Macroeconomic Drivers of Foreign Direct Investment Inflows to Nigeria: Analysis of Shocks and Long-Run Causation

Abstract

This study seeks to underscore the extent to which macroeconomic vectors cause foreign direct investment inflows using cointegration, vector error correction, impulse response functions, and variance decomposition techniques against annual Nigerian data from 1986 through 2020. It also attempts to unravel how FDI inflows respond to macroeconomic shocks. The results indicate that, in the long-run, interest rate, inflation, exchange rate, level of economic activity and growth, and degree of trade openness of the economy significantly cause FDI inflows to Nigeria. Whereas the direction of causation is positive for inflation, exchange rate and trade openness of the economy, it was negative for level of economic activity and interest rate. FDI inflows responded to shocks in the above independent variables in different directions, some positively for a designated time, while some negatively at other periods. Generally, shocks in the independent variables jointly affected the shocks in FDI from the second through the tenth periods of innovations. Policy implications favor government action to lower interest rate, maintain mild inflation and moderate devaluation of the Naira against the currencies of trading partners, among others.