EFFECT OF FOREIGN DIRECT INVESTMENT AND VALUE ADDED TAX ON MANUFACTURING SECTOR PERFORMANCEIN NIGERIA
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Abstract
This study investigates the extent to which foreign direct investment, value
added tax, inflation, and exchange rate affect manufacturing sector
performance in Nigeria for the period 1981-2022. The study deployed the
Autoregressive Distributed Lag (ARDL) bounds test approach and Toda
and Yamamoto Granger causality tests. The findings of the study
unraveled a negative and statistically significant effect of foreign direct
investment on manufacturing value added in the long run. Similarly, the
study documented a negative and statistically significant effect of value
added tax on manufacturing value added, confirming its potential to
hinder manufacturing growth. However, inflation exhibits a counter
intuitive positive and significant impact on manufacturing value added in
both the long and short run, warranting further exploration. Also, the
study discovered that exchange rate stimulates manufacturing sector
performance in both short and long run. The outcome of Toda-Yamamoto
causality analysis reveals the presence of unidirectional causality from
direct investment to manufacturing sector performance without feedback.
However, the two-way causality relationship has been observed between
value added tax and manufacturing sector performance. Thus, the study
recommends that government should review value added tax structure to
minimize its negative impact. Secondly, government should develop a
comprehensive foreign direct investment strategy focused on technology
transfer and knowledge spillovers. Implementing sound macroeconomic
policies to control inflation and maintain a stable environment. And
finally, maintaining a flexible exchange rate policy with targeted
interventions.
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