International Relations Project Topics

Effects of Foreign Direct Investment on Unemployment Level in Nigeria

Effects of Foreign Direct Investment on Unemployment Level in Nigeria

Effects of Foreign Direct Investment on Unemployment Level in Nigeria


Objectives of the study

The objectives of this study are:

  1. To investigate if there is long run relationship between Foreign Direct Investment and Unemployment in Nigeria between 1991-2017.
  2. To investigate the short run effect of Foreign Direct Investment on Un-Employment in Nigeria between 1991 – 2017.




This chapter presents the literature review which include; theoretical and conceptual review of foreign direct investment, the empirical review and the research gap of the study.

Theoretical review

The theoretical approach of foreign direct investment (FDI) on underdeveloped economies has prevailed to give rise to prolific writings on the effect of FDI (Akrami, 2008). The theoretical foundation of FDI for this study comes from three theories: Keynesian theory of unemployment, theory of comparative market economy and institutional FDI fitness theory.

Keynesian Theory of Unemployment

Keynesian Theory of Unemployment developed by Economist John Maynard Keynes (1883-1946), with his book The Theory of Employment, Interest and Money (1936), Keynes changed the way the world’s perception of the workings of the economy. First, Keynes introduced the theory that the equilibrium is determined by aggregate demand. Aggregate Demand is the amount of goods and services all buyers demand at various prices (Sayer & Morris, 2007). According to Keynes, when there is increase demand in the economy, this will encourage companies to make more goods or provide more services.  

As his book the Theory of Employment, Interest and Money (1936), was published, his home country of Britain was going through the great depression. The inflation was through the roof and a lot of people were unemployed. As stated by Sayer, Classical Theorists saw the economy in terms of reduced prices and wages while Keynes saw it in terms of fall in production. Classical Theorists lived by the principle of “Lassez Faire”; for the government to allow the economy to resolve itself since it goes through a business cycle. As Hubert Humphrey would say, “Prosperity is just around the corner”. After two years of living in their cars and not being able to afford a decent meal, the people began to see holes in this theory. Keynes objected to lassez faire, saying that it will take too long for the economy to resolve itself and “In the long run, we are all dead.” The people cannot wait for the economy to solve itself. Something had to be done now (Sauvy et al., 1969).

According to theory of competitive market economy, supply of labour and demand for labour are two invisible hands that determine employment in the labour market. Thus when the supply of labour is greater than the demand for labour, there would be excess labour. The excess labour represents unemployment. A number of factors determine the supply of labour in an economy. The chief among them is the rate of population growth. High rate of population growth is expected to increase the supply of labour and put pressure on the labour market (Fanati and Manfredi, 2013).





This study employs empirical analysis to examine the relationship between foreign direct investments and unemployment rate in Nigeria from 1991 to 2017. Annual data on foreign direct investment and total unemployment are analyzed by using Error correction model (ECM) regressions. This part also comprises research design, model specification, and time series tests.

Research design

This study used a correlational and descriptive design as part of the non-experimental research design, because it does not involve manipulating the variable of interest. The correlational design simply aimed to determine the effects between two variables, as well as how strongly these variables relate to one another (Kazdin, 1992). As well as descriptive design used to describe the words. Furthermore, the research design is chosen because data is attained from the international statistical publications in World Bank reports and world economic outlook were used as data sources.

Theoretical framework

The influence of FDI on unemployment conditions has been extensively studied in recent years. These studies have had strictly theoretical but also empirical character. However, there are still many controversies on interrelations between FDI inflow and unemployment. Different theoretical models and empirical investigations for different countries or periods show often inconsistent results. This discussion and   controversies signal that the effects of FDI on labour markets can change from one country to another. These effects can depend on the country features and specific forms of investment. For example, in principle, it is accepted that positive employment effects are usually much higher if the FDI has the form of greenfield project. On the other hand, when the foreign capital inflow takes the form of acquisitions of privatized enterprises, it usually can have minor or even negative influence on employment (Hisarciklilar et all, 2009).

Among strictly theoretical works in the field one can point at work of Fung et all, where a three sector endogenous growth model is used to investigate effects of foreign direct investment on the dynamics of unemployment, labour and capital income and national welfare in Harris-Todaro economy. Grinols builds models with different assumptions influencing the relative opportunity costs of domestic labour in order to assess consequences of increased foreign capital for an economy with unemployment. His models suggest that in case of economy with unemployment foreign capital brings significant welfare gains if the opportunity costs of labour are sufficiently low relative to the wages earned by laborers employed by new foreign capital (Grinols, 1991).




In the previous chapter, methods of analyzing the economic growths, as well as the longrun relationships between Foreign Direct Investment and Unemployment have been discussed. E-Views were used to analyze the data with respect to the specific objectives.  Objective one and objective two, the researcher also performed some preliminary test such as normality test and stationary test variables over time. Also, the researcher purely used co-integration analysis since he was interested in lon-grun relationship.

In addition, the co-integration techniques are discussed to in an attempt to find out the long run relationship between Foreign Direct Investment and Unemployment in Nigeria (1991-2017). Furthermore, econometric techniques that are discussed in the previous chapter are employed in this chapter and the results are discussed in detail.

The initial part of this chapter deals with descriptive summary of the data. This can be used to evaluate the scores of each variable for more advanced statistical analysis and the data can easily be understood in the form of tables and graphs.

In the next sub-sections of the chapter unit root tests are performed using the Augmented Dickey Fuller (ADF) and Phillip Perron (PP) tests. The results of these stationarity tests will then lead to the testing of long-run relationship between the variables understudy. The long-run relationship is captured using Johansen co-integration tests.

Data preliminary testing

Before using the data in the analysis, several diagnostic checks and tests were conducted to find out the statistical behavior of all the variables. This is important since for data to be used in any analysis, its integrity and reliability should be ascertained as well as finding out if the data is normally distributed.




The purpose of the study was to assess the relationship between foreign direct investment and Unemployment in Nigeria 1991-2017. The chapter presents the summary of the findings in the previous chapter, conclusions drawn from the study and recommendations on how unemployment can be mitigated through investment.

Summary of Findings

The main objective of this present study is to investigate the empirical relationship between Foreign Direct Investment and Unemployment for the Nigerian economy between 1991 and 2017. To this end we use a three-stage empirical process.  In the first stage of the process, we employ a combination of unit root testing procedures (ADF & PP) to investigate the stationarity properties of the time series. In the second stage, we applied the variable test for co-integration to the variables.  The third stage consists of estimating long-run and short-run through cointegration and ECM respectively.    Our empirical estimates first of all confirm that the employed time series are all integrated of either order I(0) and I(1) variables, an observation that deems the time series  suitable for ECM co-integration analysis. The results from our Johannsen co-integration test provided concrete evidence of co-integration relations between the variables. The main empirical results of ECM reveal that Foreign Direct Investment is negatively and significantly correlated with unemployment.


This paper aimed at examining the long and short-run relationship between foreign direct investments and unemployment rate in Nigeria by using the empirical analysis. Cointegration model was used to examine the ling-run relationship between the variables in the study. The results of co-integration model revealed that there is long-run relationship between the variables in the model used in this study. The study also examined the shortrun relationship between the variables in the study using error correction model (ECM). The results of the error correction model (ECM) showed that there is short-run relationship between foreign direct investment and unemployment rate in Nigeria 19912017.

Depending on the overall findings of the study, it can be concluded that there is significant impact of foreign direct investment (FDI) on unemployment rate in Nigeria. The results show that, FDI is negatively related to the unemployment and it is statistically significant at 5%. This implies that the higher the inflows of FDI the more the employment created. FDI also important as the opportunities to develop network between countries. International trade will allow the domestic market to supply goods for international demand, create more job opportunities and reduce unemployment rate.

Policy Recommendations

It was previously mentioned that the empirical findings of the study demonstrate that FDI is significant to Nigeria’s economic growth, employment and poverty reduction. However, the study finds that factor input (FDI) has negative effect on the unemployment rate in the country. There is negative relationship between the variable which means that when one variable is rising the other variable is decreasing.

Following the findings of this study and the policy implications, pro-poor projects and policies that stimulate economic growth and increase employment are important for FDI boost in Nigeria. The findings in our study are highly important in policy implementation.

First, the study recommends that Community Capital Absorption Capacity Development (CCACD) would be suitable for a least-developed country such as Nigeria.  To avoid diminishing returns, CCACD involves building capacity through community investments in rural and urban areas, as a means of supporting disadvantaged households. In this respect, absorption capacity for foreign capital from FDI and tourism is achieved. Supporting community investment implies creating jobs, and as such, factor inputs, including abundant human capital and natural resources, are utilized. In turn, a nation achieves a spiral of accelerated economic growth with limited stagnation, since jobs are continuously created and poverty continues to decline in the long-run.

Secondly, this study recommends that Nigeria should increase the absorption capacity from the foreign capital flows (FDI and tourists’ expenditure). In this way, capacity development should be created in Nigeria in the form of increasing production and consumption. Consequently, Nigeria will experience accelerated economic growth and job creation, causing the country to break the unemployment in the long-run. This study indicates that Nigeria’s economic growth, employment and poverty reduction is supported by financial resources from donors and domestic revenue. Domestic revenue mobilization through efficiency of the tax body is essential. Also, Nigeria is not only a least-developed nation but is also an HIPC. Thus, donor support could finance the domestic financial resources gap.

Thirdly, this study recognizes that tourism is important to Nigeria’s economy. To this extent, this study recommends to establish avenues through which tourism can be promoted in the country. In particular, the study would consider the tourism demand constraints for Nigeria.

Lastly unbalanced regional distribution of FDI in Nigeria due to concentration of FDI projects in Kampala and the central region surrounding the city. In this way, the impact of factor input (FDI, tourism and human capital) concentrating in Kampala could be overwhelmed, causing total negative impacts. Hence, we recommend decongesting Kampala city to first, because more balanced regional economic and social growth. Second, decongesting Kampala would lead to reduced rural-urban migration, as people would not need to migrate in search of better-paying jobs. Third, as more jobs are created elsewhere, income inequality would reduce through job distribution across the regions, as well as more balanced unemployment reduction programmes.

Limitations of the Study

This study examined the impact of FDI in Nigeria’s employment. During the study, some limitations arose that can provide opportunities for future research. First, the study was limited by scope. This is because during the years of political and economic instability, data was not available. During the 1970s, most institutions collapsed and data from UBOS was not available. Even UBOS acknowledged that they did not have most of the data from before 1985. Data insufficiency arose because since the overthrow of Mutesa, the first President of Nigeria, in 1966, the country remained in a state of war. This was exacerbated by international sanctions and numerous rebellions, which caused political and economic instability and the breakdown of institutions. Therefore, this study obtained most of its data from the World Bank database. In situations where data could be obtained from UBOS, this was the main second option.

Suggestions for Further Studies

As previously explained though theory and literature indicate that tourism contributes to employment, the impact is insignificant but positive. In this way, tourism makes a positive contribution to employment in the country, as indicated by the past studies. Therefore; more investigation would be conducted to establish the media though which tourism would make significant contribution to employment in Nigeria.

Contributions of the Study

There was previously little or no knowledge of the impact of FDI on employment in Nigeria. Therefore, this gap in empirical work was the motivation for this research. Further, previous studies adopted a linear regression model specification approach. As a departure from the previous studies, first new, variables are included in this study. Secondly, ECM procedure was used.


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