigation. J Dev Econ 72(1):57–89

    Article  Google Scholar 

  • Yao SJ, Wei KL (2007) Economic growth in the presence of FDI: the perspective of newly industrializing economies. J Comp Econ 35:211–234

    Article  Google Scholar 

  • Yusoff MB, Nuh R (2015) Foreign direct investment, trade openness and economic growth: empirical evidence from Thailand. Foreign Trade Rev 50(2):73–84. https://doi.org/10.1177/0015732515572055

    Article  Google Scholar 

Download references

Acknowledgements

The authors acknowledge anonymous referees and the managing editor. The usual disclaimer applies.

Author information

Authors and Affiliations

  1. Department of Economics, Obafemi Awolowo University, Ife, Nigeria

    James Temitope Dada & Ezekiel Olamide Abanikanda

Authors
  1. James Temitope Dada
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Ezekiel Olamide Abanikanda
    View author publications

    You can also search for this author in PubMed Google Scholar

Contributions

This work was carried out in collaboration of all the authors. E.O.A. conceived and draft the study. J.T.D participated in its design, analyse and coordination the manuscript. All authors read and approved the final manuscript.

Corresponding author

Correspondence to James Temitope Dada.

Ethics declarations

Competing of interest

The authors declared no competing interest as regards the manuscript.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Dada, J.T., Abanikanda, E.O. The moderating effect of institutions in foreign direct investment led growth hypothesis in Nigeria. Econ Change Restruct 55, 903–929 (2022). https://doi.org/10.1007/s10644-021-09332-w

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10644-021-09332-w

Keywords

JEL Classificatios

Search

Navigation