FOREIGN DIRECT INVESTMENT AND INCLUSIVE GROWTH: THE ROLE OF THE FINANCIAL SECTOR DEVELOPMENT

Abstract

This study examines the role of domestic financial sector development in the relationship between foreign direct investment (FDI) inflows and inclusive growth in Nigeria over the period 1981–2020 using annual time series data. Analytically, the study employs the autoregressive distributed lag approach to cointegration. The bounds test result shows that there is a long-run relationship between inclusive growth and financial sector development, as well as other underlying variables. Empirically, the results reveal that FDI exerts a significant positive effect on inclusive growth when the domestic financial sector has reached a certain minimum level of development. The results further show that FDI alone has a significant negative effect on inclusive growth. This means that FDI alone does not necessarily increase the well-being of the population, except when a certain minimum level of financial sector development is attained. This provides evidence that domestic financial sector development is a precondition for FDI to effectively promote inclusive growth in Nigeria. Therefore, the study recommends that the development of domestic absorptive capacity, particularly financial sector development, should be enhanced by promoting reforms that will translate FDI inflows into inclusive growth.

Data:
Received: 13 Sep 2022
Revised: 26 Oct 2022
Accepted: 10 Nov 2022
Published: 24 Nov 2022