The Role of Internatinal Capital Flow in Economic Diversification in Nigeria

Abstract

This research examines the influence of international capital flows on economic diversification in Nigeria from 1981 to 2023. Adopting an ex post facto research design, the study relies on secondary data and applies the Autoregressive Distributed Lag (ARDL) model to assess both the short-term and long-term effects of foreign direct investment (FDI), foreign portfolio investment (FPI), remittances (RMT), and official development assistance (ODA) on real gross domestic product (RGDP). Findings from the ARDL Long Run Regression reveal significant relationships among several international capital movement variables. Notably, FDI exhibits a negative and statistically significant effect on RGDP, implying that FDI inflows may not effectively drive economic growth in Nigeria, possibly due to capital repatriation or a mismatch with key economic sectors. In contrast, FPI has a positive and significant effect on RGDP, suggesting that short-term portfolio investments contribute positively to economic expansion. Similarly, ODA demonstrates a positive and significant relationship with RGDP, reinforcing the role of foreign aid in stimulating growth. However, RMT does not show statistical significance, indicating that remittances may have a limited impact on economic growth. Based on these outcomes, it is suggested that Nigeria strengthen its investment framework by channeling FDI into productive sectors to enhance growth. Furthermore, policies aimed at ensuring the stability of foreign portfolio investments and optimizing the utilization of foreign aid resources could support economic expansion. This study highlights the importance of different forms of international capital in advancing Nigeria’s economic growth.