The triangular nexus causality among economic growth, trade, FDI and Oil Price: time series analyses of Nigeria

• Published date: 01 December 2019
• Date: 01 December 2019
• Author: Edmund N. Udemba
• DOI: http://doi.org/10.1111/opec.12165

The triangular nexus causality among

economic growth, trade, FDI and Oil Price:

time series analyses of Nigeria

Edmund N. Udemba

Economics Department, Eastern Mediterranean University, Famagusta 99450, Turkey. Email:

edmund.ntom@alumni.emu.edu.tr

Abstract

The central objective of this work was to test and determine the causality between the selected

economic indicators such as trade, FDI, Oil Price and GDP in Nigeria and make a recommendation

for a timely policy framework for the betterment of the Nigerian economy. Using Nigerian annual

data of 1970–2018 with the application of Granger causality test, we found a unidirectional

causality that runs from Oil Price to both FDI and trade and from FDI to trade. There was no causal

effect transmitting from either trade to Oil Price or trade to FDI. Also, there was no transmission of

causality from GDP growth to any of the selected indicators. Our findings expose the heavy

influence of oil via price on the economic performance of Nigeria. This could justify the claim that

there is a positive relationship between Oil Price and growth. Hence, supporting the findings that

FDI is attracted by the availability of oil and the FDI will turn around influenced the rate of trade

via trade openness. This will create avenue for a virtuous economic growth circle if policy

implication is managed well.

1. Introduction

The main objective of this paper was to ascertain the interplay of the selected economic

indicators (GDP, trade, FDI and Oil Price) and to verify which causes or affect which.

The outcome will help us in agreeing or disagreeing with the already existing empirical

literature works on this topic. With the event of structural adjustment programme (SAP)

in sub-Sahara regions of Africa in the 70s, the economic performance of the individual

countries that made up the region has been on a great trend. Nigeria as a major player

in the affairs of the region through the united body called African Union (AU) has been

the centre of focus in the research activities. Economic performance of Nigeria and

what causes the activities and the directions of the impacts has been studied extensively

by so many researchers with different approaches. According to Chuku et al., (2011),

the central objective of SAP policy was the exposing of the domestic economic

performance to accommodate competition from both within and outside the economy

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for efficiency in resource use, reducing or entire removal of resource wastage, curtailing

of misalignment in the external economic activities and domestic sectors and to redirect

the economy on the pathway of recovery and viable economic growth. trade (Domestic

and International) measures among the controversial policies in securing a viable

economy. This could be the reason why Awojobi & Katircioglu (2011) in backing the

trade openness observed that export trading promotes a better economic performance in

Nigeria. In a competitive environment, prices are lower and products are diversified

through the acts of innovation with the availability of technologies in the economy by

the help of trade liberalisation. The competitiveness that is introduced through many at

times enhances the economic performance of the country in question and the welfare of

the masses. Most of the countries are interested in trade because of its perceived gains

like specialisation and efficiency in resource management and alignment into the right

policies to promote diversification. This is the more reason why many research into

economic growth considers trade as an essential indicator of measuring growth.

However, some have argued through the outcome of their research that policies like

import substitution and export promotion should be encouraged. Folasade and Ola

(2002) argued that the growth of the industrial sector in Nigeria in the 70s was the

outcome of the policy enacted then which is import substitution. In exception of import

substitution policy, the domestic firms will be exposed to the world prices generated in

the process of competitive selection in which some indigenous firms especially in the

developing economies might not stand the weight of the competition because they owe

their existence largely to previously sheltered markets and subsidised input supplies.

Knowledge of the impact of trade as a booster of growth via better economic

performance is very important in studying the causality effects in an economy even

though it is not constant. The trade as it impacts the economic performance (i.e. the

economic growth) has been researched by many such as Chaudhry et al. (2010), Ersoy

and Deniz (2011), Sakyi (2011).

Also, considering the Foreign Direct Investment (FDI) as among the indicators we

are looking at the causality effect in the economy because FDI has being on the increase

in the sub-Sahara regions of Africa in the past years. Measuring the impact of Foreign

Direct Investment (FDI) on economic performance and growth occupies a substantial

body of economic literature. Many works (theoretical and empirical) have shown

different channels through which FDI is likely to cause economic growth. Notwith-

standing, the many works that have been reported on FDI to the economies of some

countries of the Africa, the FDI has not been dealt intensively as it should be when

compared with other regions such as Latin American and the Asia. Even other

economies that have been studied immensely as regards to the effects of the FDI have

based the research on manufacturing industries. Economies where major part of the

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