Energy Consumption and Foreign Direct Investment in Nigeria: A Structural Break Analysis

Abstract

Abstract The study analyses the structural break impact on the relationship between energy consumption and foreign direct investment in Nigeria from 1970 to 2015. The study accounts for the structural break and estimates the short-run and long-run relationship between energy consumption and foreign direct investment using ARDL estimation technique and Bai-Perron Least Squares Break Point. It was observed from the findings that a strong long-run cointegrating relationship exist between energy consumption and foreign direct investment with and without structural break. The structural break test reveals a break period of 1995 which supports the occurrence of oil price review by OPEC in 1995. Also, the ARDL estimate result revealed that energy consumption, trade and exchange rate adversely attract foreign direct investment, while GDP positively attract foreign direct investment both in the short-run and long-run in Nigeria. The study concludes that even though Nigeria’s GDP is trending towards attracting FDI into the economy, energy consumption, trade and exchange rate obstruct the attraction through the additional cost incurred as a result of imbalances in the variables. A major recommendation from the findings is that energy policies need quick re-visit in Nigeria. However, they will - due to the pressure exerted by the constant growth of the population, i.e. on the demand side, demand inflation will constantly manifest.