Corruption and FDI inflow to Nigeria: a nonlinear ARDL approach
| DOI | https://doi.org/10.1108/JFC-09-2019-0116 |
| Pages | 635-650 |
| Published date | 03 February 2020 |
| Date | 03 February 2020 |
| Author | Suleiman Zangina,Sallahuddin Hassan |
| Subject Matter | Financial risk/company failure,Financial crime |
Corruption and FDI inflow to
Nigeria: a nonlinear
ARDL approach
Suleiman Zangina and Sallahuddin Hassan
Department of Economics, Universiti Utara Malaysia, Changlun, Malaysia
Abstract
Purpose –This paper aims to empiricallyexplore the asymmetric relationship between corruption control
and foreigndirect investment (FDI) in Nigeria.
Design/methodology/approach –The study utilized the non-linear autoregressive distributed lag
(NARDL)bounds test technique for the time-series analysis covering the period1984-2017.
Findings –The findings reveal that corruptioninhibits FDI inflow and corruption control has asymmetric
effects on FDIinflow to Nigeria. The coefficient of positive shock or changes in respectof corruption control is
positive as well as statistically significant during the long run, while the coefficient of negative shock is
negative, but statistically insignificant. This implies that improvement in corruption control encourages
inflow of FDI to thecountry, whereas a decrease in corruption controlhas an insignificant effect.
Practical implications –Nigeria needs to intensify its corruption control efforts to effectively enhance
the conducivenessas well as attractiveness of its business operating environmentfor FDI inflow.
Originality/value –This paper is among the first to use time-series analytical process to empirically
verify the asymmetric associationof corruption control and FDI inflow in Nigeria. In thisregard, the insight
generated byoutcomes of the study will enable specific inferencesto be drawn from the empirical findings by
policy makers,academic researchers and business practitioners.
Keywords FDI, COC, Corruption, NARDL, Asymmetric
Paper type Research paper
1. Introduction
The essential role of foreign direct investment (FDI) as a growth and development catalyst
has been widely researchedand documented in the economic development literature;yet, the
resultant contention remains largely unresolved. Nonetheless, substantial research efforts
have continued to be channeledtoward identifying the main determinants of FDI as well as
its effects on growth and other associated impacts. The reasoning behind these concerted
efforts both at the level of academics and policy making is mostly linked to the potential
benefits derivable from FDI by the host countries. Among the key benefits of FDI is the
bridging of savings–investment gap, particularly in developing countries suffering from
paucity of funds to meet their gross investmentrequirements. In addition, its contribution to
technology transfer, generation of employment, stimulation of domestic competition and
economic growth has been wellrecognized (Asiedu, 2002;Quazi, 2014).
Arising from the foregoing, it is, therefore, not surprising that various countries and
regions, particularly developing economies, have been making deliberate efforts to identify
appropriate means of enticing inflow of sufficientFDI to accelerate sustainable growth and
poverty reduction (Asiedu, 2002). This is why, FDI-oriented policies are regarded as key
priorities in the developmental framework of developing economies of Africa such as
Nigeria. As a result, there has been an increasing drive to attract FDI inflow to Nigeria and
Corruption and
FDI inflow
635
Journalof Financial Crime
Vol.27 No. 2, 2020
pp. 635-650
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-09-2019-0116
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other African countries in view of its obvious and anticipated benefits to host economy.
Regrettably, in spite of these concerted efforts,FDI flow to African countries remained low
in comparison to otherregions of the world.
Within the framework of global integration, several theoretical as well as empirical
exploits were undertaken to provide explanation in respect of FDI and its flow to host
location. Among the various theories explaining the determining factors of FDI inflow, the
eclectic model of Dunning (1977) appears to be more prevalent because of its ability to
provide elaborate analysis with regard to ownership, location and internalization (OLI)
factors as specific advantages which affects the investment decision of multinational
corporations (MNCs). According to Dunning (2001), three conditions need to be met by a
firm to qualify as a MNC. The first is advantage related to the ownership which involves
proprietorship of definite assets which the firms in the host location lacks, as this would
serve as compensation for extra costs of operating abroad by the firm such as expenses of
dealing with foreignauthorities, tax system, regulatory issues and preferencesof customers.
The second is internalizationadvantage which requires the benefits of FDI to be internalized
by the firm to minimize technology imitation, reduce costs of transaction and preserve the
firm’s reputation through effective management. The third is location advantage which
emphasizes certain advantagesin a location such as large market, low cost of labor, quality
of infrastructure, natural resources availability, institutional quality and investment
incentives which couldmake an economy attractive destination for an MNC.
Though, Dunning did not provide an exhaustive list of advantages related to location,
but maintained that factorwhich could affect the establishment and profitabilityof a firm in
the host location is considered an advantage (Ajide and Raheem, 2016). MNCs are expected
to exploit the location advantages to boost efficiency of their basic competencies through
participation in foreign operations (Dunning, 1988). In furtherance of the search for
understanding the main determinants of the inflow of FDI, evolving research efforts are
directed at exploring the role of institutional environment as a key driver of FDI inflow.
Accordingly, corruption as an institutional factor is increasingly attracting attention of
academic scholars becauseof its abilities to shape “the rules of the game”which could either
serve as investment incentive or deter foreign investors. Corruption is a country-specific
feature which directly relatesto locational advantages affecting foreign investment.
Accordingly, several empirical exploits have emerged to interrogate the influence of
corruption on FDI inflow. Exploring the link of corruption in hosting nations with MNCs’
decision, Voyer and Beamish (2004),Morrissey and Udomkerdmongkol (2012),Al-Khouri
and Khalik (2013),Mathur and Singh (2013),Quazi (2014),Abala (2014),Nnadi and
Soobaroyen (2015),Erdogan and Unver (2015),Qian and Sandoval-Hernandez (2016),
Ferreira and Ferreira (2016),Ajide and Raheem(2016),Kurul and Yalta (2017),Hossain and
Rahman (2017) and Kasasbeh, Mdanat and Khasawneh (2018) affirmed that corruption is
detrimental and thereforeretards FDI inflow. Corruption is regarded as “sands in the wheels
of commerce,”because it generates additional financial burden which affects the profits of
MNCs directly as well as distorts MNCs’activities (Habib and Zurawicki, 2002;Wei, 2000).
Furthermore, corruption burden is not only confined to bribes related expenses to access
services, but also relates to the efforts and times put in by MNCs in handling corrupt
government officials (Kaufmann, 1997). Wei (1997) argued that the unpredictable and
irregular nature of bribes being demanded by corruptofficials tend to accelerate the burden
of corruption. In addition, corruption couldspur high level of uncertainties due to its illegal
nature, because agreements or understanding relating to corrupt practices such as payment
of bribe for services cannot be enforced. This is even more worrisome when incentives to
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