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Bivariate Causality Analysis on the Impact of FDI Inflows and Economic Growth in Nigeria

Abstract

The aim of this study is to find out the direction of causality between foreign direct investment (FDI) and economic growth (GDP) in Nigeria for a period of 40 years, which is between 1970 to 2009. The study employed in its analysis, the use of Ordinary Least Square (OLS), the unit root test was used to test for stationarity of the time series, the Johansen Cointegration test was used to test for the existence of long-run relationship among the variables and finally, Granger causality test, to establish the causal relationship between the variables. The stationarity test (unit root) was carried out in other to ascertain the order of integration among the variables. The variables foreign direct investment (FDI) and gross domestic product (GDP) were found to be nonstationary at their level and first difference with 2 lags. They were thus integrated of order one 1(1). The Cointegration test which was done using Johansen Cointegration test, revealed that the variables were cointegrated and had a unchanging relationship in the long-run. To check for the direction of causality, the Granger causality test was employed and it indicated that a causality relationship ran from FDIs to GDP which showed a uni-directional relationship. From the result of this work, it was ascertained that during the period under study, that there was a positive relationship between FDI and GDP which is a strong indication that FDI leads to economic growth in Nigeria.

Obiamaka Priscilla Egbo

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