Abstract
This paper employed the good governance index as a proxy for institutional quality to examine its moderating effect on the FDI-growth relationship in Nigeria from 2006 to 2020. The ARDL bounds testing approach was employed as the technique of analysis to ascertain the direct impact of FDI on economic growth and the indirect impact through the moderating effect of institutional quality (good governance). The paper provides evidence of a long term relationship between FDI and economic growth as well as a significant unconditional positive impact of FDI on economic growth. Regarding the interactive effect of institutional quality (good governance) on the FDI-growth effect, we find convincing evidence that institutional quality (good governance) alters the effect of FDI on economic growth favourably. Therefore, it is recommended that Nigeria strengthen its governance quality to benefit more from FDI and achieve better economic growth results. Keywords: FDI, economic growth, Institutional quality, ARDL, Nigeria DOI: 10.7176/JESD/12-22-07 Publication date: November 30 th 2021
Highlights
Economic growth is one of the essential benchmarks for every well-managed economy
Where Y being the dependent variable is Gross Domestic Product (GDP) growth rate which stands as a proxy for economic growth, Yt1 is the lagged value of GDP growth rate, foreign direct investment (FDI) is Foreign direct investment measured as a percentage of GDP, GOV is good governance used as proxy for institutional quality, HC is human capital development measure as primary school enrolment, LAB is labour, GCFC is gross fixed capital formation used as proxy for domestic investment, INFR is infrastructural facilities, TOP is trade openness measured as sum of exports and imports as a percentage of GDP, INF is inflation Where β0 is the intercept, β1- β6 are slope of the explanatory variables; Ln represents the natural logarithm of variables; and ε is the error term, t denotes the time dimension
This study provides an empirical analysis of the moderating effect of institutional quality on Nigeria's FDI- growth relationship from 2006 to 2020
Summary
Given the fact that the ARDL method can estimate a cointegrating vector containing both I(1) and I(0) series, it is still necessary to rule out the likelihood that any of the series is (2). The significant p-value at 5% level of significance proves the stationary status of the series While economic growth(GDP), foreign direct investment(FDI), human capital development (HC), the labour force(LAB), gross fixed capital formation(GFCF) and openness (OPN) attained stationary after first difference I (1), good governance(GOV) and inflation (INF) attained stationarity at level I (0). This mixed order of integration of the variables calls for the usage of the ARDL approach of cointegration. The null hypothesis of the presence of unit root can be rejected
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