Services Sector FDI-Growth Nexus in Nigeria: Does Liberalization Policy Matter?

Abstract

Since it is the need of developing countries to step up own industrialization process and growth and calls for more technology spill-over through foreign investments. This made it a necessity that efforts are made by these countries to attract foreign direct investment (FDI) because of its acknowledged advantages as a tool of economic development. Nigeria, in particular, joined the rest of the world in the quest for increased FDI inflows arising from the notion that FDI leads to economic benefits within the host country. This study analyzed the role of liberalization policy on the nexus between services sector FDI and economic growth in Nigeria under scenarios with and without a structural break for the period 1981-2018. Time-series properties were examined using both conventional and unit root tests with structural breaks to account for shift dummy in the series. Their results indicate that the series is stationary at I(1) and this prompt the use of vector error correction model (VECM). The statistical results show the existence of the long-run relationship between services FDI and economic growth though services FDI spurs growth when policy shift is not included but retards growth when it is included. In the short-run, the estimate under a scenario without break reveals significant positive relationship with growth but negative and statistically insignificant under the scenario with the break. The overall analyses show that services FDI could only play a significant role in Nigeria's growth when there is no change in government policy or intervention. Based on these findings, the policy implications include the expansion of more service-oriented firms to increase sectoral share in the total GDP. The potential benefits from such expansion include creation of jobs, more inclusive growth and development, and the higher plant survival tends to increase social prosperity.