Foreign Direct Investment, Domestic Investment Crowding, and Growth in Nigeria

The relationship between foreign direct investment and domestic investment has generated sustained theoretical and empirical controversy, with crowding-in effects associated with technology and capital spillovers standing against crowding-out effects associated with competition for scarce resources and market displacement. This study examines whether foreign direct investment crowds in or crowds out domestic investment in Nigeria and the net effect on economic growth between 2005 and 2022. Annual time-series data on foreign direct investment flows, domestic fixed investment, real gross domestic product growth, and sectoral distribution are sourced from the Central Bank of Nigeria, the National Bureau of Statistics, and the United Nations Conference on Trade and Development's investment statistics database. The study employs a structural vector autoregression model to decompose the total growth effect into the direct foreign direct investment contribution and the indirect crowding-in or crowding-out channel. The theoretical framework integrates the neoclassical two-gap model, the new growth theory perspective on foreign direct investment spillovers, and the financial development-foreign direct investment complementarity hypothesis. The analysis distinguishes between resource-seeking foreign direct investment concentrated in the oil and gas sector and efficiency-seeking investment in manufacturing and services, given the well-documented differences in their domestic investment and growth effects. Existing Nigerian literature is split between studies finding net crowding-in and those finding crowding-out effects, with the outcome likely dependent on the composition of foreign direct investment inflows. This study contributes a disaggregated and structurally identified analysis of the relationship with implications for the Nigerian Investment Promotion Commission and the Federal Ministry of Finance's investment strategy. Keywords: foreign direct investment, domestic investment, crowding, economic growth, Nigeria