Foreign Direct Investment, Industrial Output and Sustainable Development in Nigeria

Abstract

The current study investigates the dynamic relationship among foreign direct investment (FDI), industrial production and sustainable development in Nigeria, in view of the long-standing failure of the nation to translate the inflow of FDI into consistent industrial growth and inclusive sustainable development in spite of decades of liberalisation of FDI. Most literature is cross-country based, and does not account for country-specific, longitudinal and reciprocal dynamics. The study uses annual data spanning 1981-2024, and estimates a seven-variable Vector Error Correction Model containing a composite sustainable development index, industrial output, FDI, government expenditure, money supply, exchange rate and inflation. Four cointegrating vectors were detected by the Johansen trace test after all series were integrated of order one. The error correction term was (-0.713) which showed that the annual adjustment towards equilibrium was rapid. Industrial output shocks showed persistently negative short-run effects, while FDI had a negative long-run and lagged short-run effect on sustainable development, which is consistent with the Pollution Haven Hypothesis and Environmental Kuznets Curve. Nonetheless, FDI-inflows reacted positively to sustainable development shocks in following periods, accounting for more than half of the forecast error variance by period 10, which shows a true and proper bidirectional link. The study recommends ESG based screening of FDI; monetary discipline; competitive exchange rate management and environmentally related industrial policy as these are dynamic and reciprocal relationship between FDI and industries in Nigeria rather than unidirectional. The novelty of the study is the simultaneous dynamic modelling of the three variables in Nigeria.