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THE EFFECT OF FOREIGN DIRECT INVESTMENT ON 

ECONOMIC GROWTH IN NIGERIA, 1999 - 2023 

 
1Ogbonna Obinna Bright and 2Prof. Mike Anyanwaokoro 

1Department of Banking and Finance, ESUT Business School, Enugu, Enugu State. 
2Department of Banking and Finance, Enugu State University of Science and Technology, Enugu 

State. 
*Corresponding Author: brightogbos@hotmail.com 

                                                 DOI: https://doi.org/10.5281/zenodo.14626833 

 

 

Abstract: This study assessed effect of foreign direct investment (FDI) on economic growth in 

Nigeria using a 24-year annual time series data ranging from 1999-2022, and obtained from World 

Development Indicators (WDI). The specific objectives examined effect of FDI and foreign exchange 

rate (FEXR) on economic growth (measured by GDP growth rate). Ex-post facto design was 

adopted because our data were secondary in nature. Data stationarity was achieved after series 

were subjected to stationarity (unit root) test. Though the variables became stationary at level and 

after first differencing, they (variables) could not be integrated of same order (which revealed 

absence of long-run relationship among the variables); hence Autoregressive Distribute Lag (ARDL) 

estimations were used to analyze our modified models. Findings revealed: i) FDI had a negative 

(approximately, -0.22) and non-significant (p-value, 0.4052 > 0.05) effect on GDP growth rate, and 

ii) FEXR had a negative (approximately, -0.86), but significant (0000 < 0.05) impact on GDP 

growth rate in Nigeria over the period of study. The economic implication being that FDI and FEXR 

could not lead to economic growth owing to corruption, poor infrastructures, insecurity and 

devaluation, fluctuation in value of naira. FDI can be a significant contributor to economic growth 

in Nigeria and have a positive impact, if government vigorously addresses infrastructural 

bottlenecks and create a policy direction that fosters effective technology transfer and knowledge 

sharing, and make Nigeria business environment more appealing to investors. Conducted in 

Nigeria, this research using ARDL model affirmed works of Nguyen (2024) in South East Asia; 

Okello and Badj (2023) in Kenya, and Mazenda (2024) in South Africa, whilst it contradicted 

studies of Mwitta (2022) in Tanzania and Alabi (2019) in Nigeria, thus contributed to knowledge. 

Keywords: Foreign Direct Investment (FDI), Economic Growth, Foreign Exchange Rate (FEXR), 

Autoregressive Distributed Lag (ARDL), Nigeria 

 

 

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1. INTRODUCTION 

In most developing countries, Foreign Direct Investment (FDI) serves as a means of earning foreign 

reserves via investments, businesses and foreign aids from advanced countries. FDI is considered a 

valuable source of finance and capital formation, Technology-Transfer and know-how, as well as a 

viable medium for trade among countries. Nigeria is among the major recipients of FDI in Africa. 

Primary investors are coming from China, India, Canada, United Kingdom, and Kenya to mention a 

few. Mining, Oil and Gas and primary agriculture are among the key sectors which draw most FDI. 

According to the requirement for accelerated growth in association with the Sustainable Development 

Goals is not completely clear, however, for economies to experience sustainable and inclusive 

development, cross-border trade is paramount (UNCTAD, 2019). FDI is highlighted as type of capital 

and means through which technology and knowledge can be transferred and diffused from advanced 

country to another.  In other words, foreign direct investment (FDI) is direct investment into 

production or business in a country by a company in another country, either by buying a company in 

the target country or by expanding operations of an existing business in that country. Foreign direct 

investment is done for many reasons including to take advantage of cheaper wages or for special 

investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free 

access to the markets of the country or the region. Foreign direct investment is in contrast to portfolio 

investment which is a passive investment in the securities of another country such as stocks and 

bonds. In this aspect, FDI inflows could help the nation's economy thrive (Mwitta, 2022). 

Theoretically, FDI has the potential to be a major driver of economic growth in Nigeria in numerous 

ways: i) brings in much-needed capital for businesses and infrastructure development, which can lead 

to creation of new jobs, expansion of existing ones, and overall economic activity; ii) transfer of 

technology and skills can benefit Nigerian businesses through knowledge sharing and training, 

leading to a more skilled workforce and increased productivity; and iii) transfer of technology and 

skills FDI can help develop export-oriented industries, bringing in foreign currency and improving 

Nigeria's trade balance. 

Nigeria’s foreign investment can be traced back to the colonial era when the colonial masters had 

intention of exploiting her resources for the development of their economy. There was little 

investment by these colonial masters. With the end of oil boom in 1982, Nigeria found herself in a 

quagmire of economic problems. These problems include unsustainable balance of payment deficits, a 

rapid escalating debt stock and a crushing debt service burden Internally, Ojo and Alege (2014) state 

that the economic problems include unsustainable fiscal deficit, rising unemployment and galloping 

inflation. Above all, investment has collapsed and this contributed strongly to a reduction in real 

output and per capita real income level.  

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http://en.wikipedia.org/wiki/Tax_exemption
http://en.wikipedia.org/wiki/Portfolio_investment
http://en.wikipedia.org/wiki/Portfolio_investment
http://en.wikipedia.org/wiki/Stock_(finance)
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Since the enthronement of democracy in 1999, the government of Nigeria has taken a number of 

measures necessary to lure foreign investors into Nigeria. These measures include the repeal of laws 

that are inimical to foreign investment development, promulgation of investment laws, various 

overseas trips for image laundry by the President among others  

Presently, Nigeria is the first host economy of FDI in Sub-Saharan Africa, and the third in the 

continent (Oyegoke & Aras 2021). Recently, Nigeria has witnessed several trade policies which aim at 

diversifying the economy away from oil revenue. These policies are focused on improving the 

industrial sector, and of course, results in austerity. In 2018, the total FDI inflow to the country was 

around USD 1.9 billion, while in 2017, FDI inflow was around USD 3.5 billion, showing a decrease due 

to the consequence of the austerity measures imposed in 2018. At the third quarter of 2019, the FDI 

was only 3.37% (USD 200.08 million) of the total capital inflow for the period. Traditionally, FDI is 

designed to improve the recipient economies thereby enhancing economic growth and development, 

it is in this view that many developing countries attract foreign investors with the hope of 

strengthening their economy by increasing the foreign investment portfolio. However, most empirical 

analysis of the impact of FDI on economic growth advises otherwise, hence, a controversy. According 

to the existing literature, some empirical results found a negative relationship between FDI and 

economic growth, while others opined that as FDI increases, it results in a boost of output 

productivity, hence a positive relationship between the variables. Therefore, this study contributes to 

the existing literature by investigating the effects of FDI both on the owner, and the host country, 

using Nigeria as a case study. 

The effect of FDI on growth of various economies has been the subject of numerous studies, all of 
which have highlighted different findings. For instance, De Mello (1999) using Ordinary Least Square 
(OLS) discovered an increase in FDI led to an increase in economic growth in Organization for 
Economic Cooperation and Development (OECD) countries. In the same vein, Ofori & Asongu (2022) 
via Generalized Method of Moment (GMM) revealed an increase in FDI brought about an increase in 
economic growth in sub-Saharan African countries. However, Wiredu et al. (2020) applying OLS 
found that FDI had a negative effect in Cote d'Ivoire, Ghana, Nigeria and Senegal. The implications of 
FDI on many economic sectors, including gross domestic product, employment, trade, education, 
technology, and so forth, have been discussed in some literature.  
Against all these backgrounds of both theoretical and empirical justifications about the contributions 
of FDI in promoting economic growth in Sub Saharan countries like Nigeria, it is noteworthy that 
there is no conclusive study on FDI- growth nexus in host countries since several other empirical 
evidences show mixed positive, negative results. Therefore, given the inconsistency with which FDI 
relates to economic growth in various countries. Consequently, this study sought to assess whether 
FDI had a positive or negative long run effect on Nigeria’s economy over the period, 1999-2022 by 
applying various econometrics techniques. This study tends to examine effect of foreign direct 
investment on GDP growth rate in Nigeria and also ascertain impact of foreign exchange rate on GDP 
growth rate in Nigeria. 

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The following distinct groups would significantly benefit from this study: 
 

Academic World  

The outcome of this work will serve as reference materials for further research activity in this or 

related areas in future, thereby adding to the limited literature on Nigeria's FDI issues. This could be 

to the extent of providing new empirical evidence to the body of knowledge, or by validating or 

invalidating the findings extant studies. It is therefore expected that the entire academics: 

researchers, lecturers and students would benefit from the empirical and methodological postulations 

of this seminar paper. 

Government/Policymakers 

Since this seminar seems to be one of the latest efforts dealing on FDI phenomenon in Nigeria, it is 

expected that findings of this study could help shape the policy direction of the Federal Government 

of Nigeria, as far as formulating and implementing robust economic policies and programmes are 

concerned. This study would further provide direction required to tackle persistent naughty FDI 

challenges in order to witness desired economic improvement in Nigeria. It is worthy of mention that 

the dwindling revenue profile of the Federal Government may remain a nightmare to our political 

leaders, thereby making FDI the only saving grace in funding myriads of government projects. 

Monetary Authorities 

The outcome of this research in form of new empirical outcomes may bring about further research 

activities such as conferences, workshops, and the likes. Position papers arising from such 

brainstorming exercises would assist the monetary authorities such as the Central Bank of Nigeria, 

National Bureau of Statistics and Federal Ministry of Finance, etc while counselling the government 

on the state of the economy. The empirical evidence from the research may be useful to the 

International Monetary Fund and the World Bank in making inferences between Nigeria and other 

jurisdictions. 

General Public 

The results of this seminar if published may not be useful only for academic purposes, but may 

provide everyone with specific pieces of information about FDI underlying forces. FDI can be a 

veritable funding option if the underlying principles are strictly followed.  

This study focused on effect of FDI on economic growth iin Nigeria. To properly analyze the variables 

and address the time scope, annualized time series data extending up to 24 years were generated from 

the World Bank Indicators for the period, 1999 to 2022. The choice of 1999 is Nigeria returned to civil 

rule, and thus more robust trade relations was commenced with global economy.  regarded as the 

lower limit or base year of study was based on data. On the content scope, this work covered five 

variables: Foreign Direct Investment (FDI), Foreign Exchange Rate (FEXR) as major independent 

variable; together with Inflation Rate (IFR) and Trade Openness (TOPN) as control variable. The 

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Gross Domestic Product Growth Rate (GDPGR) served as dependent variables. On the geography 

scope, this study was conducted in Nigeria, being the largest economy, and mostly populated in sub-

Saharan African (SSA) countries. On the methodology scope, this work adopted Autoregressive 

Distributed Lag (ARDL) methods for variable estimations because the entire dataset were integrated 

of mixed order, that is 1(0) and I(1). This study was kept within limits by non-availability of desired 

secondary data linked to our study objectives up to 2023. Admittedly, the data obtained mainly from 

the World Developmental Indicators as published by the World Bank for 24 years (1999-2022) could 

contain some measurement errors that would likely compromise the correctness or acceptability of 

our research outcomes.   

2. LITERATURE REVIEW 

2.1 Conceptual Review 

2.1.1 Foreign Direct Investment (FDI) 

UNCTAD (2016) defines FDI as an investment by entity which belongs to one country which aims to 

undertake business investment in another country for more than a year. FDI is a crucial mechanism 

to foster economic development of the growing economies as it boosts exports and trade balance 

(Hailu, 2010). Most empirical literature reports that FDI is an important source of capital that 

complements domestic private investment, generates new employment opportunities and stimulates 

technology transfer and spillovers (Naftaly, 2024). 

Types of Foreign Direct Investment  

FDI is generally alienated in two categories: horizontal FDI and vertical FDI. Further distinctions are 
made between vertical FDI's backward and forward versions. Horizontal FDI allows MNCs to expand 
their production abroad such that producing equivalent products to domestically available ones in the 
FDI receiving country. Lim (2001) highlights that Horizontal FDI seeks to penetrate a new market; 
however, it may be affected by various factors, including openness to trade and GDP growth rate. 
Horizontal FDI takes a large part in global FDI (Campos & Kinoshita, 2003). In Vertical FDI, MNCs 
takes advantages of geographical position and low costs to launch production process in receiving 
state and to produce for both the domestic and international markets. Vertical FDI is sometimes 
mentioned as the resource seeking FDI as investors tend to seek the low cost and efficient resources in 
the foreign country compared to the home country (Campos & Kinoshita, 2003). In Backward FDI, 
the established enterprises in foreign country 9 provide inputs to the parent enterprise while in 
Forward FDI, which is less popular, enterprises in the host country sells products from parent 
enterprises. Moreover, FDI can be classified into target, direction and motive as means for FDI to 
effect growth of the host nation (Khaing, 2009). Target effect ways include investment, horizontal and 
vertical FDI, and mergers and acquisitions. The direction effect can be divided into inward and 
outward FDI, whereas market seeking, resource seeking, strategic asset and efficient seeking are 
means of motive effect. 

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It is debatable whether impact of FDI can vary subject to sector; investment in good infrastructure 
(transportation, power, communication), and a stable and attractive business environment with clear 
regulations is crucial to attract and retain foreign investors. 
 

 

2.1.2 Foreign Exchange Rate 

In finance, an exchange rate (also known as a foreign exchange rate, forex rate, FX between two 

currencies is the rate at which once currency will be exchanged for another. It is also regarded as the 

value of one country's currency in terms of another currency foreign exchange rates.  According to the 

CBN (2024), N1,481.17 as at 8th June, 2024 exchanges for USD at official market, whereas the same 

dollar amount exchanges for N1,500 at the black market as at 6th June, 2024. 

Stating succinctly, Naira/US Dollar exchange rate fluctuations negatively impact Nigeria's economic 

growth. A rise in the value of Naira relative to US Dollar will enhance Nigeria's economic growth and 

vice-versa. The net effect of our study establishes that excessive volatility is detrimental to growth. 

Since GDP is based how much money an economy's output is worth, it is subject to inflation. To put it 

another way, GDP fluctuates when the value of a currency changes. It is normal for the cost of goods 

and services in a country to go up over time, and those gradual cost increases are reflected in the 

nation's GDP. 

2.1.3 GDP Growth Rate (GDPGR) 

The GDP growth rate (GDPGR) refers to the percentage increase in a country's Gross 

Domestic Product (GDP) over a specified period, usually measured annually or quarterly. 

It is used as an indicator of economic growth and is commonly expressed as a percentage 

(Adepoju, et al., 2017).  

The GDP growth rate for Nigeria has varied  over the years. In 2020, Nigeria experienced 

a contraction in its economy due the impact of the COVID -19 pandemic and declining oil 

prices. The GDP growth rate for that year was -1.92%. The growth of the real GDP in 

Nigeria was forecasted to decrease between 2023 and 2028 by total 0.2% points.  Real 

GDP increased at an annual rate of 1.3% in the first quarter of 2024, according to the 

second estimate. In the fourth quarter of 2023 real GDP increased 3.4%.  

Factors considered affecting economic growth and development in Nigeria include: infrastructure 

development, human capital development, financial development, political stability, and the impact of 

terrorism. 

2.1.4 Conceptual Framework 

Independent Variable      Dependent variable  

 

 Foreign Direct Investment 
 

GD 
GDP Growth Rate 

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Source: Author’s design (2024) 

Fig. 1:  Interplay of foreign direct investment, foreign exchange rate versus GDP   

 growth rate in Nigeria 

2.2 Theoretical Review 

According to Asongu, et al. (2021), the main theories of FDI are classical and dependency theories. 

2.2.1 Classical Theory 

The classical theory argues that FDI can be beneficial to the host country's economy in many ways: 

stimulate the development of domestic infrastructure, improve transfer of payment, transfer of capital 

skills, increase foreign earnings, technology spillover and expansion of tax revenue for the 

government (Benetrix, et al., 2023). This theory actually underpins our study. 

2.2.2 Dependency Theory 

In contrast, advocates of dependence theory maintain FDI can slow growth. The dependence theory is 

built on a Marxist foundation that perceives globalization via exploitation of cheap labour, expansion 

of foreign markets, the introduction of the capitalist system, the introduction of obsolete technology 

and exploitation of primary resources from developing countries will slow growth (Asongu et al., 

2021). The advocates of dependence theory hold that FDI can negatively influence economic growth 

through local political and economic elites collaborating with foreign investors to exploit citizens of 

host countries; Multinationals can distort domestic investment by using capital-intensive technology 

to cause unemployment increase, income inequality and change taste and preferences; Finally, most 

foreign investors will send back profits generated to their motherland and thus crowd out local assets 

and harm domestic investment (Taylor & Thrift, 2013). 

2.3 Empirical Review 

Many substantial empirical studies have explored the effect of FDI on economic growth.  A good 

number of them were captured by this study as follows: 

Garang and Thiery (2018) analyzed effect of foreign direct investment, unemployment on economic 

growth in Uganda using Autoregressive Distributed Lag (ARDL) bounds approach and GDP data 

series obtained from the world bank from 1993 to 2015. Findings showed no sufficient statistical 

evidence to suggest FDI played significant roles in reducing unemployment and boosting economic 

growth. The short-run and long-run dynamics of the model did not point to any statistically 

significant relationships.  

Trang, et al., (2019) analyzed both the short and long run impact of FDI on economic growth in 

developing countries (lower-middle) income group for the period 2000-2014 using Vector Error 

Foreign Exchange Rate 

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Correction Model (VECM) and Fully Modified Ols (FMOLS). Findings revealed that FDI stimulated 

growth in the long run, although it exhibited a negative impact on economic 

growth in the short run in some selected developing countries under review.  

Alabi (2019) explored impact of foreign direct investment on economic growth in Nigeria. Secondary 

source of data was employed in this study from 1986 to 2017 sourced from Central Bank of Nigeria 

Statistical Bulletin and World Development Indicator. Regression was used as estimation techniques. 

Findings of the study revealed FDI was positive and significant to economic growth of Nigeria within 

the period of study. 

Abdillahi and Mohd (2021) explored impact of foreign direct investment inflows on Ethiopia’s 

economic growth using 36 years’ time series data. Vector Auto regression (VAR) model found FDI to 

have a positive and significant effect on GDP advancement.  

Ofori and Asongu (2022) conducted a panel data estimation in sub-Saharan Africa for the period, 

1990-2020 based on a generalized method of moments (GMM) estimator. From the result, FDI was 

able to generate economic growth in both the long-run and short-run. However, the study noted most 

of the positive effect results depended on the country's governance dynamics. The study concluded 

that a country with strong institutional and governance quality would gain more from FDI inflow and 

thus grow its economy. 

Mwitta (2022) examined impact of foreign direct investment on economic growth in Tanzania 

spanning from 1990 to 2020 using Vector Error Correction Model (VECM). Results of the study 

showed a statistically significant positive association between real GDP growth rate and FDI inflow to 

GDP ratio. On the other hand, the study revealed a negative correlation between gross fixed capital 

formation to GDP ratio and real GDP growth rate which might be caused by current situation of 

public investment.  

Bashir ((2022) analyzed effect of foreign direct investment on economic growth in Nigeria for the 

period, 1986-2020 taking into cognizance effect of exchange rate in relationship between FDI and 

economic growth using annual time series data sourced from databases of World Development 

Indicator (WDI) of World Bank and Central Bank of Nigeria (CBN) Statistical Bulletin. Autoregressive 

Distributed Lag (ARDL) model was employed for analysis. Findings showed FDI had a positive and 

significant effect on economic growth. Exchange rate also had a positive and significant effect on 

economic growth. The implied growth effect of FDI was enhanced in presence of a stable exchange 

rate.  

Ntamwiza and Masengesho (2022) studied impact of gross capital formation and foreign direct 

investment on economic growth in Rwanda using time series data for the period 1990 to 2017. The 

Error Correction Model technique for estimation indicated a short-run and long-run positive 

relationship between capital formation, foreign direct investment and economic growth in Rwanda 

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during the research period thus confirming that gross capital formation and foreign direct investment 

were the main determinants of economic growth in Rwanda for the period under study. 

Keita and Baorong (2022) examined foreign direct investment and economic growth nexus in Guinea 

for the period, 1990 to 2017.  The findings showed FDI in the long run positively affected economic 

growth in Guinea during the research period. 

Okello and Badj Okello (2023) using the ordinary least squares method for the period from 1970 to 

2019 studied the relationship between oreign direct investment and economic growth in Kenya. The 

findings showed that the association between FDI and economic growth was negative. The negative 

result was attributed to the fact that Kenya's history as an import-substituting country and the 

counter effect of the implemented trade policies to spur economic growth in Asian countries. 

Dang, et al. (2023).  examined impact of foreign direct investment on economic development, 

considering the role of institutional quality in 63 provinces/cities in Vietnam in the period 2005–

2022. Applying various regression methods, such as Pooled OLS, the results confirm FDI foreign 

direct investment and institutional quality had a positive impact on economic development. Findings 

also provided evidence institutional quality is an important factor in attracting FDI, determining both 

the quality and quantity of inflows from other countries into Vietnam. 

Nguyen (2024) using autoregressive distributed lag (ARDL) model assessed the Influence of key 

economic globalization factors on economic growth and environmental quality in Southeast Asian 

countries.  Results indicated that FDI had a negative effect on economic growth in Southeast Asian 

countries within the review period.  

Naftaly and Kipchirchir (2024) examined relationship between FDI and economic growth in Kenya 

using an Autoregressive Distributed Lag (ARDL) regression approach and causality tests. Secondary 

time series data from 1990 to 2021 were used for analysis. Findings indicated that increasing FDI 

inflow would lead to an increase in economic growth. Also, the result indicates trade openness and 

climate changed matter from a growth perspective. Notably, the results showed short-run to long-run 

FDI kindled economic growth in Kenya. 

Mazenda, A. (2024) assessed effect of foreign direct investment (FDI) on economic growth in South 

Africa from 1980 to 2010. Johansen co-integration and Vector Error Correction Modeling (VECM) 

framework were utilized as estimation techniques. Variables specified in the methodology include real 

GDP, foreign FDI, domestic investment (INVE), real exchange rate (REXCH) and foreign marketable 

debt (DEBT). The long run results showed FDI, REXCH and DEBT had a negative impact on growth. 

INVE had a positive impact on growth.  

2.4.1  Gap in Empirical Literature 

In light of above review, several empirical studies have established a positive and negative 

relationship between FDI and economic growth as shown in Table 2.1. The study filled this empirical 

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gap by assessing the dynamics behind the mixed results and trend between FDI and growth as 

observed below: 

 (i) The unit gap of this study related to its specific objective - effect of FDI and foreign exchange 

rate dynamics on economic growth (measured by GDP growth rate). 

(ii) Regarding gap occasioned by timing, this study ranged from 1999 to 2022. The choice of 1999 

was premised on historical fact that civil rule was restored in Nigeria in 1999, when the country 

became, once more, disposed to global trading system. The upper time limit (2023) made this study 

more current compared to other existing studies.  

(iii) The content gap of this study is on the proxies of the dependent and independent variables. 

The dependent variable is GDP growth rate, while the independent variables are FDI, foreign 

exchange rate. Trade openness and inflation rate were introduced as control variables.  

(iv) The geographical gap of this study stems from the fact this study concentrated primarily and 

interrogated majorly studies conducted in other jurisdictions other than Nigeria. Hence this study was 

conducted in Nigeria to fill geographical gap. 

3. METHODOLOGY  

3.1  Model Specification  

We employed the Autoregressive Distributed Lag (ARDL) estimation model used by Mathebula, et al., 

(2024) to explore the effect of foreign direct investment on economic growth in South Africa. This is 

consistent with Trinh and Nguyen (2015), who maintained that neoclassical and endogenous growth 

models provided the foundation for most empirical works on the FDI-growth nexus  

The econometrics model is specified thus:  

𝐺𝐷𝑃𝑡 = 𝛽0 + 𝛽1𝐹𝐷𝐼𝑡 + 𝛽2𝑅𝐼𝑅𝑡 + 𝛽3𝐼𝑁𝐹𝑡 + 𝛽4𝑆𝑅𝑡 + 𝜀𝑡 --- --- --- ---  (1)  

where:  

GDP  = growth domestic product (economic growth) in period t  

FDI  = Foreign direct investment in period t  

RIR  = Real interest rate in period t  

INF  = Inflation rate in period t  

SR  = Saving rate in period t  

𝛽0−𝛽4 = Coefficient parameters  

𝜀𝑡 = Error term. 

The prior expectations are: 𝛽1>0; 𝛽2<0; 𝛽3<0 , and 𝛽4 > 0. 

However, general ARDL model is modified to reflect our hypotheses thus: 

ΔlnGDPGRt = α01 + ∑ α11∆lnGDPGRt−1
p
t=1 + ∑ α2∆lnFDIt−1

p
t=1 + ∑ α3∆lnEXRt−1

p
t=1 + ∑ α2∆lnCt−1

p
t=1 + 

β11lnYt−1+β21lnEXRt−1+β31lnCt−1+μ1t  _ _ _ _  (2) 

Where; 

GDPGR𝑡 -Gross domestic product growth rate    

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𝐹DI𝑡 – Foreign Direct Investment;  

𝐶𝑡  – Matrix of control variables;  

𝑡 – Time dimension;  

𝜇𝑡 – Stochastic term;  

𝑙𝑛 – Natural log;  

𝛼0 – Constant term;  

𝛼1 𝑎𝑛𝑑 𝛼2– Coefficients are associated with the logarithms of FDI and control variables, respectively.  

The variables were transformed into logarithms to reduce the serial correlation problem (Gisore, 

2021). 

To investigate the long-run relationship equation 3 was applied as shown below.  

lnGDPGRt = α0 + Σ α1ilnGDPGRt−i p i=1 + Σ α2ilnFDIt−i w i=0 + Σ α3ilnCt−i w i=0 + μit __  (3) 

Further, since the variables are cointegrated, the causality test was obtained using an error correction 

model derived from ARDL equation 4 specification:  

Δ𝑙𝑛GDPGRt = 𝛼0 + Σ 𝛼1𝑖Δ𝑙𝑛GDPGRt-i 𝑝 𝑖=1 + Σ 𝛼2𝑖Δ𝑙𝑛𝐹DI𝑡−𝑖 𝑤 𝑖=0 + Σ 𝛼3𝑖Δ𝑙𝑛𝐶𝑡−𝑖 𝑤 𝑖=0 + ∅1𝐸𝐶𝑇𝑡−1 + 𝜀1𝑡 

 _ _ _ _ _ _ _ _ _  (4) 

The lagged error correction term 𝐸𝐶𝑇𝑡−1, in equation 4 measures the speed of adjustment to the long-

run equilibrium and also the long-run causality relationship. 

3.2 Description of Variables in the Model 

Variables in our models are described Table 3.1 as follows: 

Table 3.1:  Summary of model variable description 

Variable Abbreviation Measurement Data Source Expected Sign 

Dependent Variable 

Economic 

Growth 

GDPGR 

 

Gross Domestic 

Product Growth 

Rate 

World Development 

Indicators 

Dependent  

Variable 

Independent Variables 

Foreign 

Direct 

Investment 

FDI FDI, net inflow World Development 

Indicators 

Positive (Ofori & 

Asongu, 2022) 

Foreign 

Exchange 

Rate 

FEXR Value of Naira to 

USD 

World Development 

Indicators 

Negative (Nyoni, et 

al., 2021)  

Control Variables 

Trade 

Openness 

TOPN Total trade per 

GDP 

World Development 

Indicators 

Positive (Malefane 

& Odhiambo, 2018) 

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Inflation 

Rate  

Nominal 

Inflation Rate 

Consumer Price 

Index 

World Development 

Indicators 

Negative 

Source:  Author's compilations, 2024 

3.3 Methods of Data Analysis 

Autoregressive Distributed Lag (ARDL) estimation technique was employed to examine the effect of 
FDI on economic growth in Nigeria for the period, 1999 to 2023. ARDL estimation model was 
preferred as it was correct for both potential endogeneity and serial correlation problems (Pesaran, et 
al., 2001).    
Before ARDL estimation, it is necessary to scrutinize the stationarity and cointegration statistics of 
the sample data, ARDL approach rejects any series integrated of order 2 or higher. Phillips-Perron 
(PP) was used to test for a unit root in the series based on a 5 per cent level of significance. A bounds 
co-integration test was deployed to check for the presence of long-run relationships in the series 
based on a 5 per cent level of significance. The use of bound test allows the co-integration link to be 
ascertained by OLS after the lag order of the model is identified. Before estimation, the lag length was 
identified and the best model estimation criterion was chosen.        
4. RESULTS AND DISCUSSION 

4.1 Data Analysis 

4.1.1 Unit Root Test 

Phillips-Perron (PP) unit root test was conducted to check whether a time series variable is stationary 
or contains a unit root. Table 4.2 displays the unit root results of the sample data. 
Table 4.1: Summary of PP unit root test results 

Variable T-Stat. Critical Values @5% P-value Order of 
Integration 

Inference 

LnGDPGR -3.245 -2.951 0.0259 I (0) Stationary 

LnFDI -5.086 -3.548 0.0012 I (0) Stationary 

dLnFEXR -7.232 -2.954 0.0000 I (1) Stationary 

dLnTOPN 
dLnIFR 

-7.153 
-12.213 

-3.553 
-3.552 

0.000 
0.0000 

I (1) 
I (1) 

Stationary 
Stationary 

Source: Author’s extract from E-views 

Table 4.1 outcomes are confirmed by the PP test which also found GDP and FDI stationary at level of 
form as revealed by the -3.245 for GDPGR and -5.086 for FDI, which are both less than their critical 
values of -2.951 and -3.548. FEXR, TOPN and IFR are non-stationary at level form; they, however 
become stationary after first differencing with all three variables (FEXR, TOPN, IFR) having a 
common p–value of 0.0000, which is below 0.05, leading to the conclusion that there is no unit root 
after first differencing. GDP and FDI, therefore, are integrated to order zero I(0), whilst FEXR, TOPN 
and IFR are integrated to order one I(1). This makes the ARDL method applicable to estimate the 
growth model since the variables are integrated of orders zero and one, that is, I(0) and I(1). 
4.2 ARDL model regression results 
4.2.1 ARDL model regression results Long–run estimates 
Table 4.2:  ARDL model results 
Variable  Coefficient  Standard Error  t-Statistic  Probability  

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FDI  -0.2193  0.2584  -0.8488  0.4052  
FEXR  -0.8596  0.1583  -5.4312  0.0000  
TOPN  -0.3145  0.1387  -2.2674  0.0335  
IFR  0.2503  0.3458    0.7239  0.4768  
Source: Author (compiled from E-views) 

GDPGR = -0.2193FDI - 0.8596FEXR - 0.3145TOPN + 0.2503IFR 
The effect of major independent variables (based on our specific objectives): foreign direct investment 

(FDI) and foreign exchange rate (FEXR)) on GDPGR in the long run, as reported in Table 4.2 is stated 

in the equation above.  

Decision 

Clearly, Table 4.2 shows that the coefficient for FDI has a negative (approximately, -0.22) and non-

significant (p-value, 0.4052 > 0.05) long-run effect on GDP growth rate in Nigeria within the review 

period.  Similarly, the coefficient for FEXR has a negative (approximately, -0.86), but significant 

(approximately 0000 < 0.05) long-run impact on GDP growth rate in Nigeria over the period of 

study. 

4.2.2 Short–run estimates  

Table 4.3:  Short–run estimates 

 CointEq (-1) D(FDI)  D(FEXR)  D(TOPN)  D(IFR)  

Coefficient -0.7782  - 0.0128  0.505531  -0.3174  

P-value 0.0000  - 0.8834  0.0095   0.0003  

Source: Author (compiled from E-views) 

The cointEq (-1) coefficient is an error correction component that displays the rate at which 

equilibrium in the growth model is regained. In other words, it represents the rate at which a previous 

period's disequilibrium is resolved. A negative coefficient indicates convergence, whereas a positive 

coefficient indicates divergence; thus, the cointEq (-1) is said to be significant when its value is 

negative and less than one, and its probability value is less than the chosen 5% significance level 

(Nkoro & Uko, 2016). Table 6 results show a large cointEq (-1) value of -0.7782, indicating that the 

speed of adjustment is around 77.8 percent. This means that anytime there is a disturbance in the 

model, the adjustment from the short run deviation to the long run equilibrium happens quickly.  

FEXR and TOPN were seen to be favourably associated to short-term growth, whereas IFR was 

discovered to be negatively related to short-term GDPGR and FDI and FEXR were discovered to be 

unimportant in explaining short-term growth. According to the study, only IFR and TOPN have a 

substantial impact on growth in the short run. 

4.3 Discussion of Findings 

Based on ARDL model results presented in Table 4.2 shows that the coefficient for FDI has a negative 

(approximately, -0.22) and non-significant (p-value, 0.4052 > 0.05) long-run effect on GDP growth 

rate in Nigeria within the review period.   

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As a result of the findings, a 1% increase in FDI resulted in approximately a 22 percent decrease in 

GDP. In the long run. The negative relationship between FDI and GDP contradicted the 

Modernization Theory, which states that an increase in FDI should eventually lead to an increase in 

GDP, indicating a positive link between the two macroeconomic variables. These findings, however, 

support the Dependency Theory, which holds that foreign direct investment has a detrimental impact 

on the host country's economic growth. 

Nguyen (2024) support the Dependency Theory and empirically discovered that FDI had a negative 

impact on South East Asian's economic growth if multinational corporations return large profits to 

their parent countries. Okello and Badj (2023) discovered in a similar study that FDI had a negative 

influence on economic growth in Kenya applying OLS to examine the datasets for the period, 1970 to 

2019 Furthermore, Mazenda (2024) also affirmed our findings that FDI had a negative effect on 

economic growth in South Africa using VECM estimation to analyze data from 1980 to 2010. 

In Nigeria, factors such as corruption, weak institutions, poor or decaying infrastructures, 

inconsistencies in government policies, as well as security concerns may have contributed to a 

negative association between FDI and economic growth. This is contrary to our prior expectation of a 

positive relationship between FDI and economic growth, indicating that this relationship is 

bidirectional because other studies support the hypothesis that there is a positive relationship 

between FDI and economic growth. For instance, the study of Mwitta (2022) who used VECM to 

analyze datasets from 1990 to 2020 confirmed that there was a positive relationship between FDI and 

economic growth in Tanzania. Similarly, Trang, et al., (2029) applying VECM to analyze datasets for 

the period, 2000 to 2014 affirmed that FDI had a positive and significant effect on economic growth 

in lower-middle income developing countries. 

Given the ARDL model results shown in Table 4.2, the coefficient for foreign exchange rate (FEXR), 

which is our second major independent variable had a negative (approximately, -0.86), but significant 

(0000 < 0.05) long-run impact on GDP growth rate in Nigeria over the period of study. This result 

implies that a 1% increase in FEXR resulted in approximately 86 percent decrease in GDP in Nigeria 

during the review period.  Our finding was affirmed by the study of Mazenda (2024) in South Africa. 

This confirms theoretical suggestions, which propose that depreciation in the exchange rate 

discourages investment, which translates into low levels of economic growth.  

5. CONCLUSION AND RECOMMENDATION 

In view of our findings, this study contrary to a priori expectations concludes that foreign direct 
investment did not bring about reliable effect on economic growth in Nigeria. This was after taking 
consideration of the long-run results. In the short-run, foreign direct investment caused a positive 
impact on economic growth, whilst crowding-out domestic investment. On the other hand, consistent 
devaluation, floatation and fluctuation in the value of the Naira discourage investment according to 
theoretical assumptions.   

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FDI can be a significant contributor to economic growth in Nigeria and have a lasting positive impact, 
if the government vigorously addresses infrastructural bottlenecks and create a policy environment 
that fosters effective technology transfer and knowledge sharing, as well as make Nigeria business 
environment more appealing to investors. Government should make exchange rate stable so that 
more foreign investment can be attracted for desired economic growth and development in Nigeria. 
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