Association between foreign capital inflow and macroeconomic factors : Evidence from Nigeria

This paper empirically examines the association between foreign capital inflows to Nigeria and real growth rate of gross domestic product, domestic credit to the private sector, rate of inflation, perceived level of corruption and market capitalization. Data covering the period 1982 and 2012 were analyzed using econometric models of cointegration technique with its implied error correction model (ECM). Results are consistent with a priori expectations as the parsimonious ECM tests suggest that high level of corruption constitutes the greatest impediment to foreign capital inflow to Nigeria. Further, the documented evidence suggests that high rate of inflation has a negative impact on foreign capital inflow to Nigeria. The short-run dynamic results suggest that domestic credit to the private sector, real growth rate of gross domestic product and market capitalization have been beneficial to foreign capital inflows to Nigeria.


INTRODUCTION
This paper empirically examines the impact of real gross domestic product growth, domestic credit to the private sector, inflation, perceived level of corruption, and market capitalization on foreign capital inflow to Nigeria.Foreign capital inflow (hereafter, FCI) can play an important role in the country's developmental efforts.
1 Because there is low rate of savings in Nigeria it is difficult to finance investment in the country entirely through domestic savings.By augmenting available local capital FCI can assist in creating direct and indirect employments in Nigeria.Umoh et al. (2012) posit that foreign direct 1 In this study, we equate foreign capital inflow with foreign direct investment, and define it in line with the International Monetary Fund's (IMF) (1993) definition, which defines it as an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor.
investment augments domestic savings in the process of capital accumulation.The private sector is a very important catalyst in the Nigerian free market economy.
The Nigerian government, like its counterparts elsewhere, realizes the need to focus on providing an enabling environment that would make the private sector to thrive in contributing meaningfully to the country's quest for development.The government has committed itself to improving the country's economic performance through expansion of the private sector.The commitment has become more pronounced or visible since Nigeria transited to democratic dispensation in 1999.Past and present leaders of Nigeria since 1999 have visited foreign countries to solicit and attract foreign investors to Nigeria.In addition, major policy steps are being taken to reduce regulatory constraints so as to attract foreign investors.
For example, visa restrictions have been relaxed, privatization of state-owned enterprises has taken place.Support for private-sector development is being pursued with vigour including, but not limited to, public-private partnerships, the establishment of the Nigeria Investment Promotion Commission (NIPC), among others.These measures have been yielding the desired effects because since the inauguration of civilian political dispensation in Nigeria in 1999 FCI to the country has been increasing.The surge in FCI to Nigeria since 1999 has partly been attributed to the democratic rule and relative peace within the system (Wafure and Nurudeen, 2010).
But beyond diplomacy-driven inflow of foreign finance to Nigeria, there is a need to examine the relationship between macroeconomic factors and foreign capital inflows to Nigeria; hence the purpose of the paper is to examine the likely impact of the macroeconomic factors on the inflow of FCI to Nigeria between 1982 and 2012.
In this paper, we argue that foreign capital is likely to flow to Nigeria when there is high real gross domestic product growth, when the country extends some credit to the private sector, and when the market size is large.Thus, we expect a positive association between FCI and real gross domestic product growth, domestic credit to the private sector, and market capitalization.We argue that high level of corruption perception and high rate of inflation are likely to militate against foreign capital inflow to Nigeria; so we expect a negative relation between FCI and high level of corruption perception, and high rate of inflation.Documented results are consistent with a priori expectations as the parsimonious ECM test suggests that high level of corruption constitutes the greatest impediment to FCI to Nigeria.Further, the documented evidence suggests that high rate of inflation has a negative impact on FCI to Nigeria.The short-run dynamic results suggest that domestic credit to the private sector, real gross domestic product growth and market capitalization have been beneficial in attracting FCI to Nigeria.The result shows a satisfactory speed of adjustment, and it indicates that a long-run relationship exists among the variables.
The paper recommends that governments in Nigeria should intensify efforts at tackling corruption in the country.The government should also employ proactive inflation reducing and stabilizing measures as they can be helpful in reducing the cost of doing business in Nigeria.Furthermore, the Federal Government of Nigeria should continue with on-going reforms of the capital market, and grant more credit to the private sector since this is likely to impact positively on FCI to Nigeria.
This paper contributes to the growing literature on the determinants of foreign capital inflow to Nigeria.Specifically, the paper extends this literature by introducing and investigating additional variables such as corruption and domestic credit to the private sector.
The remainder of the paper is organized as follows: the next section reviews related literature, presents the theoretical framework, and develops the hypotheses.Section 3 addresses methodology.Section 4 presents the empirical results while section 5 is the discussion and conclusion of the paper.

Review of related literature
Numerous studies have been undertaken on foreign direct investment (FDI) to Nigeria (Obadan, 1982;Ekpo, 1995;Anyanwu, 1998;Ayadi, 2009;Wafure and Nurudeen, 2010;Umoh et al., 2012).While a section of the literature conceives foreign direct investment as the cause of some hypothesized variables (Ayadi, 2009, Umoh et al. 2012), others (Borensztein et al., 1998) view it as the effect of some hypothesized variable.Ekpo (1995) who examines the relationship(s) between foreign direct investment and some macroeconomic variables for the period, 1970-1994 shows that real income per capita, rate of inflation, world interest rate, credit rating, and debt service explain the variability of foreign direct investment to Nigeria.Anyanwu (1998) identifies change in domestic investment, change in domestic output or market size, indigenization policy and change in openness of the Nigerian economy as major determinants of foreign direct investment to Nigeria.Ayanwale (2007) who examines the determinants of foreign direct investment inflow to Nigeria finds that market size, infrastructure development and stable macroeconomic policy are the determinants of FDI to Nigeria.Ayanwale (2007) finds a positive link between FDI and gross domestic product growth in Nigeria.Obadan (1982) argues that market size, trade policies and raw materials are very important determinants of FDI to Nigeria.Wafure and Nurudeen (2010) who investigate the determinants of FDI to Nigeria find that market size of host country, deregulation, political instability, and exchange rate depreciation are the main determinants of foreign direct investment to Nigeria.
In this paper, we follow the above strand of prior literature to examine the relationship between foreign capital inflow (FCI) to Nigeria and macroeconomic factors.In the next subsection we present the paper's theoretical framework and hypotheses.

Theoretical framework and hypotheses
This subsection presents the theoretical framework of the *Corresponding author.E-mail: asienen@fuotuoke.edu.ng,ndidi_66@yahoo.co.uk.Tel: (+234) 7033097520 study, alongside the five hypotheses of the paper.
In the paper, we relate foreign capital inflows to real growth rate of gross domestic product, market capitalization, domestic credit to the private sector, and perceived level of public sector corruption in Nigeria as well as inflation.Below, we motivate the choice of these variables.
FCI and real growth rate of gross domestic product: It has been shown (Akinlo, 2004;Ayadi, 2009) that there is no significant relationship between FDI and gross domestic product growth in Nigeria.Akinlo (2004) who investigates the impact of FDI on economic growth in Nigeria using data for the period, 1970 to 2001 finds that both private capital and lagged foreign capital have small and insignificant impact on economic growth.Ayanwale (2007) finds a positive link between FDI and growth in Nigeria.Ayadi (2009), while comparing growth rate of GDP with the FDI growth rate, finds that there is negative and insignificant relationship, indicating that FDI cannot be said to have contributed significantly to growth in Nigeria.Against this backdrop, we formulate our first hypothesis, H1, thus: H1: There is no association between FCI to Nigeria and real gross domestic product growth FCI and perceived level of corruption: The level of corruption in Nigeria can have an impact on FCI inflow to Nigeria.Prior studies document mixed findings about the effect of corruption on economic activities.Pantzalis et al. (2008) present the literature that documents negative effect of corruption on investment.Pantzalis et al. (2008) opine that corruption distorts economic decisions and hence might lower investment.Wijeweera and Dollery (2009), who examine the effects of corruption on foreign direct investment inflow, find that there is no statistically significant impact of corruption on foreign direct investment.In light of the literature, we hypothesize that:

H2: There is no association between FCI to Nigeria and perceived level of corruption in the public sector in Nigeria
FCI and domestic credit to private sector: Aremu (1997) argues that host countries make credit available to investors in form of subsidized loans, loan guarantees as well as guaranteed export credits.Aremu (1997) notes that the credits provided directly to foreign investors for their operations are to help defray some inevitable costs which invariably have an immediate impact on cash flow and liquidity.This leads to the third hypothesis, H3, that: H3: There is no association between FCI to Nigeria and domestic credit to the private sector FCI and market capitalization: According to Djankov et Asien and Oriavwote 309 al. (2008) and Kwok and Tadesse (2006) the size of a country's equity market can be measured by the overall market capitalization of the country's capital market relative to its GDP.Wafure and Nurudeen (2010) find a positive and statistically significant relationship between market size and foreign direct investment.Hence, the next hypothesis, H4, is stated that: H4: There is no association between FCI to Nigeria and the country's market capitalization FCI and Inflation: It has been argued that one aspect of high inflation is that it causes large and seemingly arbitrary redistributions of wealth (Paldam, 2002, p. 222), which can decrease FCI.That is, high inflation can discourage FCI to Nigeria.Hence the next hypothesis, H5, is stated thus:

Sources of data
We collected all our data from World Bank's Development Indicators for Nigeria, Central Bank of Nigeria Statistical Bulletin and National Bureau of Statistics2,3,4 These data sources contain a repository of Nigeria's development indicators on major macroeconomic variables such as the amount of foreign direct investment to Nigeria, real gross domestic product growth, domestic credit to private sector, inflation rate, and market capitalization amongst other important indicators.Umoh et al. (2012) and Bushman et al. (2004) collected data for their studies from the World Development Indicators database.Our data cover the period 1982 through 2012.

Methods of analyzing data
We applied econometric models in analyzing the data.Specifically, we used cointegration test, vector error correction as well as Augmented Dickey Fuller (ADF) Unit Root.The conventional approach to time-series econometrics is based on the implicit assumption of stationarity of time-series data.A recent development in time-series econometrics has cast serious doubts on the conventional time-series assumptions.There is substantial evidence in the recent literature to suggest that many macro-economic time series may possess unit roots.That is, they are non-stationary processes.A time-series integrated of order zero I(0), is level stationary, while a time-series integrated of order one, I(1) is stationary in first difference.Most commonly, series are found to be integrated of order one, or I(1).The implication of some systematic movements of integrated variables in the estimation process may yield spurious results.In the case of a small sample study, the risk of spurious regression is extremely high.In the presence of I(1) or higher order integrated variables, the conventional t-test of the regression coefficients generated by conventional OLS procedure is highly misleading (Granger and Newbold, 1977).Resolving these problems requires transforming an integrated series into a stationary series by successive differencing of the series depending on the order of integration (Box and Jenkins, 1970).However, Sargan (1964), Hendry and Mizon (1978) and Davidson et al. (1978) have argued that the differencing process loses valuable information in data, especially in the specification of dynamic models.If some, or all, of the variables of a model are of the same order of integration, following the Engle-Granger theorem, then the series are cointegrated and the appropriate procedure to estimate the model will be an error correction specification.Hendry (1986) supports this view, and argues that error correction formulation minimizes the possibilities of spurious relationships being estimated as it retains level information in a non-integrated form (Hendry, 1986).Davidson et al. (1978) propose a general autoregressive distributed lag model with a lagged dependent variable, which is known as the 'error-correction' term.Davidson et al. (1978) also advocate the process of adding lagged dependent and independent variables up to the point where residual whiteness is ensured in a dynamic specification.Therefore, error correction models avoid the spurious regression relationships.To guard against the possibility of estimating spurious relationships in the presence of some non-stationary variables, estimation is performed using a general-to-specific Hendry-type error correction modelling (ECM) procedure.This procedure begins with an overparameterized autoregressive distributed lag (ADL) specification of an appropriate lag.The consideration of the available degrees of freedom and type of data determine the decision on lag length.With annual data, one or two lags would be long enough, while with quarterly data a maximum lag of four can be taken.Under this ECM procedure, the long run relationship is embedded within the dynamic specification.

Dependent and independent variables
Dependent variable: The dependent variable is FDI which is a proxy for foreign capital inflow (FCI).Our use of FDI as the dependent variable is influenced by Onuchukwu and Adelegan (2004) who use the same measure as their dependent variable.

Independent variables:
The independent variables are real gross domestic product growth (RGDPR), domestic credit to private the sector (DC_PS), perceived level of corruption in the public sector (CORR), rate of inflation (INF) and market capitalisation (MCAP).As earlier predicted, we expect positive signs for the coefficients of DC_PS, MCAP and RGDPR, and negative signs for the coefficients of CORR and INF.The E-view 4.1 software is used to estimate the model shown in equation 1 above.

Definition of variables
FDI is used as a proxy for FCI.FDI is the amount of foreign direct investment to Nigeria from 1982-2012 (Bushman et al., 2004, p.233).RGDPR = Growth rate of Nigeria's real gross domestic product.DC_PS = domestic credit to private sector, and it refers to financial resources provided to the private sector.These include loans, purchases of non-equity securities, and trade credits and other accounts receivable that establish a claim for repayment.For some countries, these claims include credit to the public.MCAP = Amount of Nigeria Stock Exchange market capitalization from 1982 through 2012.The assumption behind this measure is that it is less arbitrary than any other measure of stock market development (Saibu, 2012;p. 4).According to Djankov et al. (2008), theoretically, it would appear that the measure of Nigeria's stock market capitalization is relevant for testing foreign capital inflow to Nigeria.

EMPIRICAL RESULTS
In this section, we present the empirical results of the study.We separate the estimation process into components of cointegration test and vector error correction unit root test.The Augmented Dickey Fuller (ADF) Unit Root test was used to test whether or not the variables are stationary, and their order of integration.The result of the ADF unit root test is shown in Table 1.
As can be seen from the table, the result of the ADF unit root test indicates that market capitalization (MCAP), foreign direct investment (FDI), corruption (CORR) and domestic credit to the private sector (DC_PS) were originally non-stationary.They, however, became stationary after the first difference was taken.The real gross domestic product growth rate and inflation rate were stationary at the levels probably because they were computed in growth rate.However, following Harris (1995) and Gujarati (2003), both I(1) and I(0) variables can be carried forward to test for cointegration.This forms the basis of the cointegration test that follows next.

Cointegration test
The Johansen cointegration test was used to test whether a long-run relationship exists among the variables.The result of the Johansen cointegration test is shown in Table 2.
The result of the trace statistic indicates two cointegrating equations whereas the result of the Max-Eigen test indicates one cointegrating equation.Thus, we can

Vector Error Correction (VEC)
The relevant portions of the VEC result are shown in Table 3.The vector error correction test result shows that the corruption equation constitutes the true cointe-grating equation.However, the others are statistically flawed, since they are either not significant or have the wrong signs.

Overparameterization and parsimonious ECM
The result of the overparameterize ECM result is shown in Table 4.The overparameterize ECM result includes two lags of each independent variable.The Akaike and Schwarz information criteria were used to select the appropriate lag length.The parsimonious ECM result was obtained by deleting insignificant variables from the overparameterize ECM result.The result of the parsimonious (preferred) ECM is shown in Table 5.
The result of the parsimonious ECM shows that domestic credit to the private sector has a significant and positive impact on foreign capital inflow to Nigeria.The result suggests that an increase in domestic credit to the private sector by 1% increased foreign capital inflow by about 18%.This is an indication that domestic credit to the private sector is an important determinant of foreign capital inflow to Nigeria, which fails to support H3.The signed result for corruption perception shows that corruption has a negative and significant (p < 0.05) impact on the level of foreign capital inflow to Nigeria, thus failing to support H2.This finding shows that corruption has a detrimental impact on foreign capita l inflow to   Nigeria.This suggests that an increase in corruption by 1% increased foreign capital inflow by approximately 38%.The result of the test for market capitalization, H4, indicates that the level of market capitalization has significant and positive influence on the level of FDI to Nigeria.The result shows that an increase in the level of market capitalization by 1% is likely to increase FDI by about 67%.This high elasticity provides an indication that the capital market plays a major role in attracting FDI to Nigeria.Testing for the impact of inflation on FDI, H5, the result shows that inflation rate has a detrimental impact on FDI to Nigeria, which fails to support H5.The result suggests that an increase in the inflation rate by 1 unit is likely to reduce FDI by about 04 percent.Finally, we test for H1.As predicted, the level of real gross domestic product growth rate has a positive impact on the level of foreign capital inflow to Nigeria; however, the result is not statistically significant (p > 0.01).This test fails to reject H1 that there is no asso-ciation between FCI to Nigeria and real gross domestic product growth.

Diagnostic test
We performed a diagnostic test, the result of which is shown in Table 6.
The result of the jarque-bera normality test indicates an acceptance of the null hypothesis that the residuals are normally distributed.The Breusch-Godfrey serial correlation test shows that the residuals are not serially correlated, and the result of the white heteroskedasticity test indicates that the residuals are homoskedastic.
The result of the Commutative Sum of Recursive Residuals (CUSUM) and Cumulative Sum of Squares of Recursive Residuals (CUSUMQ) stability test are shown in Figures 1 and 2.
It can be seen that the result of both the CUSUM and CUSUMQ stability test indicates that the model is stable.This is because both the CUSUM and CUSUMQ lines fall in-between the two 5% lines.

Variance decomposition
Finally, we performed a variance decomposition test, and the result of the test is shown in Table 7.
The result of the variance decomposition of FDI presented in Table 7 shows that apart from shocks to itself which explain 100% of the changes in first period and 75% in the last period, shocks to corruption explain about 10% of the changes in FDI in the 7th period and this increased to 12% in the last period.The shocks to FDI explain about 24% of the shocks in domestic credit to the private sector in the second period, but this decreased to 10%in the last period.Shocks to FDI explain about 33% of changes in inflation in the first period and this increased to 41% in the 5th period.It, however, decreased to about 12% in the last period.Shocks to FDI explain about 5% of the changes in economic growth in the first period, but decreased to 4% in the last period.

DISCUSSION
A major policy thrust in both industrialized and less developed countries has been the increase in foreign capital inflow to facilitate capital accumulation and skills development as well as increase foreign exchange earnings.In Nigeria, the ability of the Federal Government to increase FCI has been bedeviled by several factors.Our result indicates that corruption is the greatest impediment to attracting foreign capital inflow to Nigeria.The result indicates further that high inflation rate has also bedeviled the attraction of FCI to Nigeria.This is not surprising, however, given the high cost of doing business in Nigeria as a result of decaying infrastructure.
The documented result shows that domestic credit to the private sector has been beneficial in attracting FCI to Nigeria.The policy of increasing the market capitalisation in Nigeria has also been beneficial to FCI in Nigeria.The documented result also shows a satisfactory speed of adjustment, which suggests that a long-run relationship among the macroeconomic variables.

CONCLUSION
In this paper, we empirically examine the impact of real gross domestic product growth, domestic credit to the private sector, inflation, perceived level of corruption, and market capitalization on foreign capital inflow to Nigeria between 1982 and 2012.From the result of the parsimonious ECM we find that domestic credit to the private sector has a significant and positive impact on foreign capital inflow to Nigeria.This is an indication that domestic credit to the private sector is an important determinant of foreign capital inflow to Nigeria.We  document evidence suggesting that corruption perception has a negative and significant impact on the level of foreign capital inflow to Nigeria.This finding shows that corruption has a detrimental impact on foreign capital inflow to Nigeria.We document evidence that indicates that the level of market capitalisation has significant and positive influence on the level of foreign capital inflow to Nigeria.This high elasticity provides an indication that the size of the capital market plays a major role in attracting foreign capital inflow to Nigeria.Our finding reveals that high inflation rate has a detrimental impact on FDI to Nigeria.As predicted, the level of real gross domestic product growth rate has a positive impact on the level of foreign capital inflow to Nigeria; however, the result is not statistically significant, which makes it difficult to infer the relationship between real gross domestic product growth and foreign capital inflow to Nigeria.

RECOMMENDATIONS
We recommend that governments in Nigeria should intensify efforts at tackling corruption in Nigeria.The government should also employ proactive inflation reducing and stabilizing measures as they can be helpful in reducing the cost of doing business in Nigeria.Furthermore, the federal government should continue with on-going reform of the capital market and grant more credit to the private sector since this is likely to result in impacting positively on FCI in Nigeria.This paper contributes to the literature that examines the relationship between foreign capital inflow to Nigeria and macroeconomic factors of domestic credit to the private sector, real gross domestic product growth, corruption, market capitalization and inflation.The paper extends this literature by introducing and investigating additional variables.
INF = is the inflation rate during the period 1982 through 2012 CORR = measures perceived level of public-sector corruption in Nigeria.

Table 1 .
Summary of ADF unit root test result.

Table 2 .
Summary of Johansen cointegration test.

Table 3 .
Vector error correction test result.