Effect of Budget Deficit and Foreign Direct Investment on Economic Growth in Nigeria

Abstract

Foreign Direct Investment (FDI) can be a source of valuable technology and know-how and enhances linkages with local firms, which can help to boost growth in an economy. Based on these arguments, industrialized and developing countries have offered incentives to encourage foreign direct investments in their economies. Deficit spending may be consistent with public debt remaining stable as a proportion of GDP, depending on the level of GDP growth. When the economy has high unemployment, an increase in government purchases creates a market for business output, creating income and encouraging increases in consumer spending, which creates further increases in the demand for business output. The policies of budget deficits have however posed challenges to the Nigerian economy with regard to its effectiveness and the accumulation of debt, the justification for growth notwithstanding. Government deficit spending is a central point of controversy in economics, with prominent economist holding differing views. Ordinary Least Square (OLS) multiple regression technique is used and it is useful for estimation, Gross Domestic Product which is the dependent variable will be regressed on the explanatory variables in the equation which includes Foreign Direct Investment and Budget Deficit. The findings of the study indicated that Foreign Direct Investment and Budget Deficit made positive impact on Economic Growth in Nigeria. The recommendations of the study were: Fiscal deficits should be channeled to productive investments like road construction, electricity provision and Pipe-borne water that would serve as incentives to productivity through the attraction of foreign direct investments and adequate monetary policy should be geared towards balancing the role money supply performs to both budget deficit and Foreign Direct Investment.