FISCAL PRUDENCE, FINANCIAL DEVELOPMENT, AND FDI INFLOW: AN EMPIRICAL ANALYSIS OF THE NIGERIAN ECONOMY

Abstract

The Covid-19 pandemic has brought fiscal sustainability into sharp focus as countries face declining revenue and rising debt levels in the wake of an unprecedented global recession. This study examines the concepts of fiscal prudence and fiscal profligacy and their implications for sustainable fiscal policies. The ability of governments to meet their intertemporal budget constraint is considered crucial in assessing fiscal prudence. Macroeconomic stability is essential for attracting foreign direct investment (FDI) in developing economies, as it signals a conducive environment for investors. Various indicators, including fiscal balance, government debt, government expenditure, foreign reserves, and national savings, are used to gauge the fiscal health of a country's economy. Additionally, factors such as fiscal incentives, infrastructure spending, currency depreciation, and political stability influence FDI inflows. While larger countries tend to attract more FDI, openness, stability, and favorable government policies also play significant roles. This research explores the relationship between macroeconomic variables and FDI inflows in Nigeria, employing econometric techniques such as log-linear linearization of multiple regression equations and the autoregressive distributed lag (ARDL) bound testing approach. The log-linear approach overcomes issues associated with nonlinear equations, while the ARDL model provides insights into both short-run and long-run equilibriums. The findings contribute to understanding the dynamics and effects of selected macroeconomic variables on FDI inflows, shedding light on the importance of domestic savings in the long run and the potential harms of protected and regulated FDI. This research has implications for policymakers aiming to attract FDI and promote sustainable economic growth and development in Nigeria and other developing countries.