Shadow economy and foreign direct investment in Nigerian manufacturing industry
by Folorunsho Monsuru Ajide; James Temitope Dada; Johnson Kolawole Olowookere
International Journal of Economics and Business Research (IJEBR), Vol. 23, No. 2, 2022

Abstract: In this paper, we investigate the symmetric and asymmetric effect of shadow economy on foreign direct investment (FDI) in Nigerian manufacturing sector using ARDL and NARDL estimation techniques for the period of 1975-2017. We find that an increase in shadow economy reduces FDI net inflow in the short run while this relationship turns to be positive in the long run. This result persists after using NARDL to re-estimate the model. Negative and positive changes in the size of shadow economy have negative and significant effects on FDI in the short run, while in the long run both changes have positive effects on FDI in the sector. The results imply that in the short run, new foreign investors would like to operate in the formal sector due to tax incentives and other financial incentives available for new entrants. However, in the long run, shadow economy attracts FDI, because incentives enjoyed have expired coupled with high cost of doing business in the country. The investors would prefer to either look for loopholes in tax laws or attempt to evade tax and cut down official remittances to the government by operating in the informal sector of the economy.

Online publication date: Mon, 31-Jan-2022

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