Foreign Capital Inflows and Economic Performance in Nigeria

Abstract

Foreign capital inflows have become indispensable instruments for stimulating economic activity, especially in Nigeria where domestic savings are inadequate to meet investment needs. Among the most prominent forms of these inflows are foreign direct investment (FDI), foreign portfolio investment (FPI), and diaspora remittances. These capital inflows are widely recognized for their potential to enhance GDP growth, reduce poverty, and generate employment by augmenting domestic investment, deepening financial markets, and increasing household income. However, the extent to which these inflows have effectively improved economic performance in Nigeria remains highly debated and empirically inconclusive. This study therefore examined the effect of foreign capital flows on economic performance in Nigeria. This study employed ex post facto research design to examine the effect of foreign capital flows on economic performance in Nigeria. The scope of this study span 1998 to 2024. Time series data were obtained from World Development Indicators (WDI). Descriptive and inferential (Error correction mechanism (ECM) were used to analyse data at 5 per cent level of significance. ECM analysis results showed that foreign capital inflows exert negative and significant effects on poverty gap (Adj. R2 = 0.94; (F (6,22) = 19.04, P = 0.0000. Specifically, POV (-1) had negative and significant effect on POV (α1 = 0. 96; ECM = -27; p < 0.05); foreign capital inflows exert significant effect on GDP (Adj. R2 = 0.66; (F (6,22) = 3.66, p < 0.05). Specifically, FDI (-2) had positive and significant effect on GDP (φ = 3.75; ECM = -24; p < 0.05); foreign capital inflows exert negative and significant effect on unemployment (Adj. R2  = 0.66; (F (6,22) = 8.0, p <0.05). Specifically, FPI (-1) had negative and significant effect on unemployment (β = -3.71; ECM = -65; p < 0.05). The study concludes that foreign capital flows exert significant effect on economic performance in Nigeria in the period under study. It is therefore recommended that Government should prioritize policies that attract and retain foreign direct investment in sectors with high employment and value-addition potential. Government and financial institutions should promote diaspora investment schemes, matched funding programs, and financial inclusion initiatives that encourage remittances to support entrepreneurship and small-scale enterprise development.