Michael Emeka Obiechina and Emmanuel UzodinmaUkeje
Evidence abound that some transition and developing countries are attracting large inflows of foreign capital that could engender economic growth or have destabilizing effect on their economies if not well managed. This has undoubtedly aroused anxiety over its potential effects on economic growth, the competitiveness of the export and external sectors viability. The study examines the impact of capital flows (foreign direct investment), exchange rate, export and trade openness on economic growth in Nigeria as well as the causal long-run relationship among the variables, using time series data from 1970 – 2010. The unit root test confirmed the series to be stationary at I(1), while the Johansen cointegration test suggested the existence of at least one cointegration vector among the variables. Using Engle-Granger 2-Step procedure, it was observed that all the variables, except the fdi are statistically significant and impact on economic growth in the short-run dynamic equilibrium model. Exogeneity test confirmed that fdi has weak exogeneity with economic growth. In addition, the Pairwise Granger causality revealed the existence of uni-directional causality between economic growth and fdi, and uni-directional and bi-directional causality among some of the variables. Consequently, it is recommended that government should continue to pursue trade and foreign exchange policies that would ensure competitiveness and viability of the export sector as well as economic growth, while foreign direct investment should be encouraged amidst thriving business environment that would engender economic growth.
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