Foreign Capital Inflows and Economic Growth in Nigeria: An Empirical Approach

Abstract

Foreign capital inflows have been considered as focal to the process of economic development of
any economy, especially the developing countries. As such, they resort to it as the primary means to
achieving rapid economic growth. Despite the foreign inflows, the growth experience of the
developing countries, Nigeria not excluded, have not been encouraging and they languish in external
debt problem and in poverty. Hence, the study attempts to examine the nature of causality between
foreign capital inflows components and real GDP(economic growth) and also, the impact of foreign
capital inflows on economic growth in Nigeria. The reason for specific country case study is that
pervious studies are cross-sectional in nature and each of the country has unique features which
could hamper the result of the analysis. Thus, there is need to examine Nigeria’s situation. The
dynamic interaction among aid, remittance, FDI and external debt and growth of the Nigerian
economy was examined using the concept of cointegration, variance decomposition and impulse
response analysis and Block Exogeneity tests. The result of the cointegration revealed that causal
relationship exist between foreign capital inflows and economic growth in Nigeria. The variance
decomposition result supports that of cointegration analysis of causality which revealed that,
causality runs from foreign aid, remittance(RMC), external debt(TED) and foreign direct
investment(FDI) to real GDP(growth). Responses of the real GDP to one standard deviation
innovations of the components of foreign capital inflows do appear to be very sensitive. The shocks
appear to be very pronounced within the forecast period. However, the block of exogeneity tests
shows that the granger causality runs from remittance(RMC) and external debt(TED) to real
GDP(growth) only. Only remittance(RMC) and external debt(TED) are significant. But jointly
they all enter the model. However, the result of the error correction model shows that there is a
significant positive, negative, positive and negative effect of foreign aid, remittance, FDI and
external debt on real GDP respectively. It takes some time before their impacts are manifested
except FDI.