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Abstract

Findings from extant studies on the nexus between foreign direct investment (FDI) and economic growth were mixed. Some studies found that FDI raised economic growth in recipient countries, while others argued the reverse. However, the contributions of FDI have been argued to depend strongly on key factors such as trade openness, human capital development and financial development in the recipient countries. Financial development was key as it provided access to external finance and better allocation of funds to domestic firms. Therefore, this study provided new evidence on the impacts of sectoral FDI (manufacturing, mining and quarry, agriculture, and service) on economic growth and examined the moderating role of financial development using both bank-based and market-based measures between 1981 and 2021. The Endogenous Growth Theory provided the framework and the Dynamic Ordinary Least Square (DOLS) was employed as the estimation technique. The findings showed that when financial development was not interacted with FDI, the effect of sectoral FDIs on growth was mixed and depended on the measures of financial development. However, when financial development was interacted with FDIs, FDI for all the sectors had significant positive effects on economic growth. Thus, while foreign direct investment alone decreased economic growth, its interaction with financial development exerted positive impacts on economic growth in Nigeria. Thus, the government should enhance the level of financial development in the economy.