Foreign direct investment and economic growth in Nigeria: A granger causality analysis

The main aim of this study is to establish if there is a causal relationship between Foriegn Direct Investment (FDI) and economic growth in Nigeria. This study used annual time series variables computed from natural logarithms of gross domestic product (GDP) at current prices, net inflow of FDI, inflation rate and exchange rates, covering a period of 27years that span from 1981 to 2007. The study utilized the Ordinary Least Square, Unit root test to test for stationarity of the time series and Granger causality test to establish the causal relationship between the variables. The stationarity test (unit root) showed that the included variables, gross domestic product (GDP), foreign direct investment (FDI), exchange rate (EXRATE) and inflation rate (INFRATE) were non-stationary at their level and first difference with 2 lags. They were thus integrated of order one, I(1). The Granger causality test was adopted and it showed that a causality relationship ran from FDIs to GDP and not from GDP to FDIs. The findings showed that there is a positive relationship between FDI and GDP which implies that FDI stimulates economic growth in Nigeria. It is imperative, therefore, that the enabling environment should always be provided in Nigeria in order to attract more foreign investment and further stimulate the country’s economic growth.