Abstract

The nexus of foreign direct investments (FDI), trade openness, capital formation in promoting economic growth has been the subject of much debate among development specialists, researchers, aid donors as well as recipients in Nigeria in particular. In spite of this, there are only few empirical studies that investigate the nexus of foreign direct investments (FDI) trade openness, capital formation to economic growth rate in Nigeria. Theoretically, the nexus between trade openness, foreign direct investment (FDI), capital formation, and economic growth tends to be positive. However, this paper tries to examine the nexus between trade openness, foreign direct investment (FDI), capital formation, and economic growth rate in Nigeria which spanned over a period of 25 years (i.e.1986 – 2011), using time series data analysis. The stationarity tests were conducted since time series data are assumed to produce spurious outcome (see Granger and Newbold, 1974). Hence, all variables of interest were tested using ADF and PP unit root test, and they were all found to be stationary at first differencing. Perhaps, the Johansen-Juselius procedure is applied to establish the co-integrating relation between variables of interest. Subsequently, the result of the study show a long-run equilibrium relationship of gross domestic growth rate and the explanatory variables. The study shows a significant positive effect between the degree of trade openness, level of capital formation while a positive but insignificant relationship exist between the volume of FDI and gross domestic product growth rate. Thus to capture the short run dynamics of the study vector error correction model (VECM) was estimated. It was recommended that the Nigeria government should increase the efficacy of its fiscal and monetary policies to increase more on its exports as well as rates of GDP growth. However, the government should critically look into its institutional frame work since the positive but insignificant of the volume of FDI on economic growth, signifies as greater dilemma to the economy. Therefore, should formulate FDI-led polices and ensure higher degree of capital formation to enhance her economic growth rates at large.