Foreign Direct Investment-Trade Nexus in Nigeria: Do Structural Breaks Matter?

Abstract

In this paper, three innovations are introduced to the literature on the Foreign Direct Investment (FDI)-trade nexus: identification and consideration of structural breaks in the underlying time series data; use of disaggregated data set that captures the oil and non-oil dichotomy of the Nigerian economy; and introduction of identified break in the short-run model. We found the existence of a co-integrating relationship between the variables amidst observed breaks in 1980 and 1992. Thus, considering structural breaks in estimations cannot be downplayed as ignoring this may yield biased and inconsistent estimates. Findings revealed a one-way causal linkage between non-oil imports and oil exports to oil FDI with no reverse causality observed, while non-oil FDI was found to Granger cause non-oil exports. The results made a case for further diversification of trade in a bid to dampen the effects of exogenous shocks as well as gearing more efforts towards the provision of an enabling environment, particularly in the non-oil sector to spur direct investments.