Foreign Direct Investment, Business Environment and Economic Growth in Nigeria: A Dynamic GMM Approach (1986-2023)

Abstract

The study investigates the role of foreign direct investment (FDI) and business environment in Nigeria's economic growth from 1986-2023. Static models fail to capture endogeneity and the dynamic interactions among macroeconomic variables; therefore, this study employs the Generalized Method of Moments (GMM) to address feedback effects, autocorrelation, and endogeneity in the relationship between FDI and economic growth. The validity of the instruments is guaranteed by the Hansen test (Arellano & Bover, 1995), and the absence of second-order autocorrelation is guaranteed by the Arellano-Bond test (Arellano & Bond, 1991), which strengthens the model's validity. The model also incorporates inflation and trade openness as control variables to strengthen the explanation of Nigeria's growth profile. At 5% level of significance, GMM estimation (Blundell & Bond, 1998) reveals that lagged GDP has a positive significant effect, augmenting growth persistence in the long run. FDI has a positive significant effect on economic growth, supporting the growth-led investment hypothesis. The investment climate, as proxied by regulatory quality and institutional performance measures, also strongly affects growth positively. Inflation negatively affects economic growth, showing macroeconomic instability effects. Trade openness has a positive effect on growth but with weaker statistical strength (marginally significant at the 10% level with a p-value j 0.07). From the above findings, the study recommends improving regulatory frameworks, institutional quality, and macroeconomic stability for greater effectiveness of FDI and spurring sustainable development in the Nigerian economy. These findings extend a dynamic and policy-driven contribution to growth and development literature in emerging economies.