Foreign Inflows and Economic Development in Nigeria: An ARDL and Novel Dynamic ARDL Simulation Approach

Several studies have been done on foreign inflows and economic development in Nigeria using various estimation techniques, but this study examined the effect of foreign inflows on economic development in Nigeria employing ARDL approach and the Novel dynamic ARDL simulation approach. Foreign Direct Investment was captured as physical investments made by foreigners in Nigeria, while foreign portfolio investment has to do with investment in securities by foreigners. In achieving this, we x-rayed the effect of foreign direct investment, foreign portfolio investment and remittances on economic development proxy by per capita income. The study used annual data from 1986 to 2020 and obtained from World Development Indicator (WDI) and United Nations Conference on Trade and Development (UNCTAD). The method employed was the autoregressive distributed lag (ARDL) method and the novel dynamic autoregressive distributed lag (DARDL) Simulation. The latter was employed to analyze the future response of economic development to 10% shocks in the predictor variables. The cointegration result which was based on the bound test affirmed long run relationship among the variables. The ARDL results shows that foreign portfolio investment and remittances have inelastic positive and significant impact on economic development. We found evidence that shows that foreign direct investment has negative and insignificant impact on economic development in the long run. In the short run, foreign direct investment and remittances significantly improve economic development. The dynamic ARDL simulations revealed that economic development responded positively to 10% negative shocks to foreign direct investment. Economic development responded in the same direction to 10% positive and negative shocks to foreign portfolio investment and remittances. We therefore recommend a cut in the cost of sending remittances through fostering greater competition between money transfer operators (MTOs) and providing business supporting infrastructures.