FDI, private investment and public investment in Nigeria: An unravelled dynamic relation

Abstract

For decades, scholars have continually emphasized the importance of FDI in the less developed countries. Some believe that FDI can fill investment gaps, either private or public and mobilizes savings (Lee and Suruga, 2005; Todaro and Smith, 2003; Hayami, 2001). This study seeks to verify the interactions and transmission mechanism between FDI, private direct investment and public direct investment in Nigeria. Furthermore, these variables were examined to ascertain their direction of causality and whether or not they have long run linear relationship. Also, the impulse responses of these variables to shocks in the extraneous variables were verified; using the Multiple-Equation VAR models with time series data ranging from 1970-2012. The co-integration result indicates that there is no long run relationship between these variables. In addition, the variance decomposition result shows that 46 percent of innovations in FDI were explained by its own past values, while 21 percent of the innovations were due to shocks, to private domestic investment with 31 percent due to public investment. The response of public and private investment to shocks in FDI is positive and significant in the short run and so is consistent with the findings of Jansen (1995), Misun and Tomsik (2002). Efficient infrastructure in terms of public investment in basic infrastructure cannot be overemphasized amongst others.