ABSTRACT

The study investigated the effect of fiscal policy on foreign direct investments in Nigeria using annual time series data from 1981 to 2018 sourced from the Central Bank of Nigeria Statistical Bulletin and the National Bureau of Statistics. Specifically, the study estimated the effect of tax rate, government capital expenditures, government recurrent expenditures and deficit financing on foreign direct investment inflows. The data analysis was carried out with the aid of ordinary least squares technique based on Johansen cointegration, vector error correction mechanism and Granger causality test since the variables used for the study were integrated at first difference as revealed by the unit root test. Based on the results of the analysis, it was found that a long-run relationship existed between tax rate, government capital and recurrent expenditures, and government debt. Also, it was found that increased tax rate and government debt had a negative and significant effect on FDI in the long-run, while government capital and recurrent expenditures had a positive and significant effect on FDI in the long-run. The negative and significant effect of government debt which was used to proxy deficit financing could be due to the debt burden arising from huge debt servicing. In the short-run, tax rate and government debt had a negative and significant effect on FDI, while government capital and recurrent expenditures were found to have a positive effect on FDI, but capital expenditure was not significant. The value of ECM given as -0.825584 indicated a feedback of or an adjustment of 31.16% from the previous period disequilibrium of the present level of FDI. The Granger causality test revealed that recurrent expenditures and debt Granger caused FDI, while FDI Granger caused tax rate. Based on these findings, the study concluded that fiscal policy do affect the flow of foreign direct investment into Nigeria. It was recommended, among other things, that government should establish a strong fiscal responsibility and transparency system in the country, adopt tax reforms that would be favourable and encourage increase in FDIs in Nigeria.