Cointegration and Causality Between Return on Investment and Foreign Direct Investment in Nigeria

Abstract

Foreign direct investment (FDI) inflows into the Nigerian economy has not been stable. Notwithstanding this fluctuation, the country is still one of the largest destinations of FDI inflows in Africa. It is empirically unclear how return on investment affects FDI inflows in Nigeria. This paper investigates the effect of return on investment on FDI in Nigeria using yearly data for the period 1971 to 2015 by means of the (ARDL) approach. The study reveals the existence of a cointegration relationship among return on investment, electricity infrastructure, official exchange rate, real GDP growth, political instability, and FDI net inflows in Nigeria, It showed that both short-run and long-run relationships exist between return on investment and FDI net inflows, while both electricity and real GDP growth only has a long run relationship with FDI inflows. The Granger Causality Test reveals a unidirectional causality running from return on investment to FDI net inflows and not vice versa. The paper submits that return on investment, electricity infrastructure, and real GDP growth, exerted a positive and statistically significant influence on FDI net inflows in Nigeria. This shows they are important factors in determining FDI inflows. However, both official exchange rate and political instability did not have any significant effect on FDI net inflows both in the short-run and in the long-run. Thus, it is recommended that the Nigerian government should sponsor and host programs that will create the awareness that Nigeria is an investors’ haven.

Keywords: Foreign direct investment (FDI), return on investment, ARDL, Granger causality, Nigeria.