A Test for Complementarity or Substitutability between Foreign Direct Investment (FDI) and International Trade: Evidence from Nigeria’s Non-Oil Sector

Abstract

This study investigated the dynamic relationship between foreign direct investment and trade in Nigeria’s non-oil sector between 1981 and 2015. Though the theoretical literature argues that there could be complementarity or substitutability between them, the empirical literature has remained inconclusive. Invoking the product life-cycle theory proposed by Vernon (1966) and employing the Autoregressive Distributed Lag (ARDL) framework, we examined the nature of the relationship between non-oil trade (both imports and exports) and inward non-oil FDI stock while controlling for real gross domestic product, real effective exchange rate, and average manufacturing capacity utilization. Our empirical results showed a significant complementary relationship between Nigeria's inward non-oil FDI stock and non-oil exports. Meanwhile, no relationship was observed between inward non-oil FDI stock, non-oil import, and non-oil total trade. To this end, inward FDI stock in Nigeria’s non-oil sector complements the sector’s exports, automatically boosting non-oil exports. We also established that economic growth reinforced the complementary relationship between inward FDI stocks in the non-oil sector and aggregated and disaggregated trade measures, particularly over the short-term horizon. Therefore, appropriate inward FDI stock is required to boost the export performance of Nigeria’s non-oil sector, which would help diversify the fiscal revenue and foreign exchange sources away from the traditional oil and gas sector. Keywords : Inward FDI stock, non-oil trade, Complementarity, Substitutability, Nigeria, JEL Classification: C51, F12, F23. DOI: 10.7176/JESD/13-22-03 Publication date: November 30 th 2022