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FOREIGN DIRECT INVESTMENT, FINANCIAL DEPTH AND OUTPUT PERFORMANCE IN THE PRESENCE OF STRUCTURAL BREAKS: Evidence for Nigeria

FOREIGN DIRECT INVESTMENT, FINANCIAL DEPTH AND OUTPUT PERFORMANCE IN THE PRESENCE OF STRUCTURAL BREAKS: Evidence for Nigeria

 

Abstract: This paper examines the linkage between foreign direct investment, financial depth and economic growth in Nigeria for the period 1970Q1-2011Q4. Essentially, it employs the cointegration approach proposed by Gregory and Hansen (1996) (GH) within a neo-classical growth framework. Consequently, it modifies the Toda and Yomamoto (1995) multivariate causality test to account for structural breaks obtained from the GH approach. It finds evidence of structured breaks in 1991Q1, 1981Q1 and 1981Q3, and 1977Q4, which coincided with deteriorating economic conditions following the negative crude oil price shock of the late 1970s. Nevertheless, the breaks had no significant impact on growth and resulted in a stable model as indicated by the inverse roots of AR characteristic polynomial. Also, our findings lend support to the existence of a long-run relationship between FDI, financial depth and economic growth. However, it finds no evidence of causality running from FDI and financial depth to economic growth and otherwise. Therefore, a policy implication of these findings is the need to deepen the financial system and improve its regulatory framework in order to stimulate more foreign direct investments that will help create jobs and sustain inclusive growth in Nigeria.

 

 

 

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