Oil Price Shocks and Foreign Direct Investment (FDI): Implications for Economic Growth in Nigeria (1980-2014)

Abstract

High Oil price fluctuations have been a common feature in Nigeria and these have considerably constituted a major disturbance in the foreign direct investment (FDI) to the Nigerian economy despite various reforms introduced and implemented by Nigerian authorities to attract FDI. The over-reliance on oil production for income generation combined with local undiversified revenue and export bases is an issue for concern. The linkage amongst foreign direct investment (FDI), oil price and export and economic growth are still a vital subject in the developing economies. In practice, FDI inflows consider a one of the source of a long run economic growth (Bosworth, Collins et al. 1999) and as a crucial source for increasing the capital stock of a country (Barro and Sala-i-Martin, 1995). An increase in the level of aggregate export is also a significant policy towards the reinforcement level of economy (Tyler, 1981). The study is to examine the effect of oil price shock on foreign direct investment (FDI) in Nigeria. Furthermore to examine the extent to which the interaction of oil price and FDI affect Nigeria’s economic growth in the long-run Nigeria.Using structural vector autoregression (SVAR) methodology, the effects of crude oil price fluctuations on foreign direct investment (FDI) and economic growth were examined. After appropriate robustness checks, the study finds out that oil price shocks insignificantly retards economic growth while oil price itself significantly improves it and FDI. The significant positive effect of oil price on FDI and economic growth confirms the conventional wisdom that oil price increase is beneficial to oil-exporting country like Nigeria. Shocks however create uncertainty and undermine effective fiscal management of crude oil revenue; hence the negative effect of oil price shocks. The study suggests strongly that diversification of the economy to other minerals resources as a source of revenue.

Keywords: Oil price shock, FDI, GDP.