Foreign Direct Investment Inflows And Real Sector: A Vector Autoregressive (Var) Approach For The Nigerian Economy

The flows of foreign direct investment (FDI) to developing economies have been considered important for sustainable growth as they enhance job creation and the transfer of technology and management expertise. As a result, the attention of scholars has been drawn to examining the relationship between FDI and growth resulting in several studies in this area. Notwithstanding, few studies have been carried out on the impact of FDI on real sector growth, particularly in the Nigerian economy. Hence, this study examines the effect of FDI on the real sector in Nigeria between the periods 1981–2016 using the impulse response function (IRF) and variance decomposition (VDC) of VAR. The study found that agricultural sector output responded positively to shocks in FDI inflows but it was statistically insignificant. The IRF also revealed that industrial sector output responded positively to shocks in FDI and it was statistically significant. This presupposes that the inflows of foreign direct investment have positive effects on the growth of the industrial sector in Nigeria. The VDC showed that FDI inflows exert influence on both the agricultural sector output and industrial output. However, FDI inflows influence the industrial sector output in a greater proportion than the agricultural sector. Using the VAR Granger causality, the study also found that while FDI inflows cause growth in industrial sector output, they, however, do not cause growth in agricultural sector output. The implication of the study is hinged on the fact that FDI inflows have not been driving the growth of the agricultural sector in Nigeria. This could be adduced to some structural bottlenecks besetting the growth and competitiveness of the sector, which have made the sector unattractive to foreign investors. The study, therefore, recommends that the government should greatly invest in rural infrastructure development that will encourage foreign investment. Also, the government should intensify research and development institutions in order to seek new knowledge and enhance innovation in the agricultural sector.