Trade Openness and Investment in Nigeria

Abstract

This study investigated the impact of trade openness on
investments in the Nigerian economy, focusing specifically on
foreign direct investment (FDI) and foreign portfolio investment
(FPI) from 1984 to 2022. Utilizing the Autoregressive Distributed
Lag (ARDL) estimation technique, the research explores both the
short-run and long-run dynamics between trade openness and
investment, incorporating macroeconomic variables such as
exchange rate, GDP growth rate, population growth, interest
rate, and manufacturing sector capacity utilization. Stationarity
tests using the Augmented Dickey-Fuller (ADF) and Phillips
Perron (PP) methods confirmed mixed integration orders, while
the bounds testing approach indicated the existence of long-run
relationships among the variables. Empirical findings revealed
that trade openness does not significantly influence either FDI or
FPI in Nigeria, suggesting that the country has not fully
leveraged the potential investment benefits of open trade policies.
However, exchange rates were found to significantly impact FDI,
and GDP growth rates significantly influenced FPI. These results
imply that trade openness alone is insufficient to drive investment
inflows without supportive macroeconomic and institutional
frameworks. Based on these findings, the study recommends that
the Nigerian government prioritize infrastructure development,
strengthen regulatory protections for investors, promote
innovation, and enhance financial market infrastructure to
attract more foreign investment and ensure long-term economic
growth.