The Effect of Foreign Direct Investment on Nigeria Economic Growth

Abstract

This study examines the effect of Foreign Direct Investment (FDI) on economic growth in Nigeria, with particular emphasis on the short-run relationship, causal direction, and overall effect of FDI on economic performance. The study employs annual time-series data covering 1983–2025, with real Gross Domestic Product (RGDP) serving as the measure of economic growth, while inflation and exchange rate are included as control variables. The study adopts the Autoregressive Distributed Lag (ARDL) framework to investigate the dynamic relationship between FDI and economic growth, complemented by the Granger causality test to establish the direction of predictive causality. Preliminary stationarity results indicate a mixed order of integration, with the variables integrated at levels and first differences, and none integrated beyond order one, thereby supporting the use of the ARDL approach. The selected ARDL model is ARDL (3,2,1,0). The bounds testing procedure does not provide evidence of a long-run cointegrating relationship among the variables at the 5% significance level. The short-run error correction results, however, indicate that FDI has a statistically significant negative effect on economic growth in Nigeria. This finding suggests that the growth contribution of foreign investment may be constrained by weak domestic linkages, limited technology and knowledge spillovers, imported inputs, profit repatriation, and inadequate absorptive capacity. The Granger causality test further reveals a unidirectional predictive relationship running from economic growth to FDI, while FDI does not Granger-cause economic growth. Diagnostic tests indicate that the estimated model is free from significant serial correlation, heteroskedasticity, and functional-form misspecification at the 5% level. The study concludes that attracting FDI alone may not automatically translate into higher economic growth and recommends policies that strengthen domestic productive capacity, local value addition, technology transfer, and the absorptive capacity of the Nigerian economy.