Causality and Dynamics of Foreign Direct Investment and Economic Growth in Nigeria: An Impulse Response Function Analysis

Abstract

This study, using the impulse response function (IRF) analysis and the Granger causality test, empirically examines the simultaneous interactions and responses to innovations or shocks between foreign direct investment (FDI) and real gross domestic product (RGDP) as well as the nature of causality between them. Annual time series data from 1970-2012 were employed in the analysis. The Johansen cointegration test identifies one cointegrating vector among the two core variables of interest. The impulse response function analysis reveals that economic growth responds positively to a one standard deviation positive shock to FDI, depicting a positive relationship. However, the accretion in economic growth exhibits a fluctuating or up-and-down trend all through the periods under consideration. Also, a one standard deviation positive innovation to economic growth causes FDI to increase, showing a positive relationship as well. On the other hand, the granger causality test result shows a unidirectional causal relationship between FDI and economic growth, with the former causing the latter. Therefore, practical policies and programmes that would help to maximize existing foreign investment so as to achieve a stable and steady economic growth which in turn would attract more foreign investment into the Nigeria economy should be urgently embark upon by the government and policy makers.

Key words: Economic growth, foreign direct investment, impulse response, granger causality.