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

The Dynamic Effect of Trade Openness, Debt, and Foreign Investment in Ghana’s Economy: An ARDL Bound Testing Approach

“…The study utilized the autoregressive distributed lag (ARDL) bound testing method developed by Pesaran et al [47], which aids in determining the presence of a long-run relationship in the series. The ARDL approach has been widely adopted by researchers in a single-equation total growth model, as evidenced by studies conducted by Thobekile et al [48], Rathnayaka et al [49], Hao [50], Khalid [51], and Ari et al [52], among others, to explore the relationship between FDI, trade openness, and other variables' impact on economic growth. Building upon existing literature, this current study utilized data from the World Development Indicators (WDI) on gross domestic product per capita (GDPpc) measured in thousands of United States dollars (USD) using 2015 as the based year, net foreign direct investment inflows (% share of GDP), external debt representing foreign loans measured in billions USD, trade openness (exports plus imports ratio to GDP), and unemployment rate measured in percentage.…”

The Effect of Trade Openness on GDP Growth in Congo

“…Trade openness can have a negative impact on GDP growth when countries have specialized in a low total factor productivity (TFP) level of development and conversely trade openness can have a positive effect on GDP growth when the TFP level is high. Ari et al (2022) analyzed the association between trade openness, foreign direct investment (FDI) and economic growth in Nigeria for the period 1996-2019. Results from an Autoregressive Distributed Lag (ARDL) model indicate that FDI and capital stock are related to economic growth in the short and long run.…”

“…Rodriguez and Rodrik (2000) and Stiglitz (2004) argued that trade openness can be detrimental to economic growth in developing countries. Ari et al (2022) show that trade openness has a negative effect on economic growth in Nigeria. In the denser studies, Romer (1986), Lucas (1988) and Alesina et al (2005) highlighted the benefits of trade openness in light of the positive externalities in human capital accumulation and economic growth.…”