An Analysis of the Impact of Macroeconomic Variables and Foreign Direct Investment in Nigeria: A VECM Granger Causality Framework

Abstract

This study examines the impact of macroeconomic variables on foreign direct investment in Nigeria over the period of 1981 to 2014. The data for the research was taken from Central Bank of Nigeria (CBN). Based on empirical analysis and econometrics technique, co integration method was adopted to measure the long run relationship between macroeconomic variables (economic growth, exchange rate, inflation-consumer price index, and oil price) and foreign direct investment and the direction of causality between the variables using VECM Granger causality framework plus variance decomposition and impulse response for robust analysis. The result from Johansen’s estimation revealed FDI and macroeconomic variables have at least one common stochastic trend driving the relationship between them. The results from VECM are as follows; that there is long-run unidirectional causality between FDI and real GDP, whereas, in the short run causality do not run from any direction. There is bidirectional causality between FDI and exchange rate. However; there is no causal relationship between in the short run. There is also a noticeable unidirectional causality running from inflation rate captured by consumer price index to FDI in the short run. Bidirectional causality between FDI and Oil price was reported in the long run. These results could be a guide to policy makers in analysing the FDI inflow into the Nigerian economy as thus policies should aim at improving stock improving the level of infrastructure on the continent, opening up and liberalizing trade, strengthening institutions and reducing macroeconomic instability will be beneficial for FDI flows to the continent. Finally, policies aimed at attracting FDI are necessary because higher FDI flows can cause more banking and financial development. Also, government should strengthen the political institutions and adopt democratic principles that will ensure stability within the polity. The current crisis in the Niger-Delta region has been a major obstacle to crude oil production. The restoration of peace in the region will, in turn, too more foreign investment to Nigeria. Finally, the government should invest more in infrastructure (like power, energy, transportation, telecommunication, etc,) so as to enhance the competitiveness of the environment of investment and ultimately increase FDI inflows. All of these should be complemented with the on-going war on corruption.