The Short and Long Run Determinants of Foreign Direct Investment in Nigeria

Abstract

What determines foreign direct investment inflows has been a subject of controversy among scholars. As a result of the highlighted gap discussed in this study, the short and long run determinants of foreign direct investment and their effects on foreign direct investment inflow in Nigeria was investigated from 1986 to 2018. Data were analyzed with Augmented Dickey-Fuller and Phillips Perron unit root test, Autoregressive Distributed Lag and Pairwise Granger Causality techniques. Evidence of long run dynamic equilibrium relationship was established between foreign direct investment and its determinants. The short and long run coefficients revealed that government capital expenditure and inflation impede the inflow of foreign direct investment both in the short and long run while exchange rates serve as a bane to foreign direct investment in the long run. However, gross domestic product and trade openness were found to stimulate the inflow of foreign direct investment in the short and long run. The Pairwise causality result revealed that government capital expenditure, exchange rate and trade openness had independent causality with foreign direct investment while gross domestic product and inflation rate had unidirectional causality with foreign direct investment. Thus, the government should allocate more funds for the provision of enabling and investment enhancing the environment to promote foreign direct investment inflow. The study added value to previous studies by estimating the short and long run determinants of foreign direct investment using the more dynamic and robust technique of Autoregressive Distributed Lag developed by Peseran and Shin (1999).