Transforming the Nigeria Economy through Foreign Direct Investment: The Role of Financial Development

Abstract

The paper examines the causal relationship between foreign direct investment, the significance of the country’s financial system development and economic growth over the period 1981-2013. The study moved away from the standard approach of estimating the effect of FDI on economic growth, by incorporating financial development to examine its role in attracting FDI for the promotion of growth process. Using time series data published in the 2014 statistical bulletin by central bank of Nigeria, the study investigated the time series properties of the variables employing the Augmented Dickey Fuller test approach, and adopted the multivariate autoregressive test to confirm the existence of causal relationship among the variables of study. The result confirmed the existence of bi-directional causality among the variables, except the ratio of money supply to economic growth which showed a unidirectional causality from GDP to MSS. The paper suggests the need for a comprehensive and sequential reform of the financial system and sound articulation of economic policy for continued attraction of more FDI to boost economic growth.

Keywords: FDI, Financial Development, Economic Transformation, Cointegration