The Impact of Foreign Direct Investment on Economic Growth in Nigeria: An Ordinary Least Squares Analysis (1990–2025)

This paper explores how foreign direct investment (FDI) affects Nigeria's economic growth from 1990 to 2025. The yearly data for this study comprise a total of 36 observations. Data were sourced from the Central Bank of Nigeria Statistical Bulletin and the World Bank Development Indicators. Real gross domestic product (RGDP) serves as the dependent variable, while FDI, the interest rate, and the exchange rate are the independent variables. All variables are in natural logs except the interest rate, allowing coefficients to be read as elasticities. The Augmented Dickey–Fuller test was employed to establish the integration order. Consequently, every variable was found to be integrated of order one. Therefore, ordinary least squares (OLS) was used to estimate the long-run level relationships among these variables. OLS is recognized for providing reliable estimates of cointegration vectors when variables are I(1), although Engle and (C. W. Granger, 1987) and (Stock, 1987) note that OLS estimators face super-consistency issues. A static levels regression of I(1) series is likely to have serial correlation in residuals, so the usual standard errors should be interpreted with caution. Long-run estimates indicate that the exchange rate elasticity of real GDP was positive and significant, while the interest rate elasticity was negative and significant. The estimates also reveal that FDI has a statistically significant negative elasticity. Diagnostic test results confirm residual normality and no significant heteroscedasticity. However, positive and significant serial correlation was detected in the residuals. Thus, future research should consider a full error-correction model formulation. The study concluded that FDI did not generate a positive growth dividend in Nigeria during the review period when exchange rate and interest rate effects were accounted for. The devaluation of the Nigerian currency in the final years of the sample seems to have outweighed FDI's positive impact on growth. The study recommends that maintaining exchange rate stability and lowering monetary policy interest rates to encourage investment would lead to better growth outcomes.