FOREIGN DIRECT INVESTMENT AND TRADE OPENNESS IN NIGERIA

Abstract

In Nigeria, trade openness and foreign direct investment are essential macroeconomic variables due to the nation's dependence on oil exports and its initiatives to diversify the economy. Global economic crises, institutional quality, and sector-specific factors, such as extractive industries, influence this relationship (Frankel & Rome, 2017). This study empirically examines the correlation between trade openness and foreign direct investment (FDI) in Nigeria and utilises annual time series data from the World Bank and the Central Bank of Nigeria, employing the autoregressive distributed lag (ARDL) bounds testing method for cointegration, including error correction modelling and causality assessments. The findings indicate a long-term link between trade openness and foreign direct investment (FDI), with trade openness having a positive and statistically significant impact on FDI inflows. In the near term, the adjustment process is represented by a negative and substantial error-correction term, signifying that departures from equilibrium are rectified over time. Causality analysis underscores the significance of export-oriented trade policies, macroeconomic stability, and structural changes in augmenting Nigeria's appeal to international investors. The study suggests that although trade liberalisation might enhance capital inflows, supplementary measures such as infrastructure improvement, exchange rate stability, and institutional strengthening are crucial for sustaining foreign direct investment and optimising its developmental impact.