The Impact of Trade Openness and FDI on Nigeria’s Economic Growth: Revisiting the Unsettled Debate

Abstract

The association between trade openness, foreign direct investment (FDI) and economic growth has been thoroughly researched, producing contradictory and unsettled findings. The main reason behind such mixed results may be the lack of capital stock and labour force in the growth–trade relationship. In this study, we re-examine the impact of trade openness and FDI on economic growth. Hence, we used annual time series data for the period of 1996–2019. We evaluate the robustness of our findings by using more than one index of trade openness and by controlling relevant variables that are found significant in growth literature. The Autoregressive Distributed Lag (ARDL) model is used in this article. The results indicate that FDI and capital stock are linked to economic growth in the short and long term. Trade openness, on the other hand, has a negative impact not only on short-term but also on long-term growth. Furthermore, we discovered corruption, inflation and labour force to have significant negative association with economic growth. This connotes that openness to capital flows is more important to the Nigerian economy than trade openness. Thus, if complementary strategies are implemented, the negative association between economic growth and trade openness may be significantly reversed. These results, therefore, suggest the promotion of policies that support improvement in capital formation by private, public and foreign investors. JEL Classification C13, F10, F43, N17, O40