Foreign direct investment and economic growth in Nigeria: a granger causality test

Abstract

The paper examines the causal relationship between foreign direct investment ( FDI) and economic growth, measured by the gross domestic product (GDP). Augumented Dickey-Fuller (ADF) test was used for the unit root test, Johansen Cointegration test was conducted to establish short and long run relationship between the two variables, ordinary least square (OLS) statistical technique was used to assess the degree of influence the variables have on each other. Finally, Granger causality wasused test to study the direction of causality between the two variables. These techniques were applied on time series data obtained from the Central Bank of Nigeria for a period of 37 years (1970-2007). The conventional view which suggests that the direction of causality runs from FDI to economic growth is true in Nigeria. Empirical findings clearly suggest that GDP causes FDI in Nigeria and vice versa. The contribution of FDI to economic growth is significant.

Keywords: Economic growth, FDI, Granger causality, cointegration