Abstract:

In order to achieve a sustainable rate of economic growth, Nigeria like other developing countries needs to adopt and implement new technologies available in developed countries. Foreign direct investment can perform the role of bridging this gap because it facilitates technological diffusion. However, the effect of the foreign direct investment on economic growth in the domestic countries is not automatic. Some studies have found out that foreign direct investment affects growth only when a certain level of absorptive capacity is reached. This study investigated this assertion in Nigeria. The objectives of the study are to examine the effect of foreign direct investment on economic growth without conditioning on absorptive capacity in Nigeria and to investigate the effect and extent of absorptive capacity on foreign direct investment and economic growth in Nigeria. The empirical study employed the Ordinary Least Square (OLS} technique of estimation on a time series data that span from 1980 through 2006. The major findings of the study revealed that foreign direct investment alone cannot promote economic growth except when there is sufficient absorptive capacity. Only human capital and domestic investment have sufficient absorptive capacity to support foreign direct investment in promoting economic growth but openness, financial development and infrastructure do not have sufficient absorptive capacity to support foreign direct investment in promoting growth in Nigeria.  The study, therefore, recommended that policies should be directed towards developing the absorptive capacity, instead of wasting scarce resources on attracting foreign direct investment.