Long Run Relationship between Macroeconomic Variables and FDI in Nigeria

Abstract

It is evidence that foreign direct investment contributes to the survival of any developed or developing countries. It is paramount to find out the determinant of FDI performance as a result this paper is design to investigate the long run relationship between macroeconomic variables and foreign direct investments in Nigeria. The study makes use of data from the database of World Bank between 1980 to 2010. VAR and Impulse Function were the major econometrics techniques used for data analysis having performed unit root test and co integration. The result showed evidence of a negatively strong relationship between FDI and GDP in the country suggesting inverse relationship. EX, IF, MSP and IR exact direct impact on FDI. The Impulse- Response Function analysis of LNIR to LNFDI revealed that one standard deviation shock of LNIR to LNFDI was positive between the period 1 and 3 but became negative from period 3 to period 8. The shock was positive from period 9 to 12. The pattern of the effect of LNEX to LNFDI experienced negative trend behavior from 13 to 17 periods. Stability set in from period 18 to period 20. The graphical behavior of the shock of LNEX to LNGDP was observed to be positive from period 1 through to period 20. This indicates one standard deviation positive shock of LNFDI to LNEX. The channel of LNGDP behavior to LNFDI within the periods revealed positive trend from period 1 to period 20. In addition, the reaction of LNFDI to LNMSP was positive from period 1 to period 3 but became negative from period 4 through to period 20. We concluded that FDI survives in an atmosphere of robust GDP, Exchange rate and regulated money supply. Furthermore, it is recommended that government should work on the Interest rate and inflation rate policies to enhance foreign direct investment in Nigeria.

Keywords: Foreign Direct Investment, VAR, IRF, Stability, Periods