Effect of Sectoral Foreign Direct Investment on Nigeria’s Economic Development

Abstract

This study investigated the effect of sectoral foreign direct investment on Nigeria's economic development over the period 1985-2024. Employing econometric analysis with dual development indicators Gross Domestic Product Per Capita (GDPPC) and Human Development Index (HDI), the research examined FDI impacts across six strategic sectors: mining and quarrying, manufacturing and processing, agriculture, transport and communication, building and construction, and trading and business. Time series data were analyzed using Augmented Dickey Fuller unit root tests, Johansen cointegration techniques, and Ordinary Least Squares regression models. The stationarity tests revealed mixed integration orders, with HDI and FDI in building and construction stationary at level, four variables stationary at first difference, and two variables stationary at second difference. Cointegration analysis confirmed long-run equilibrium relationships between sectoral FDI and economic development indicators. The findings revealed pronounced sectoral heterogeneity in developmental impacts. Manufacturing sector FDI emerged as the only statistically significant determinant of both GDPPC (coefficient = 0.953, p = 0.0401) and HDI (coefficient = 0.092, p = 0.0001), demonstrating its critical importance for Nigeria's economic development. Mining, agriculture, transport, construction, and trading sectors showed insignificant effects despite receiving substantial investment inflows. The HDI model exhibited substantially superior explanatory power (R² = 0.979) compared to the GDPPC model (R² = 0.508), suggesting sectoral FDI patterns more strongly influence comprehensive human development than per capita income alone. Several sectors displayed unexpected negative coefficients, indicating potential structural inefficiencies including profit repatriation, crowding out of domestic enterprises, and limited spillover effects. The study concluded that manufacturing FDI represents Nigeria's most effective investment category for driving development, while aggregate FDI data masks critical sectoral heterogeneity with important policy implications. The research recommends prioritizing manufacturing sector FDI through targeted fiscal incentives, enhancing domestic absorptive capacity, implementing strategic investment screening, and strengthening institutional quality to optimize foreign investment's developmental contribution.