Financial Development, Foreign Direct Investment and Economic Productivity Nexus in Nigeria

Abstract

The role of financial development cannot be overemphasized for a sound and healthy structure of an economy. Also, a well-functioning and adequately regulated financial market is considered a prerequisite for reaping significant gains from foreign direct investments, which in turn could be channelled to enhance economic productivity. This empirical study explores the impact of financial development and foreign direct investment on economic productivity and the direction of causality between financial development and foreign direct investment on economic productivity respectively. The Autoregressive Distributed Lag (ARDL) Model, the Granger Causality Test and the Fully Modified Ordinary Least Squares (FMOLS) for robustness check were adopted as the main analytical techniques. The findings of the study indicate that financial development has significant but negative impact on economic productivity in Nigeria while foreign direct investment exerts a positive and statistically significant long-term effect on economic productivity. Additionally, Investment, Regulatory Quality, Inflation Rate, and Interest Rate are also discovered to have a negative impact on economic productivity in Nigeria. The Fully Modified Ordinary Least Squares (FMOLS) results further confirm these findings. This study thus recommends that Central Bank of Nigeria should initiate reforms that must be directed at improving the quality of financial development indicators and its services to meet the needs of foreign and domestic investors and the economy at large; the government should create an enabling environment, provide infrastructural facilities, and improve the quality of institution to enable Nigeria's economy to thrive productively given any global economic shocks.