Government Fiscal Policy and Foreign Direct Investment in Nigeria: An Application of VAR Model

Abstract

Purpose: The aim of this paper is to examine the impact of key fiscal policy variables (government capital expenditure, government revenue, government recurrent expenditure, external debt and tax revenue) on foreign direct investment and to check if there exists a causal relationship between fiscal policy and Foreign direct investment in Nigeria.

Approach/Methodology/Design: Times series Econometrics methods such as Vector Autoregressive (VAR) Model, unit root test, cointegration test, Lag selection test and Granger causality test on annual data obtained from CBN statistical bulletin and National Bureau of Statistics spanning 1985 to 2020 were used.

 Findings: The results of the unit root test showed that FDI, government capital expenditure, government revenue and tax were stationary at order one (1), while recurrent expenditure and external debt were stationary at order zero (0). Also there exists co-integration among all the variables in the model. The findings showed that fiscal policy has insignificant impact on foreign direct investment in Nigeria. 

 Originality/value: The results of this paper give valuable information on the relationship that fiscal policy may have with foreign direct investment and a need for a well-articulated and coordinated fiscal policy to attract FDI in Nigeria for optimum growth and development.