Causality Analysis of the Impact of Foreign Direct Investment on GDP in Nigeria

Abstract

This study used a Cointegration VAR model to study the Contemporaneous Long – run dynamics of the impact of foreign direct Investment (FDI) on Growth Domestics Products (GDP)
with other four macroeconomic variables in the Nigerian Economy for the period of January 1970 to December 2004. The Unit Root Test suggests that all the variables are integrated of order 1. The VAR (3) model were appropriately Identified using AIC information criteria and the VECM (2) model with cointegration relation of exactly one .The study further investigate the causal relationship using the Granger Causality analysis of VECM which indicates a uni–directional causal relationship between GDP and FPI at 5% as in inline with other studies of Basu et al.(2003). The results of Granger Causality Analysis also show that some of the variables are Granger Causal of one another, at 5% level of significance. Having established the fact that foreign direct investment has positive impact on growth domestic product, government should strategize policies that would enhance foreign direct investment in Nigeria.