Domestic investment, external debt and economic growth: Cointegration and causality evidence from Nigeria
Keywords:Domestic investment, External debt, FDI, Economic growth
This paper investigates the causal relationship between domestic investment, external debt and economic growth in Nigeria from 1970 to 2013. In doing so, we use the Bayer and Hanck, cointegration test and Granger causality tests, which is augmented with a lagged error correction term. The results reveal a unique and stable cointegrating relationship among the candidate variables. The results also show bidirectional causality flows among domestic investment, external debt, foreign direct investment and economic growth. In addition, the results demonstrate a unidirectional causality running from external debt to economic growth, and economic growth to domestic investment. Taken together, the results show that all the four variables have a complementarity relationship with one another, and influence economic growth in Nigeria.
Nigeria. In VGR. C, Govindaraju, M., Nourani, K.S.J., Singh, M.A, Mia & Mubarik S. (Eds.), Promoting Growth,
Excellence and Sustainability. Paper presented at the postgraduate conference on Economics, Public
administration and Business organised by Faculty of Economics and Administration, University of Malaya,
5th September, 2015, 456-465. Kuala Lumpur, Malaysia.
Anyanwu, J.C. (2012). Why does foreign direct investment go where it goes? New evidence from African countries. Annals of Economics and Finance, 13(2), 425-462.
Apergis, N., Katrakilidis, C.P., & Tabakis, N.M. (2006). Dynamic linkages between FDI inflows and domestic
investment: A panel cointegration approach. Atlantic Economic Journal, 34.
Bayer, C., & Hanck, C. (2013). Combining non-cointegration tests. Journal of Time series analysis, 34(1), 83-95.
Blomstrom, M., Lipsey, R.E., & Zejan, M. (1993). Is fixed investment the key to economic growth? (NBER Working paper No. 4436). Massachusetts: National Bureau of Economic Research.
Bosworth, B.P., Collins, S.M., & Reinhart, C.M. (1999). Capital flows to developing economies: Implications for
saving and investment. Brookings Papers on Economic Activity, 1999(1), 143-180.
Carrion-i-Silvestre, J.L., & Sanso, A. (2005). A guide to the computation of stationarity tests. Empirical Economics, 31,433-448.
Caselli, F., & Feyrer, J. (2007). The marginal product of capital. The Quarterly Journal of Economics, 122(2), 535-568.
Chenery, H.B., & Strout, A. (1966). Foreign assistance and economic development. American Economic Review, 56(4),679-733.
Choe, J. I. (2003). Do foreign direct investment and gross domestic investment promote economic growth? Review of Development Economics, 7(1), 44-57.
Clements, B., Bhattarcharya, R., & Nguyen, T.Q. (2003). External debt, public investment, and economic growth in low income countries (No. 03/249). Washington, D.C.: International Monetary Fund.
Dickey, D.A., & Fuller, W.A. (1979). Distributions of the estimators for autoregressive time series with a unit root.
Journal of American Statistical Association, 74(366), 427-481.
Dickey, D.A., & Fuller, W.A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root.
Econometrica, 49(4), 1057-1072.
Engle, R.F., & Granger, C.W.J. (1987). Co-integration and error correction: representation, estimation, and testing.
Econometrica, 55(2), 251-276.
Eshaq, E. (1983). Fiscal and Monetary Policies and Problems in Developing Countries. Cambridge, United Kingdom: Cambridge University Press.
Ezirim, C.B., Anoruo, E., & Muoghalu, M.I. (2006). The impact of external debt burden and foreign direct investment remittances on economic growth: An Empirical evidence from Nigeria. African Economic and Business Review, 4(1), 25-47.
Granger, C.W.J. (1969). Investigating causal relations by econometric models and cross-spectral methods.
Econometrica, 37(3), 424-438.
Granger, C.W.J. (1988). Developments in the study of cointegrated economic variables. Oxford Bulletin of Economics and Statistics, 48, 213-228.
Gregory, A.W., Haug, A.A., & Lomuto, N. (2004). Mixed signals among tests for cointegration. Journal of Applied
Econometrics, 19(1), 89-98.
Hansen, H., & Rand, J. (2006). On the causal links between FDI and growth in developing countries. The World
Economy, 29(1), 21-41.
Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference and cointegration with application to the demand for money. Oxford Bulletin of Economics and Statistics, 52(2), 169-2010.
Lean, H.H., & Tan, B.W. (2011). Linkages between foreign direct investment, domestic investment and economic
growth in Malaysia. Journal of Economic Cooperation and Development, 32(4), 75-96.
Lutkepohl, H. (2004). Univariate time series analysis. In Lutkepohl, H., & Kratzig, M. (Eds.). Applied Time Series
Econometrics. Cambridge, United Kingdom: Cambridge University Press.
Neumann, R.M. (2003). International capital flows under asymmetric information and costly monitoring:
Implications of debt and equity financing. Canadian Journal of Economics, 36(3), 674-700.
Nurkse, R. (1963). Problems of Capital Formation in Underdeveloped Countries. London, United Kingdom: Oxford
Phillips, P., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrica, 75(2), 335-346.
Rasiah, R. (2005). Trade-related investment liberalization under the WTO: The Malaysian experience. Global
Economic Review, 34(4), 453-471.
Sadiq, A.T., & Bolbol, A.A. (2001). Capital flows, FDI, and technology spillovers: Evidence from Arab countries.
World Development, 29(12), 2111-2125.
Saggi, K. (2000). Trade, foreign direct investment, and international technology transfer: A survey (Policy Research Working paper No. 2349). Washington, D.C.: The World Bank.
Schemidt-Hebbel, K., Serven, L., & Solimano, A. (1994). Saving, investment, and growth in developing countries: An overview (Macroeconomic and Growth Division No. 1382/1994). Washington, D.C.: The World Bank.
Tang, S., Selvanathan, E.A., & Selvanathan, S. (2008). Foreign direct investment, domestic investment and onomic growth in China: A time series analysis (UNU-WIDER No. 2008/19). Finland: United Nation University.
Ullah, I., Shah, M., & Khan, F.U. (2014). Domestic investment, foreign direct investment, and economic growth
nexus: A case of Pakistan. Economics Research International, 2014, 1-5.
Wiener, N. (1956). The theory of prediction. In Beckenbach, E. (Eds.), Modern Mathematics for Engineers. New York: McGraw-Hill.