ABSTRACT
This study investigates the impact of Foreign Direct Investment (FDI) on economic growth in Nigeria, employing an Augmented Solow model framework. The analysis expands the list of policy variables to include export value, import value, interest rate, and gross fixed capital formation (GFCF). Utilizing data from 1991 to 2022, the econometric model was specified as a function of these variables, with the primary estimation technique being the error correction mechanism (ECM). This approach allows for the integration of both short-run dynamics and long-run equilibrium, ensuring theoretical rigor and data coherence.
The empirical results reveal significant relationships between the variables and Nigeria's real GDP growth. Long-run estimates indicate that FDI and trade openness positively influence economic growth, while real exchange rate and interest rate exhibit negative impacts. GFCF, as a proxy for capital stock, shows an insignificant effect on growth in the long run. Short-run estimates highlight the significant short-term impact of trade openness on GDP, with FDI and interest rate also influencing growth, albeit negatively.
Diagnostic tests, including the Breusch-Godfrey Serial Correlation LM Test and the Breusch-Pagan-Godfrey Heteroskedasticity Test, confirm the reliability of the model, indicating no significant issues of serial correlation or heteroskedasticity. These findings underscore the importance of FDI and trade policies in fostering economic growth in Nigeria, while also suggesting the need for careful management of exchange and interest rates to optimize growth outcomes. This study contributes to the broader understanding of the determinants of economic growth in developing economies and provides valuable insights for policymakers in Nigeria.
