The Effects of Trade Openness, Foreign Direct Investment and Exchange Rate Fluctuations on Non-oil Gross Domestic Product Growth

Abstract

This study investigates the effects of trade openness, foreign direct investment (FDI), and exchange rate on non-oil GDP in Nigeria between 1986 and 2019. Annual time series data on trade openness measured as the ratio of exports plus imports to GDP ((X+M)/GDP), FDI, exchange rate and non-oil GDP growth rate were sourced from the Central Bank of Nigeria’s Statistical Bulletin, National Bureau of Statistics, and the World Bank World Development Indicators (2020) database. The data analysis was done via Autoregressive Distributed Lag (ARDL) method and Vector Error Correction Mechanism. The study established that trade openness is non-linearly related to Nigeria’s non-oil GDP (NOG), implying that higher degree of trade openness negatively affects NOG in the current year, but this effect turns positive by the end of first year. FDI on the other hand, has a positive but statistically insignificant relationship with Nigeria’s NOG in the short run, and exchange rate fluctuations negatively affect NOG in the short run. In the long run, the study found that trade openness, FDI, and Exchange rate have no significant impact on non-oil GDP in Nigeria. The insignificant impact of the variables could be explained and attributed to inconsistency and abrupt change of policy, wide fluctuations in the flow of FDI and exchange rate movements. The study recommends that increasing the efficiency of the country’s external sector, particularly the export sector would enable Nigeria to reap full benefits of trade openness. The study further recommends that deliberate efforts be made to redirect the flow of Foreign Direct Investment to the productive sector of the economy particularly the agricultural sector.