GROWTH EFFECTS OF FOREIGN DIRECT INVESTMENT AND FINANCIAL DEEPENING IN NIGERIA (1981-2018)

Abstract

This study investigates growth effects of foreign direct investment and financial deepening in Nigeria for the period 1981-2018. Data employed for this study were obtained from Central Bank of Nigeria Statistical Bulletin and World Development Indicators. Pairwise granger causality test and autoregressive distributed lag (ARDL) model were employed in the data analysis. Empirical results show that foreign direct investment (FDI) has positive significant effect on economic growth (GDP) in Nigeria both in the long and short runs. Financial deepening measured as broad money supply as a ratio of GDP (broad money velocity) has positive significant effect on GDP in Nigeria in the long run but the position is reversed to negative non-significant in the short run. In the long run, financial deepening indicator-credit to private sector as a ratio of GDP-, has negative non-significant effect on GDP in Nigeria while its influence is absent in the short run model. Findings also reveal a unidirectional causality from FDI to GDP. Likewise, unidirectional causality flows from GDP to each of the two financial deepening indicators, thus lending credence to the demand-following hypothesis. This study concludes that foreign direct investment and financial deepening have positive growth effects in Nigeria with causality flowing from foreign direct investment to economic growth and the latter granger-causing financial deepening in Nigeria. To boost economic growth, there is a need for Nigeria’s government to further develop the financial system and implement policies to stimulate FDI inflows to the country.