Foreign Direct Investment and Economic Growth in Nigeria: Evidence from Bounds testing and ARDL Models*

Abstract

This study investigated the relationship between foreign direct investment (FDI) and economic growth in Nigeria. Bounds testing approach and Autoregressive Distributed Lags (ARDL) model were used in model estimation for the period covering 1981- 2013. Results overwhelmingly show evidence that a long run (cointegrating) relationship exists between FDI and economic growth. Our error correction model was negative and statistically significant and had an error correction of approximately %43. In the short run, FDI has a small positive but insignificant effect on growth while in the long run, it has a small negative and insignificant effect. The study also examined the effect of international trade and government’s macroeconomic policies on the model and found that while economic policy had no significant effect, international trade had a strong impact on growth. Based on its findings, the study called for a review of our national policy on education to emphasize practical vocational and entrepreneurial skills in order to enhance the productivity of human resources. It also recommended that economic policy be used as a tool to diversify FDI away from the oil sector to the agricultural and manufacturing sectors where there is high potential for job creation and where growth would more easily translate to development.

Keywords: Cointegration, Economic Growth, Error Correction Model, Foreign Direct Investment.

JEL classification: E22, F21.