Vector Error Correction Analysis of Foreign Direct Investment and its Effect on the Performance of Nigerian Economy (1990- 2018)

Abstract

Nigeria as one of the developing countries of the world has adapted a number of strategies aimed at accelerating growth and development of the domestic economy; thus, one of such is to attract foreign direct investment (FDI) into the country. Study by Andabai and Igbodika (2018) posited that in a globalized world no country is self-sufficient, indeed economies all over the world are expected to linked directly or indirectly together. Thus, this relationship is also made possible through foreign direct investment. The work of Uguegbe (2017) viewed foreign direct investment as a catalyst for growth and development in any modern economy; because, it stimulates domestic investment through increase in capital formation and facilitating technology transfer in the host countries. Hence, as a result, foreign direct investment has been considered as one of the most important sources of external inflow to the Nigerian economy over the years (Legbosi, 2017). The work of Ogbeke (2018) revealed some potential advantages of the foreign direct investment to the host economy as: to facilitates the utilization and exploitation of local raw material, introduces modern techniques of management and marketing, eases the access to new technologies, foreign direct investment inflow can be used for financing current account deficit etc. Study by Togbuko(2018) stated that government have been trying to lift the country out of the economic doldrums without achieving success as desired. One of the major constraint identified by the work of Ogbekondu (2018) is inadequate savings needed for the required investment. Hence, foreign direct investment is needed to reduce the difference between the desired gross domestic investments and domestic savings in an economy. Abstract: The study evaluated the Vector Error Correction analysis of foreign direct (FDI) investment and its effect on the performance of Nigerian economy; for the period 1990-2018. Secondary data were used and collected from Central Bank of Nigeria Statistical Bulletin. The study used Gross Domestic Product as the dependent variable to measure economic performance; whereas, Exchange Rate, Foreign Direct Investment and Inflation Rate respectively were employed as the explanatory variables. The result confirmed that about 78% short-run adjustment speed from long-run disequilibrium. The study revealed that foreign direct investment had a significant effect on Gross Domestic Product in Nigeria. Exchange rate was positive; but had an insignificant effect on Gross Domestic Product in Nigeria. Inflation rate had an insignificant effect on Gross Domestic Product. The coefficient of determination indicated that about 64% of the variations in economic growth can be explained by changes in foreign direct investment variables in Nigeria. The study concluded that foreign direct investment had significantly affected the growth and development of the Nigerian economy. The study recommended that the Government and policy makers should provide adequate infrastructure and policy framework that will be conducive for doing business in Nigeria, so as to attract inflow of FDI. The policy makers and government should formulate policies that will be favorable to local investors in order to complement the inflow of investments from abroad. Government should improve the investment climate in order to encourage domestic and foreign investors through infrastructure development.