A Vector Autoregressive Analysis of Policy and Non-Policy Predictors of Foreign Direct Investments in Nigeria

Abstract

Foreign direct investment (FDI) has remained the most stable form of capital flows from capital abundant economies to capital deficit countries. This has prompted several studies into its drivers as the recipient countries strive to maintain large hold of it. This paper explores the policy and non-policy predictors of FDI inflows to the Nigeria with the years under consideration spanning from 1980 to 2015. The specific objectives of this paper are to assess the effects of degree of openness, exchange rate, unemployment, electricity generation and gross domestic product on FDI inflows to Nigeria. The datasets for the underlying variables were sourced from the Central Bank of Nigeria Statistical Bulletin, National Bureau of Statistics and International Energy Statistics and analyzed using Vector Autoregressive (VAR) technique. The Augmented Dickey-Fuller test result for stationarity indicates that all the variables stationary at first difference. Evidences from the empirical analysis of the economic time series reveal that the lagged value of FDI is significant in driving the current value of FDI in Nigeria during the study period. This is suggestive that the location of foreign direct investment in Nigeria is a reflection of imitative decision of other firms in the oligopolistic market conditions. However, gross domestic product, exchange rate and electricity generation exerted positive, but insignificant effects on FDI during the period studied. Conversely, degree of openness and unemployment had an insignificant negative influence on FDI. The Granger causality test reveals that the variables in the model jointly Granger caused FDI during the years under consideration, indicating that they collectively have predictive power for FDI during the period studied. It was uncovered from the variance decomposition estimates that exchange rate has the highest predictive for FDI for a sample of 8-years period. In view of findings, this paper recommends that government should ensure that the existing foreign direct investments are protected and offered necessary incentives in order to attract more foreign investments in key sectors of the Nigerian economy.