FDI-growth nexus and the moderating role of financial development in Nigeria: Fresh empirical insights

Abstract

This study examines how the nexus between foreign direct investment (FDI) and economic growth nexus is moderated by financial development in Nigeria. Efforts are also made to estimate the threshold level of financial development beyond which FDI can deliver desirable growth outcomes in Nigeria. The analysis is based on annual time-series data on relevant variables over the period 1986-2022 collected from secondary sources. The study specifies an interactive model based on the FDI Photosynthesis Model, and this is estimated using the Fully Modified Ordinary Least Squares (FMOLS), Canonical Cointegrating Regression (CCR), and Autoregressive Distributed Lag (ARDL) techniques. The results show that FDI does not exert any significant positive direct effect on economic growth in Nigeria. The study also finds that the effect of the interaction of FDI with financial development is positive but insignificant in the short run, while it is negative and significant in the long run. The threshold analysis reveals that the levels of financial development beyond which FDI can deliver desirable growth outcomes in Nigeria are 19.14 and 68.16 percent of GDP based on the FMOLS and CCR estimates, respectively. The study concludes that financial development limits the transformative effect of FDI on economic growth in Nigeria.