As previously mentioned, macroeconomic and general financial conditions haven been hardly analyzed in the theoretical literature of financial FDI. This is why we focus on theories explaining general FDI. These may be classified in two broad groups.
First, general equilibrium models compare trade and FDI on the basis of the relative factor endowments, transport costs and opportunities for knowledge transfer [Markusen and Makus [2001, and Helpman 1987]. Secondly, financial conditions-related theories are based on hypothesis of imperfect capital markets. In this vein, the relative wealth hypothesis of Froot and Stein focuses on the effects of exchange rates movements in general FDI flows. A depreciation of the local currency increases the relative wealth of foreign investors, allowing them to outbid local rivals for profitable projects.
This research paper is empirical in nature based on the subject matter. Therefore, it is designed to bring out concrete and determinable empirical evidence relating to the effect of FDI on Nigeria Financial Sector. Four models will be built to test the relationship between FDI and other explanatory variables while One model will be built to test the causal link between FDI and the growth of Nigeria financial sector. Therefore, we will measure the financial determinant by Market Capitalization of the Nigeria stock Exchange (NSE) while the macroeconomic variables are Gross Domestic Product (GDP), External Debt (EXDEBT), Inflation rate (INF), Exchange rate (ECHR). The institutional determinant is represented with Degree of Openness (DOP) which measures the rate at which an economy is open to foriegn trade. It is the ratio of the summation of export and import values to GDP.
The main arguments of this research paper will be synthesized into the following hypotheses stated in nulls (Ho) forms as:
1 Foreign Direct Investment does not influence the growth of Nigeria Financial sector
2 The Nigerian Capital Market does not play any active role in the accumulation of foreign capital to the Nigeria Financial sector.
3 Foreign Direct Investment does not significantly affect the growth of the Nigeria capital market.
Sequel to the research design above, the following models are adopted for the purpose of this study. Model 1 will adopt and modify the work of Al nessar and Gomez, which made use of pooled data from 15 Latin American countries between 1978 and 2003. The variables adopted are FDI and other banking sector variables. In this study, we will modify the model to include the contribution of financial sector to Gross Domestic Product (GDPfin), and Foreign Direct Investment (FDI). Model 2 and 4 will be related to the work of Alfaro et al and Lee and Chang which provides evidence for the relationship between FDI and local financial market. We will adopt All Share Index (ASI) as a proxy for Nigeria Financial market. Furthermore, Model 3 will go in line with the assertions of (Ncube, 2007; Claesen and Laeven 2003; Meon and Weill, 2010; Asiedu, 2002; Yartey and Adjasi, 2007; Ang, 2008) who all posited that there exist financial, macroeconomic and institutional determinants of Foreign direct Investment (FDI). All these models will be estimated by the Ordinary Least Square (OLS) of Regression analysis and the Johansen Cointegration technique using the Error Correction Mechanism (ECM). The model will be estimated using the Pairwise Granger Causality test of 1969. in detail