Causal Relationship between Foreign Direct Investment and International Trade in Nigeria

Abstract

International Trade and Foreign Direct Investment plays significant role in nation's economic development, especially the developing countries of the world among which we have Nigeria economy. More important to the increasing trend and significance of FDI and Foreign Trade are the concept of substitutability and/or complementarities of these two economic agents and thus the need to examine the nexus between them using the data from 1970 and 2019.

The study adopted Johansen co-integration test to confirm the existence of both long-run relationship among the variables while two different approaches of time and frequency domains were employed to uncover the direction of causality between the variables. The time domain approach used was VECM granger causality test while the frequency domain approach used was Breitung-Candelon causality test.

The Johansen co-integration test outcome reveals the existence of positive long-run relationship between foreign direct investment and export and a negative long-run relationship between foreign direct investment and import. Finding further reveals unidirectional causality between FDI and import in the long run running from FDI to import, but there is bi-directional causality between FDI and export in the long-run. Also a unidirectional causality exists between Export and Import running from Export to import.

This study concluded that FDI in Nigeria is favourable, with the positive long run relationship between FDI and export and negative long run relationship between FDI and import, and therefore suggest that the Government should come up with policies that will help the inflow of FDI into the economy.