Abstract:
The traditional economic theories posit that foreign direct investment inflows and the Capital markets are expected to serve as a means of complementing a nation’s domestic resources given a situation where savings are less than investment needs. Several economic, political and social policies have been deliberately initiated in Nigeria, aimed at attracting Foreign Direct Investment (FDI) inflows. However, the much anticipated surge of FDI into the Nigeria economy has not yet occurred. This is particularly worrisome, as Nigeria possesses quite a number of attributes of a good FDI destination, some of which includes; size of market, availability of natural resources, low labour cost amongst others, thus necessitating the need for a study to investigate the linkage and causality between foreign direct investment inflows and capital market development in Nigeria. The Time series expo factor research design encompassing the Autoregressive Distributed Lag (ARDL) bounds testing approach to co-integration and the Toda-Yamamoto (T-Y) Granger Causality test are employed in this study using data set for 36 years. The empirical results indicate a positive relationship between FDI inflows and market capitalization both in the short-run and long-run, while the Primary and non-primary analysis indicates that the manufacturing sector receives more FDI inflows, when compared to the services and agriculture sectors. The study concludes that FDI has a complementary role to capital market development in Nigeria. It is therefore recommended that government should attract FDI by taking various steps such as: maintaining macroeconomic stability in the country, minimizing the volatility of foreign exchange and interest rate through appropriate legislations and robust financial policies.
