The Role of Foreign Direct Investment in Economic Growth: Empirical Evidence from Sign Identified Structural Vector Autoregression Model

Abstract

This study investigates the impact of Foreign Direct Investment (FDI) on economic growth in Nigeria, focusing on the influence of oil price shocks and demand-driven factors. The aim is to assess how FDI affects macroeconomic performance, particularly through inflation, manufacturing output, and real GDP. The study adopts the Structural Vector Autoregression (SVAR) methodology, utilizing cointegration analysis and unit root tests to examine the relationships among these variables. The theoretical framework is anchored in Neoclassical Growth Theory and the Eclectic Paradigm (OLI Model), which help to explain FDI's impact on growth and sectoral development. The findings reveal that FDI significantly influences Nigeria’s economy, with demand shocks having a larger effect than oil price fluctuations on economic growth. Technological spillovers and innovation are also highlighted, showing how FDI boosts productivity in sectors like manufacturing and agriculture. The study further suggests that oil price shocks dominate in the short term, but demand and supply shocks have more pronounced long-term effects on Nigeria's real GDP and industrial output. The study concludes that strategic reforms are needed to diversify the economy and reduce oil dependence. Therefore, it recommends strengthening macroeconomic policies, improving infrastructure, and attracting high-quality FDI into non-oil sectors, such as manufacturing and agriculture, to ensure sustainable economic growth.