


































American Interdisciplinary Journal of Business and 

Economics 
ISSN: 2837-1909| Impact Factor : 8.87 

Volume. 12, Number 1; January-March, 2025; 

Published By: Scientific and Academic Development Institute (SADI) 

8933 Willis Ave Los Angeles, California 

https://sadijournals.org/index.php/AIJBE| editorial@sadijournals.org 

 

 

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IMPACT OF TAXATION AND FOREIGN DIRECT INVESTMENT ON 

ECONOMIC DEVELOPMENT IN NIGERIA 
 

Ojedokun Olatunji Dauda 

Department of Business Administration, Faculty of Management Sciences, Lagos State University 

                                                                Email: dokundan@yahoo.com 

                                                      DOI: https://doi.org/10.5281/zenodo.14944383 

Abstract: Taxation is a vital tool that enables infrastructural development, which paves the way for FDI that 

enhances economic development. The objective of this study is to examine the impact of taxation and foreign 

direct investment on economic development in Nigeria while accounting for the country’s poverty rate. The World 

Bank Development Indicator provided the secondary data for this study, which covered the years 1991 to 2023. 

The unit root test illustrated that the unit root that could cause the wrong conclusion has been eliminated. The 

VAR and VECM illustrated both the short- and long-term links of economic development with taxation and FDI 

while adjusting for the poverty rate. The FMOLS indicates a long-run impact of taxation on economic growth, 

while the OLS regression establishes that while poverty reveals a negative influence, taxation and FDI have a 

positive impact on economic development .Thus, the Nigerian government should implement adequate fiscal 

policy measures to combat the high poverty rate that contributes to tax evasion, and the appropriate tax authority 

should sensitise the entire citizenry about the importance of paying taxes as well as implementing a new tax 

reform bill that will improve infrastructural growth, attract FDI, and enhance economic development. 

Keywords: Taxation, FDI, Economic development, VECM, FMOLS, OLS Regression 

 

Introduction 

A fundamental part of a nation’s budgetary plan, taxation proxied by tax revenue is important for the stability and 

economic growth of every country (Adefolake & Omodero, 2022). There is currently ongoing discussion of a 

new tax reform bill to foster economic growth and development in Nigeria (Oluwadele, 2024). It is mostly the 

source of money for government expenditure on infrastructure and public services such as health, education, and 

transportation, as well as infrastructure. Mostly, one can categorise tax revenue as either direct or indirect taxes. 

Personal income tax and corporate tax are two examples of direct taxes, those levied directly on individuals and 

companies based on their income or profitability. At numerous points of manufacturing and distribution, goods 

and services pay indirect taxes, including value-added tax (VAT) and excise taxes. Both types of taxes are 

necessary for a balanced tax system since they serve to diversify income sources and lower the risks related to 

depending too much on one tax type (Bird & Zolt, 2021). Recent trends suggest that broadening the tax base and 

raising tax compliance will be increasingly important to boost income and create an enabling environment for 

foreign investment. Among the numerous strategies governments are applying to address the challenges with tax 

mailto:dokundan@yahoo.com


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revenue collection are improving administrative efficiency, leveraging technology, and implementing 

comprehensive tax modifications. For example, digital tax administration solutions have drastically improved the 

tax collection process efficiency and lowered tax evasion opportunities (OECD, 2022). The economic policy of a 

nation is primarily dependent on taxation, which influences not only the overall economic climate but also the 

provision of public goods and services, affecting government spending capacity, impacting stability, enabling 

foreign direct investment, and subsequently enhancing economic development.  

There are various ways in which taxation shapes economic development. First, adequate tax revenue enables 

governments to finance significant infrastructure improvements, including public transit systems, bridges, and 

highways, thereby increasing economic activity and employment prospects. On the other hand, tax collections 

support social services, including education and healthcare, which are basic for long-term economic growth and 

help to build human capital (IMF, 2021). Economic growth typically correlates with effective tax collection. A 

well-organised tax system that provides an equitable distribution of tax burdens and promotes compliance helps 

strengthen the overall economic stability of a country. Higher tax revenue as a percentage of GDP in countries, 

for instance, seems to have stronger infrastructure and public services, which in turn serve to support sustainable 

economic development (Piketty, 2020). Still, various factors influence the effectiveness of tax revenue collection: 

taxpayer compliance degree, tax policy design, and tax institution quality. Inadequate resources in tax 

administration or outdated systems might lead to inefficiencies that compromise efforts at income collection and 

create appreciable tax losses. Furthermore, influencing revenue generation is the discouragement of businesses 

and people from following tax laws arising from complex tax rules and costly compliance expenses (Slemrod, 

2019). 

Taxation and foreign direct investment greatly contribute to economic development (Alabi, 2019). Funding public 

services and infrastructure helps establish an environment suited for economic activity and; hence, assists 

infrastructure growth. The consequence of tax revenue on economic development shows that governments’ 

funding of infrastructure projects required for economic growth comes from sufficient tax revenue. These 

expenses improve transportation, communication, and utilities, boosting business operations and increasing the 

standard of living. Taxes cover social programs, including social security, healthcare, and education. Stability, 

long-term economic growth, and long-term economic development are all based on these projects. They affect 

human capital development by giving the government a steady flow of money; an effective tax system can help 

keep the economy stable. This consistency is what helps economic planning and keeps investor confidence 

(Auerbach et al., 2021). Even if it is somewhat crucial, tax collection presents several challenges. Tax evasion 

and avoidance undermine efforts at income gathering, which is sometimes due to the high poverty rate in 

developing nations like Nigeria. Older systems, inadequate resources, and staff training could all impede effective 

tax collection and compliance (Tanzi & Shome, 1993; Kon-Sapawi et al., 2022). Depending on economic 

variances, the fairness and efficiency of tax systems could be altered. Maintaining public support and compliance 

calls for fairness and freedom from unjustly burdening low-income individuals’ tax policies (Bird & Zolt, 2021). 

Looking at tax revenue on a global scale shows that different countries, including Nigeria, handle it in different 

ways and with different results. The goal of this study is to add to the body of research by examining how taxation 

and foreign direct investment affect economic growth in Nigeria while accounting for the country’s poverty rate. 

Literature review and hypothesis development 

The theoretical underpinning of this study includes the public choice theory and the endogenous growth theory. 

The public choice theory posits that the government consistently seeks to augment tax revenue to fund its 



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expenditures. Simultaneously, the government uses tax funds to make decisions regarding the allocation of 

resources to manage economic activities. Hence, the allocation of funds by the government can play a substantial 

role in fostering economic expansion. Consequently, greater government revenue leads to enhanced economic 

growth. There is evidence from Tosun and Abizadeh (2005) that supports this argument. They studied the 

relationship between taxation and economic growth in 21 OECD (Organisation for Economic Cooperation and 

Development) member nations between 1980 and 1999. For their analysis, they employed a random-effects model 

(REM). The results show that tax revenue—specifically, personal and corporate taxes—and economic growth are 

strongly and statistically significantly correlated. Similarly, Ocran (2011) used a vector autoregression (VAR) 

model to investigate how the fiscal policy affected South Africa’s economic growth. The findings showed that 

tax revenue and economic growth were positively correlated. However, the impact on economic growth of solely 

implementing tax revenue is more delayed. However, according to the endogenous growth theory, taxes stimulate 

economic growth. This contrasts with the neoclassical growth theory of Solow and Swan, who claimed that taxes 

have no lasting impact on economic growth (Romer et al., 2010). 

Moreover, Canavire-Bacarreza et al. (2013) conducted a study investigating the influence of taxation on economic 

growth in Latin America. They used vector autoregressive (VAR) models for each nation. Nonetheless, their 

conclusions were indeterminate. The researchers performed a comprehensive analysis of panel data from three 

distinct categories of countries: Latin American nations, developing nations, and developed nations. The findings 

indicate a favourable association among personal income tax, corporate income and economic growth in Latin 

American countries. However, there is no empirical evidence to support this association in either emerging or 

developed countries. Babatunde et al. conducted a study in 2017 to investigate the correlation between taxation 

and economic growth in Africa from 2004 to 2013. Descriptive statistics and unit root tests were employed to 

assess the normality and stability of the GDP and tax variables before estimation. The study’s findings reveal a 

positive correlation between tax revenue and GDP in Africa, suggesting that tax income contributes to economic 

growth. 

Ujkani and Gara (2023) investigated the correlation between inflation and tax revenue in Latin American 

countries by employing econometric models. The research revealed a negative correlation between inflation rates 

and tax revenue, with tax evasion intensifying the situation. The research concluded that inflation control is 

indispensable for the preservation of tax revenue levels and the encouragement of economic expansion. Ujkani 

and Gara suggested employing coordinated fiscal and monetary policies to tackle inflation and tax evasion issues. 

Abd Hakim et al. (2022) implemented regression analysis and cross-country comparisons to examine the 

relationship between unemployment and tax revenue. The research concluded that the government's finances were 

further compromised by tax evasion, which led to a decrease in tax revenue due to the high unemployment rate. 

The conclusion emphasised the importance of policies that proactively address both unemployment and tax 

evasion to increase economic growth and tax revenue. The authors promoted comprehensive reforms to 

employment and taxation.  

Joseph et al. (2019) examined the relationship between tax revenue and foreign direct investment (FDI) in 

Nigeria’s emerging economies. As determined by the regression analysis, the study found that FDI was 

discouraged by high levels of tax revenue, which had a detrimental effect on economic development. They 

concluded that the promotion of economic development and the attraction of foreign investment are contingent 

on the reduction of tax evasion. The recommendation was to improve anti-evasion measures to create a more 

favourable investment environment. Ayenew (2016) used a cross-sectional econometric approach to examine the 



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correlation between tax revenue and economic stability in Ethiopia. The study determined that the expansion of 

tax revenue contributed to economic stability; however, these benefits were compromised by tax evasion. Harris 

concluded that the implementation of effective measures to counteract tax evasion is essential for the increase in 

tax revenue, which is contingent on economic stability.  

Wright and Clark (2020) investigated the influence of inflation on tax revenue in Sub-Saharan Africa by 

employing regression analysis and cross-sectional data. The research demonstrated that high inflation rates had a 

detrimental impact on tax revenue, which was further intensified by tax evasion. Wright and Clark concluded that 

inflation control is indispensable for the preservation of tax revenue and the encouragement of economic 

expansion. Martinez (2020) examined the relationship between economic development and poverty in African 

countries, including Nigeria. Tax evasion, associated with increased poverty rates and a decrease in GDP, further 

exacerbated this issue. Martinez concluded that the primary methods of promoting economic development are to 

address destitution and improve tax compliance. The recommendation was to integrate poverty alleviation 

initiatives with tax reform initiatives to create a favourable investment environment. 

John (2016) examined the impact of direct foreign investment on Nigeria’s economic growth from 1981 to 2015 

using a multiple regression analysis. According to the study, Nigeria's GDP shows that foreign direct investment 

has a positive and significant effect on the country's economic growth. According to the study, GDP was 

positively but marginally impacted by the exchange rate. The effect of foreign direct investment (FDI) on 

Pakistan’s economic growth between 1991 and 2015 was examined by Ali and Hussain (2017). Regression and 

correlation analyses were used in the study. Their findings demonstrated that FDI aided Pakistan’s economic 

expansion. Alabi (2019) investigated the effect of foreign direct investment on Nigeria’s economic growth by 

using multivariate time-series analysis. According to the study, FDI significantly boosts Nigeria's economic 

expansion. Davis (2022) implemented regression analysis and a cross-sectional methodology that showed that 

economic development was negatively impacted by reduced tax compliance, which was linked to elevated poverty 

levels. Davis concluded that the improvement of economic conditions for the impoverished could promote 

economic development and enhance tax compliance. Sullivan and Clark (2021) implemented econometric 

modelling techniques to investigate the influence of tax revenue on economic development in Nigeria. The 

research concluded that GDP growth was positively influenced by increased tax revenue; however, these benefits 

were limited by high levels of tax evasion. Sullivan and Clark concluded that the improvement of tax revenue is 

essential for economic development, with effective tax enforcement being of the utmost importance. The 

recommendation was to strengthen tax policies and improve revenue collection systems. Additionally, Adebanjo 

et al. (2024) established that taxation has a significant positive impact on the developed nations’ economic 

performance. The literature review's argument develops the following hypotheses: 

H1: Taxation has a positive significant impact on economic development. 

H2: FDI has a positive significant impact on economic development. 

Data and Methodology 

Data description 

The secondary data used in this research was collected from the World Bank development indicators from 1991 

to 2023 based on their availability to avoid missing values using purposive sampling. The collected dataset 

includes the gross domestic product (GDP), which is the total monetary value of all the goods and services that a 

country produces each year and is measured in billions of USD; the foreign direct investment (FDI), which is the 

return on foreign investments made in a country each year and is also measured in billions of USD; taxation, 



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which is the amount of money that the government gets from people and businesses to pay for building up 

infrastructure, which is measured as a percentage of GDP; and poverty, which is the situation where people cannot 

meet their basic needs for a good quality of life, which is measured as a percentage. 

Methodology 

This study applied a quantitative research design to analyse the impacts of taxation and FDI on economic 

development in Nigeria while incorporating the poverty rate. This study used several quantitative methods to 

analyse the data collected. These included the unit root test, ordinary least square (OLS) regression, fully modified 

ordinary least square (FMOLS), Johansen cointegration, the vector autoregression (VAR) model, and the vector 

error correction model (VECM). The choice of this quantitative method was because the dataset is on a continuous 

scale, and it satisfies the appropriate diagnostic tests, which makes it suitable for this study. 

Unit root test 

The Augmented Dickey-Fuller method was employed to perform a unit root test as part of the research. The 

objective of the test is to determine the stationarity of the series. This is achieved by comparing the alternative 

hypothesis, which asserts that the series is stationary, with the null hypothesis, which is based on the presence of 

a unit root. The test is essential for identifying and eliminating any non-stationarity that could result in incorrect 

conclusions or spurious correlations. The unit root test is essential for identifying the elimination of unit roots that 

may lead to erroneous outcomes (Adebanjo et al., 2024). 

OLS Regression and FMOLS 

This study used the functional model technique, employing OLS regression to establish the connection between 

the variables and FMOLS to examine the long-term influence of the regressors on the dependent variable, which 

was also adopted in the work of Adebanjo et al. (2024). The functional link between the two models given above 

can be defined as follows: 

𝐺𝐷𝑃 =  𝑓(𝑇𝑎𝑥𝑎𝑡𝑖𝑜𝑛, 𝐹𝐷𝐼, 𝑃𝑜𝑣𝑒𝑟𝑡𝑦)                                                                                               [ 1]        

The OLS regression model specification will take the following form:  

𝐺𝐷𝑃𝑡  =  𝛽0 + 𝛽1(𝑇𝑎𝑥𝑎𝑡𝑖𝑜𝑛)𝑡  + 𝛽2(𝐹𝐷𝐼)𝑡  +  𝛽3(𝑃𝑜𝑣𝑒𝑟𝑡𝑦)𝑡  

+ 𝜀𝑡                                                                                                                                  [2] 

GDP is the dependent variable and the main regressors or independent variables include Taxation and FDI, while 

the control variable is the Poverty rate. The εt is the stochastic error term that accounts for other factors not 

included in the model. The β0 is the constant term while the β1 to β3 are the coefficient estimates of the regressors. 

Johansen Cointegration, VAR, and VECM 

The Johansen cointegration test can be used to see if the variables that have been combined show cointegration 

at levels one or two after the first difference, or at most two after the second difference. This test permits several 

cointegrating relationships. Two variations in the Johansen cointegration test, the trace and max eigenvalue, are 

considered foundational for inferences or decision-making. There is a long-term link between the variables when 

there is co-integration. This study suggested the vector error correction model (VECM) and the vector 

autoregressive model (VAR), with VECM coming first. The VAR helps to examine the short-term connection 

between the variables, while the VECM is suitable for the long-term link between the variables of interest. This 

research interest also includes the need to examine both the short-run and long-run link of taxation and foreign 

direct investment with the economic development of Nigeria; hence, the need to also specify VAR and VECM. 

Thus, the VAR model can be illustrated as follows: 



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𝑌𝑡 = 𝜑𝑖 + 𝛷1𝑌𝑡−1 + ⋯ + 𝛷𝑝𝑌𝑡−𝑝 + 𝜀𝑡                                                       [3]                                               

Where 𝑌𝑡 represents the vector of the endogenous stationary series of GDP, Taxation, FDI and the poverty rate. 

Since cointegration exists among the endogenous variables, the vector error correction model (VECM) was also 

specified as follows: 

𝑌𝑡 = 𝜑𝑖 + 𝛱𝑌𝑡−1 + ∑ 𝛷𝑗

𝑝−1

𝑗=1
∆(𝑌𝑡−𝑗) + 𝜀𝑡                                                      [ 4 ]                                            

Where 𝛱𝑌𝑡−1 is the error-correction term,  𝜑𝑖 is the constant term, 𝑝 is the estimated number of lags estimated 

and 𝛷𝑗 is the coefficient estimate of the endogenous series. 

Diagnostic tests 

The diagnostic tests, such as the normality, multicollinearity using the variance inflation factor (VIF), 

autocorrelation, and heteroscedasticity, were conducted to validate the fitted OLS regression, while the VIF and 

normality tests were carried out to validate the fitted FMOLS and the normality test, as well as the autocorrelation 

test, which was also conducted to validate the VAR and VECM. The sole purpose of the diagnostic tests was to 

establish the validity of the models applied in this study. 

Results and Discussion 

Results 

Table 1: Descriptive Statistics 

 GDP Taxation FDI Poverty 

 Mean  278.8780  18.3339  3.0248  91.5994 

 Median  278.2608  20.0800  2.0054  92.2500 

 Std. Dev.  170.2908  8.8527  2.6001  1.1918 

 Skewness  0.0504 -0.0699  0.8788 -0.1910 

 Jarque-Bera  3.0396  3.5418  4.4369  2.4720 

 Probability  0.2188  0.1702  0.1088  0.2905 

 Observations  33  33  33  33 

Source: Author’s Computation 

Table 1 shows that the average GDP is about 279 billion USD with a variability of about 170 billion USD, the 

average taxation is about 18% of GDP, the average FDI is about 3.0 billion USD with a variability of about 2.6 

billion USD, and the average poverty rate is about 92% with a variability of about 1.2% during the period under 

review. The normality test of all the datasets used with Jarque-Bera showed that the skewness is close to zero and 

the probability values are higher than the 5% significance level. This means that the datasets used in this study 

are normally distributed. 

Table 2: Unit Root Test 

Differenced Series Test-Statistic        P-value      Order Level 

GDP -4.49 0.0012 Order 1 

Taxation -5.58 0.0001 Order 1 

FDI -7.00 0.0000 Order 1 

 Poverty rate                                          -7.29                0.0000               Order 1 

Source: Author’s Computation 

After the first difference, Table 2 demonstrates that the series including the GDP as a stand-in for economic 

development, taxes, foreign direct investment, and poverty rate are statistically significant at the 5% level, 



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suggesting that the unit root that could produce inaccurate findings has been removed. This suggests that the 

series can be subjected to additional econometric studies. 

Table 3: OLS Regression Model 

Overall Model P-value = 0.0000 

GDP Coefficients Test-Statistics P-value VIF 

Taxation 6.889  2.97 0.006 3.49 

FDI 11.431  2.48 0.019 1.18 

Poverty rate -79.231 -4.82 0.000 3.17 

Constant 7628.171  5.19 0.000 NA 

R-squared = 0.8789 

Adj R-squared = 0.8663 

 

Diagnostic tests: 

Normality test with Jarque-Bera: P-value = 0.4160 

Autocorrelation Test: P-value = 0.0527 

Heteroscedasticity: P-value = 0.2464 

Source: Author’s Computation 

 

Table 3 indicates that the overall model P-value is below 0.05, the threshold for significance, suggesting that the 

OLS regression model is statistically significant at the 5% level. This implies a significant linear relationship 

between economic development, taxation, and FDI, while controlling for the poverty rate in Nigeria. The 

coefficient estimates of taxes have a strong positive influence on economic development, suggesting that an 

increase in taxation will enhance economic development, consistent with the first study hypothesis (H1). The 

coefficient estimates of FDI exhibit a strong positive effect on economic growth, indicating that an increase in 

FDI will enhance economic development, hence corroborating the second study hypothesis (H2). The coefficient 

estimates indicate that the poverty rate negatively and significantly affects economic development, implying that 

increases in the poverty rate decrease economic development. Furthermore, the Variance Inflation Factor (VIF) 

for all regressors is below 5, signifying that the Ordinary Least Squares (OLS) regression model is free from 

multicollinearity concerns. The normality test, autocorrelation, and heteroscedasticity test showed that their 

respective probability values exceeded the 0.05 significance level, indicating that the model satisfies the normality 

of the residuals and does not have the problems of autocorrelation and heteroscedasticity, satisfying the OLS 

assumptions. The R-squared value of 0.8789 indicates that the 87.89% variability in the economic development 

can be explained by taxation, FDI and the poverty rate. 

Table 4: FMOLS 

GDP Coefficients Test-Statistics P-value VIF 

Taxation 6.729 2.626 0.0138  3.35 

FDI 11.951 2.339 0.0267  1.17 

Poverty rate -81.868 -4.504 0.0001  3.06 

Constant 7866.352 4.843 0.0000  NA 

R-squared = 0.8720 

Adj R-squared = 0.8580 

 

Diagnostic test: 

Normality test with Jarque-Bera: P-value = 0.3995 



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Source: Author’s Computation 

Table 4 indicates that the coefficient estimates for taxation and foreign direct investment (FDI) exert a significant 

positive influence on economic development in the long run at the 5% level, signifying that an escalation in 

taxation and FDI fosters economic growth over time. Conversely, the coefficient estimate for the poverty rate 

demonstrates a significant negative impact on economic development in the long run, implying that an increase 

in the poverty rate leads to a deterioration in economic development over the same period. The R-squared score 

of 0.872 signifies that 87.2% of the variation in economic development is attributable to taxation, foreign direct 

investment, and poverty. The Variance Inflation Factor (VIF) of the Fully Modified Ordinary Least Squares 

(FMOLS) regressors is below 5, signifying the absence of multicollinearity in the model. Furthermore, the 

normality test of the FMOLS residuals revealed a p-value greater than 0.05, indicating that the residuals were 

normally distributed, thereby affirming the appropriateness of the FMOLS methodology. 

Table 5: VAR Model 

VAR Equation Lag Parameters R-squared P-value 

ΔGDP 9 0.9406 0.0000 

ΔTaxation 9 0.9263 0.0000 

ΔFDI 9 0.8195 0.0000 

ΔPoverty 9 0.8829 0.0000 

Normality test with Jarque-Bera: P-value = 0.4885  

Autocorrelation test: P-value = 0.1834 

Source: Author’s Computation 

Table 5 shows that the differenced endogenous series of GDP, taxation, FDI and poverty have 9 estimated lag 

parameter values with their corresponding P-values less than 0.05 significant level, suggesting that there is a 

short-run relationship between the economic development, taxation and FDI while controlling for the poverty rate 

in Nigeria. 

Table 6: Johansen Cointegration and VECM 

Johansen tests for Cointegration: 

Trace statistic at the first cointegrating equation: 

56.71 

Critical value 5% at first cointegrating equation: 

47.21 

VECM Equation Lag Parameters R-squared P-value 

ΔGDP 6 0.1765 0.0087 

ΔTaxation 6 0.2556 0.0083 

ΔFDI 6 0.3564 0.0314 

ΔPoverty 6 0.3211 0.0060 

Normality test with Jarque-Bera: P-value = 0.1917 

Autocorrelation test: P-value = 0.3700 

Source: Author’s Computation 

Table 6 shows that the trace statistics of about 56.71 for the Johansen cointegration exceed the critical value of 

47.21 at the 5% level, suggesting that there is an appearance of cointegration among the series, which suggests 

the fitting of the VECM. The VECM shows that the differenced endogenous series having 6 estimated lag 

parameters have probability values less than 0.05 significant level, indicating that there is a long-run relationship 

between the economic development, taxation and FDI while accounting for the poverty rate in Nigeria.  



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Figure 1 illustrates the combined graph of the upward trend pattern of economic development, declining rate of 

taxation, constant level of poverty, and low state of the FDI. 

 
Figure 1: Combined graph of GDP, Taxation, FDI and Poverty against Year 

Discussion 

The analysis indicates that the average GDP is approximately 279 billion USD, exhibiting a variability of around 

170 billion USD. The average taxation stands at about 18% of GDP, while the average FDI is roughly 3.0 billion 

USD, with a variability of approximately 2.6 billion USD. Additionally, the average poverty rate is about 92%, 

showing a variability of around 1.2% during the reviewed period. This corresponds with Nigeria’s present 

economic situation, which is characterised by low foreign direct investment and taxation, alongside a rise in the 

poverty rate. 

Furthermore, the unit root test demonstrates that the presence of a unit root, which could yield erroneous results, 

has been eradicated, indicating that additional study may proceed. The OLS regression model demonstrates 

statistical significance at the 5% level, signifying a substantial linear association between economic development, 

taxation, and FDI, while controlling for the poverty rate in Nigeria. The coefficient estimates of taxation exhibit 

a significant positive effect on economic development, suggesting that an increase in taxation will enhance 

economic development, corroborating the first research hypothesis (H1) and reinforcing both the public choice 

theory and the endogenous growth theory. The coefficient estimates of FDI exhibit a strong positive effect on 

economic growth, indicating that an increase in FDI will enhance economic development, hence corroborating 

the second study hypothesis (H2). This aligns with the research of Sullivan and Clark (2021), Adebanjo et al. 

(2024), John (2016), and Alabi (2019). Simultaneously, the coefficient estimates of the poverty rate exhibit a 

strong negative effect on economic growth, indicating that rises in the poverty rate led to a deterioration in 

economic development, corroborating the findings of Davis (2022). 

The estimated FMOLS indicates that the coefficients for taxation and FDI exert a significant positive influence 

on economic development in the long run at the 5% level, suggesting that increases in taxation and FDI enhance 



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economic development over time. Conversely, the coefficient for the poverty rate demonstrates a significant 

negative impact on economic development in the long run, implying that an increase in the poverty rate leads to 

a decline in economic development over time. The VAR model indicates a short-term relationship among 

economic development, taxation, and FDI, while controlling for the poverty rate in Nigeria. The Johansen 

cointegration test suggests the presence of cointegration, warranting the application of the VECM. The estimated 

VECM demonstrates a long-term relationship among economic development, taxation, and FDI, while 

considering the poverty rate in Nigeria. 

Conclusion 

Taxation is an essential mechanism that facilitates infrastructural development, hence attracting foreign direct 

investment that promotes economic growth. This study aims to analyse the effects of taxation and foreign direct 

investment on Nigeria's economic development, considering the nation's poverty rate. The study indicates that 

taxation and foreign direct investment (FDI) exert a significant positive influence on economic development, 

suggesting that increases in both taxation and FDI will enhance economic growth. Conversely, the poverty rate 

has a significant negative effect on economic development, implying that increases in poverty contribute to a 

decline in economic progress. 

The findings indicate that taxation and foreign direct investment (FDI) exert a significant positive influence on 

economic development in the long term, suggesting that increases in taxation and FDI enhance economic growth 

over time. Conversely, the poverty rate has a significant negative impact on economic development eventually. 

Consequently, the Nigerian government should enact effective fiscal policies to address the elevated poverty rate 

that contributes to tax evasion. Additionally, the relevant tax authority must educate the entire populace on the 

significance of tax compliance and implement the new tax legislation aimed at fostering infrastructural 

development, attracting foreign direct investment, and promoting economic growth. 

References 

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