Causality nexus between trade, political instability, FDI and economic growth: Nigeria experience

Abstract

The purpose of this study is to examine the causal relationship between FDI inflow, volume of trade, political instability, and gross domestic product (GDP) in Nigeria using time series data from 1981 to 2014. The ADF and Phillips Perron (PP) tests were used to see whether all variables are stationary. Consequently, the Johansen and Juselius cointegration tests were employed to investigate the existence of long-run relationship among the variables. The findings indicated that there was a long-run relationship among the variables used in this study. The multivariate Granger causality test was carried out using the VECM approach to analyse the causal links among all the variables. A bidirectional causality was discovered between the FDI inflow and economic growth (GDP), but there was one-way direction between political instability and FDI, as well as between political instability and GDP. Apart from that, there was also one-way relationship between FDI and volume of trade within the stated period. The results from this study can be used as a guidance for policymakers on FDI, where the government can pay more attention on the issue of political instability and insecurity. The government needs to review and implement a strong, vibrant policy to ensure maximum security and peace in the country with the purpose of attracting more foreign investors.