THE ASYMMETRIC IMPACT OF FOREIGN DIRECT INVESTMENT AND FINANCIAL DEVELOPMENT ON GROWTH USING A NONLINEAR ARDL APPROACH

Abstract

Foreign direct investment and financial development are critical in enhancing the growth of the host economy. This study investigates the asymmetric impact of foreign direct investment (FDI) and financial development (FD) on growth in Nigeria. To accomplish this objective, the study employs time-series data and a nonlinear Autoregressive Distributed Lag (NARDL) framework to decompose FDI and FD into positive and negative changes. We use GDP growth as the regressor, FDI and trade openness as explanatory variables, financial development as a mediating variable, and the human development index and the exchange rate (EXR) as control variables. The results of this study show that FDI and positive financial development (+ve) significantly increase the GDP growth rate in the short and long terms. At the same time, negative FDI and financial development shocks reduce growth, suggesting that improvements in the financial sector and FDI potentially drive economic growth. Results also indicate that the mediating variable (FDI*FD) is significant, showcasing that financial development facilitates FDI's growth impact. Based on our empirical outcome, the paper concludes that FDI and FD are critical in enhancing growth. The findings of this study suggest that government and policy analysts should encourage FDI by initiating environmentally friendly policies and establishing an adequate institutional framework to protect and promote foreign investment not only in Nigeria but also in other developing countries. Significantly, absorptive capacity, such as the financial sector, should be strengthened to optimize FDI's impact on growth.

JEL Classification Codes: F21, F30, F43.