Capital Flows and Industrial Output in Nigeria

¹Ihejirika Peters O., ²Ndugbu Michael O. and ³Bigbo Oki

^1,2,3 Department of Banking and Finance, Faculty of Management Sciences, Imo State University Owerri, Imo State, Nigeria

Abstract

This study examined the relationship between capital flows and industrial output in Nigeria from 1982 to 2020. Data on Industrial output (INDQ), Foreign Direct Investment Inflows (FDI), Foreign Portfolio investment (FPI), External debt stock (ExD) and Migrant remittance inflows (RMT) were analyzed using the vector autoregression (VAR) model. The impulse response function shows that FDI and FPI exhibit positive effects on INDQ for about two periods after which the effects could not be sustained. The evolution of industrial output due to shocks in external debt was passive. Against appriori expectations, remittances showed a negative effect on INDQ. The VAR Granger Causality/Block Exogeneity Wald Tests results indicate that FDI and FPI Granger cause industrial output. External debt and remittances do not Granger cause industrial output. The variance decomposition result shows that FPI contributed more to changes in INDQ followed by RMT, FDI and ExD in that order. The study concludes that capital flows’ components vary in their relationship with industrial output in Nigeria. But, Capital flows as represented by FDI, FPI, ExD and RMT jointly and significantly Granger cause INDQ. Therefore, Government may have to rely mostly on FPI and FDI to promote Industrial output growth and reduce to the barest minimum the use of external debt. Finally, Government should be concerned about the negative effect of remittances on industrial output and think of ways to not only reverse the trend but use it to spur industrial output.

Keywords: Capital flows, industrial output, remittances, external debt, vector autoregression Nigeria