The Trade Liberalization. Foreign Direct Investment Nexus In Nigeria (1990-2016)

Table of Contents

1 CHAPTER ONE
1.1 BACKGROUND TO THE STUDY
1.2 STATEMENT OF THE RESEARCH
1.3 RESARCH QUESTIONS
1.4 RESEARCH OBJECTIVES
1.5 RESEARCH HYPOTHESIS
1.6 SIGNIFICANCE OF THE STUDY
1.7 DELIMITATION OF THE STUDY

2 CHAPTER TWO. SURVEY OF RELEVANT LITERATURES
2.1 CONCEPTVAL FRAMEWORK
2.2 THEORETICAL LITERATURE
2.2.1 TRADE THEORIES
2.2.1.1 THE MERCANTILIST TRADE THEORIES (1500-1600)
2.2.1.2 THE ABSOLUTE ADVANTAGE TRADE THEORY (1776)
2.2.1.3 THE COMPARATIVE COST ADVANTAGE THEORY (1817)
2.2.1.4 THE HECKSHER-OHLIN MODEL
2.2.1.5 THE NEW GROWTH MODEL
2.3 EMPIRICAL LITERATURE
2.3.1 FOREIGN STUDIES
2.3.2 DOMESTIC STUDIES
2.4 SUMMARY, LIMITATIONS OF PREVIOUS LITERATURE AND VALUE ADDITION

3 CHAPTER THREE. RESEARCH METHODOLOGY
3.1 THEORETICAL FRAMEWORK
3.2 MODEL SPECIFICATION
3.2.1 MODEL ONE FOR OUR PRIMARY OBJECTIVE
3.2.2 MODEL TWO FOR OBJECTIVE TWO
3.3 ESTIMATION TECHNIQUE
3.4 METHOD OF EVALUATION
3.4.1 ECONOMIC CRITERIA: A PRIORI EXPECTATIONS
3.4.2 STATISTICAL CRITERIA: FIRST ORDER TEST
3.4.3 THE ECONOMETRIC CRITERIA: THE SECOND ORDER TEST
3.5 THE PRE-TESTS
3.5.1 STATIONARITY TEST
3.5.2 CO-INTEGRATION TEST
3.5.3 ERROR CORRECTION TEST
3.6 SOURCES OF DATA
3.7 SOFTWARE PACKAGE

4 CHAPTER FOUR
4.1 DESCRIPTIVE ANALYSIS
4.1.1 TIME SERIES PLOT OF THE DATA AND THE TREND ANALYSIS
4.2 PRE-ESTIMATION TEST
4.2.1 THE UNIT ROOT TEST RESULT
4.2.2 ENGLE-GRANGER TWO-STEP CO-INTEGRATION TEST RESULT
4.3 PRESENTATION OF REGRESSION RESULTS
4.4 EVALUATION OF RESULTS
4.4.1 EVALUATION BASED ON ECONOMIC (A PRIOR) CRITERIA
4.4.2 EVALUATION BASED ON STATISTICAL CRITERIA
4.4.2.1 ADJUSTED R[2] (CO-EFFICIENT OF DETERMINATION)
4.4.2.2 THE T-STATISTIC
4.4.2.3 THE F-TEST
4.4.2.4 THE ASSUMPTION OF NO SERIAL CORRELATION
4.4.2.5 TEST FOR HETEROSCEDASTICITY
4.4.2.6 TEST FOR THE PRESENCE OF MULTICOLLINEARITY
4.4.2.7 PRESENTATION OF ERROR CORRECTION REGRESSION RESULTS.
4.5 THE SECOND MODEL FOR OBJECTIVE TWO
4.5.1 THE RESULTS OF THE GRANGER CAUSALITY TEST.

5 CHAPTER FIVE
5.1 THE SUMMARY OF THE STUDY
5.2 POLICY IMPLICATION OF THE STUDY.
5.3 CONCLUSION.
5.4 RECOMMENDATIONS OF THE STUDY.
5.5 LIMITATION OF THE STUDY AND SUGGESTION FOR FURTHER STUDY

6 REFERENCES

7 APPENDICES

ACKNOWLEDGEMENT

I express my heartfelt gratitude to my parents for giving me this invaluable gift of education. Daddy and mummy, I say thank you for your steadfastness in this struggle. My siblings and Brethren, I appreciate your financial and moral support. Nobody has ever made it without an able assistance, I am heavily indebted to Dr. J.E Ogbuabor, the man who made me love research. Thank you Sir for making available the requisite resource materials I needed in this study. The academic and non-academic staff of the Department of Economics are highly acknowledged. Also, the authors and writers of articles and other researchers whose works were cited in this study are not left out in this acknowledgement.

ABSTRACT

Despite the degree of economic openness in Nigeria,our country, accordingto World Bank (2018), still ranks 145th position out of 190 countries in the ease of doing business index for 2018. However, it was on account of this ground that this study seeks to empirically examine the interlinkages between trade openness and foreign direct investment in Nigeria by relying on annual time series data spanning the period 1990-2018 and using the Engel-Granger two step co-integration test to establish the existence of a stable long run equilibrium relationship among the variables at 5% level of significance. The study employed the Ordinary Least Square (OLS) regression technique and the pairwise granger causality test to validate the nature of the relationship existing between trade openness and foreign investment in Nigeria. Sequel to the regression result, we found that although openness is statistically insignificant, foreign direct investment responds positively to changes in trade liberalization. Similarly, the granger causality reveals a zero causality between TOPEN and FDI. The study therefore recommends that since TOPEN has proven to be an insignificant determinant of foreign investment and thus not granger causing FDI, the government should adopt measures that would make our economy business friendly and should use tax rate that is tenable for the foreign investors.

1 CHAPTER ONE

1.1 BACKGROUND TO THE STUDY

International economics, from time immemorial, has occupied itself with issues relating to Foreign direct investment (FDI) both in developed and developing nations. In fact, the steady streams of theoretical and empirical research have been on the impulses and responses that FDI generates in an economy. Foreign Direct Investment induces growth through technology diffusion, human capital development, export promotion, employment generation and productivity growth (Li and Liu, 2005; Liu et.al, 2009; Alfaro et.al, 2010; Lee et.al 2012; Junior, 1999; Yao, 2006 and Ramirez, 2006). Consequent upon the benefits of FDI, the dominant theme of research has been on factors influencing FDI. For instance, previous studies concentrated more on firms and industry specific variables in trying to explore the movement of foreign direct investment. However, currently, attention has shifted to the spatial aspect of FDI and the subsequent consequences on the expansion of multinational enterprises into foreign market. This shift in attention to the locational aspect of FDI can be attributed to the realization that countries compete with each other to attract a major share of FDI inflows thereby making changes in domestic policies on key factors that attract FDI. No wonder, location variables are main factors influencing FDI but their overall influence now has continued to dwindle and this explains the present emphasis on the role of macroeconomic policies in the host country on FDI inflows (Dunning, 2009), Therefore, it is not surprising that several macroeconomic policy changes were made in most developing nations in the1980’s. These macroeconomic policy reforms were implemented in most emerging economies not only to enhance domestic investment but also to foster increased foreign direct investment. Over the years, the Nigerian government has adopted several adjustment policies to attract FDI. In particular, the government embraced the structural adjustment programme in the mid1980’s. which entailed; the liberalization of various sectors of the economy, attraction of foreign investors to the manufacturing sector through tax incentives, privatization of government owned enterprises and liberalization of interest and exchange rates mainly to provide enabling environment for increased FDI inflows into the economy. Moreover, still in the early 1990’s, many macroeconomic policies aimed at fostering faster growth in FDI into the country were put in place. But, in spite of all these measures, the shares of aggregate FDI inflows in Nigeria relative to the GDP is still low when compared to some other African countries. Also, in aggregate terms, the amount of FDI flows to Nigeria in relation to those of the Asian countries is relatively low.

Be that as it may, it is a widely accepted theory that FDI boosts economic growth through technological progress regardless of whether the economy is developed or developing (Jayachandran and Seilan, 2010). And that was why during the last three decades, there was a growing concern among several countries to accelerate this process of technological transfer. One of these ways is, ‘trade liberalization.’ This simply means that all countries that have had sustainable growth in FDI and hence economic prosperity have opened up their market for trade and investment. Open economies, generally, have greater market opportunities but at the same time are faced with more international competition from businesses based in other countries since foreign direct investment is the investment that a firm headquartered in one country makes in operation in another country.

Trade openness, as a result of trade liberalization is a mechanism where countries permit or have free trade with other countries. The trading activities may include; imports and exports, foreign direct investment, borrowing and lending, and repatriation of funds abroad. Trade liberalization has over the years increased the global importance of foreign direct investment. This is because, FDI raises the amount of available capital stock, encourages technological transfer and enhances the process of competition.

Apparently, the notion of trade liberalization, as a matter of fact became largely pronounced due to the embracement of theIMF’s Structural Adjustment Programme (SAP)implemented by most Sub-Saharan African countries including Nigeria. Notably, the removal of all forms of restrictions to foreign trade, reduction of wastages, elimination of persistent misalignment in the external and domestic sector, constant redirection of the economy towards the path of recovery and growth and a general opening of the domestic economies to face increased competition to ensure efficiency in resource use are the corner stones of the SAP induced policy (Effiom et.al, 2011). Thus, trade liberalization is one of the most controversial issues in international economics and finance. Generally, the relationship between open trade and growth has been the bone of contention in numerous theoretical and empirical studies (Edward, 1992 cited in Olaifa et.al, 2015; Chaudhry et.al, 2010; Ersoy and Deniz, 2011 and Sayki, 2011). The reason behind this is mainly that in a competitive environment, prices get lower and products become diversified through which increased welfare emerges. Gains from specialization and efficiency are also further accrued merits inherent in economic openness. Therefore, it is quite reasonable that economies generally desire to be economically open.

Sequel to the above, this research seeks to investigate the trade liberalization-FDI nexus in Nigeria covering the time frame from 1990 to 2016.

1.2 STATEMENT OF THE RESEARCH

World Bank (1993) posits that the economies of countries with more trade openness relatively outperform their less open counterpart. But, the confusing scenario recently is whether trade liberalization/openness likewise fosters Foreign direct investment in emerging economies. In a bid to provide practical answers to this, the world economies; both developing and developed nations have witnessed rapid trade liberalization either unilaterally or as part of multilateral ties with the WTO, IMF and World Bank. Baier and Bergstrand (2001) stated that income growth, tariff rate reductions and lower transport costs are contributory factors for the rapid growth in world trade openness and liberalization.

Indeed, the earliest form of liberalising trade prior to the structural adjustment programme (SAP) was the import substitution policies of the 1970’s. But this policy did not record much success as a result of an unconducive macroeconomic environment. The adoption of the Structural Adjustment programme in 1986, however brought about the emergence of trade liberalization which was accompanied by; elimination of foreign exchange control to reflect economic realities, removal of price control and the disbandment of the commodity boards. The policy thrusts of SAP in Nigeria were to; create an enabling environment to enhance increased inflows of capital transfers, adopt appropriate technologies and increase shares of trade revenue to the government as another means of reducing the total reliance on crude revenues. Nonetheless, the core objective of liberalization, whatever the dimension it might take, is to particularly attract foreign investment and expand the economy in general.

Not surprisingly, in the opening decade of 21st century, the global stock of inward Foreign direct investment mounted from US$ 7.5 trillion in 2000 to US$ 19 trillion in 2010 while its share in world GDP rose from 23% in 2000 to over 31% in 2010. In turn, trade in goods and services grew from US$ 16 trillion in 2000 to over US$ 37 trillion in 2010 as a result of liberalization (UNICTAD, 2010a, 2011 cited in Martinez, 2015).

However, contrary to the above, the financial and economic crises of the second half of the century induced a turning point in the upward trend of trade and FDI flows. Thus, inward FDI flows fell to 15% in 2008, 37% in 2009 and increased only by a modest 5% in 2010. The total amount of FDI flows was 37% lower in 2010 than in 2007. Furthermore, trade also decreased during the economic crisis. After a significant slowdown in 2008, the volume of world trade dropped by over 13% in 2009, thus representing its highest fall since the 2nd World war. However, the total volume of merchandise trade globally recorded a 14% increase in 2010, hence roughly offsetting its decline in 2009.

Precisely, the table below turns our attention to the status of the Nigerian economic indicators before and after liberalization.

Table 1: Economic indicators in the pre and post liberalization periods in Nigeria.

Abbildung in dieser Leseprobe nicht enthalten

Source; World Development indicators 2017.

The economic indicators depicted in table 1 above show that inflows of Foreign Direct Investment rose from the pre-liberalization period and increased significantly in the post liberalization era. Virtually, all the indicators showed an upward trend from the pre-liberalization to post liberalization era. However, of policy interest are the behaviour of interest and inflation rates which continued to rise even significantly in the post.lib period. Thus, negating the a priori expectation that the availability of cheaper imported products ought to lower domestic prices.

At this juncture, it would be empirically imperative to graphically explore some of the stylized facts inherent in the behavioural movement of Foreign Direct Investment in Nigeria that motivated our analysis of this topic.

Abbildung in dieser Leseprobe nicht enthalten

Fig 1: Foreign Direct Investment Trend Analysis in Nigeria.

From the graph above, it could be seen that the aggregate FDI inflows declined in 1980 by 1.15% and increasing only by 1.68 in 1985. However, following the IMF’S structural adjustment reforms introduced in the mid-1986, aggregate FDI increased by 7.78 and 10.83 percentage of GDP in 1989 and 1994 respectively. Regrettably, FDI inflows into the economy experienced a downward shift from the year 1996 to 1999 as a result of the annulment of the general election in 1993 and its attendant crisis thereto. However, the embracement of democratic governance in late 1999 coupled with the introduction of various financial and economic reforms in the economy, aggregate foreign direct investment increased by 1.64% in 2005 when compared to its position in 1999 and further to 5.05% of GDP in 2009. Nonetheless, the inflow of FDI into the economy recorded a 29% downward trend in 2010 due to the global financial crisis that plunged the economy in the mid of 2009. Furthermore, the worst happened in 2015 where the country experienced a 32.90% decline in the inflow of foreign Direct investment, thus representing the greatest fall in FDI inflow since the Civil War. However, shortly a year after, precisely towards the end of 3rd quarter in 2016, the FDI inflow recorded a 41.75% change.

Although the aggregate inflow of FDI into the country increased for most years from 1985 to 2016, it is quite interesting to note, that, the country has not faired well in attracting Foreign investment when compared to other Asian countries like China, Thailand, India and Malaysia. Consequently, this explains why venturing into the ‘trade liberalization-FDI nexus in Nigeria’ is of empirical importance.

1.3 RESARCH QUESTIONS

In line with the background and purpose of research, it is expedient to conduct a research that seeks to answer the following questions:

What is the exact link between Foreign Direct Investment and Trade liberation?

Does Trade Liberalization foster foreign direct investment?

1.4 RESEARCH OBJECTIVES

The primary objective of this study is to investigate the nature of the relationship between foreign direct investment and trade liberalization in Nigeria.

2 To ascertain the direction of causation between FDI and trade Liberalization

1.5 RESEARCH HYPOTHESIS

Based on the statement of the problem, we claim the following research hypotheses:

Ho: The nature of association between FDI and trade liberalization in Nigeria cannot be well spelt out

Ho: Trade liberalization does not granger cause foreign direct investment in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

This study is poised to examine the nexus between trade liberalization/openness and Foreign direct investment in Nigeria. There have been series of attempts to verify the relationship between trade openness and foreign direct investment in the case of emerging economies. But, some, if not all of these attempts produced mixed and conflicting results. For instance, though earlier studies pinpointed the existence of a substitution association between trade, foreign direct investment and trade liberalization (Graham, 1996; Bayoumi and Lipworth, 1997; Nakamura and Oyama, 1998), other contributors argued that trade and FDI are complements rather than substitute (Balasubramanyam et.al, 2002; Egger and Plaffermayer, 2004 and Martinez,2010). Furthermore, another group of researchers found both complementary and substitution relationship between trade and FDI (Blonigen, 2001; Swenson, 2004 and Fillat et.al, 2008). Therefore, ascertaining the clear interface between trade openness and foreign direct investment, which this study seeks to explore, would be of immense help to the government and policymakers to be watchful when enacting any form of liberalization policies for the purpose of attracting FDI inflows into the country. This is so because, if this study affirms a negative linkage between openness and FDI, then it becomes glaringly clear that liberalization policies would not improve the position of foreign investment into the economy, rather it would decline it.

Among other beneficiaries of this research are those seeking employment in foreign owned firms because if truly liberalization negates FDI inflows and since foreign direct investment is an investment made to acquire lasting interest in enterprises operating within the domestic economy of those job seekers, it means that, the higher the degree of openness, the lesser the presence of those multinational companies in the home country. Hence, the less probability of gaining employment in such desired establishment. Finally, students of tertiary institutions and other scintillating researchers of related discipline would see this study as a reference material that provokes reasons for more researches on the discourse of the trade openness-FDI nexus in Nigeria. Indeed, this research would be equally seen as a great addition to the existing body of knowledge.

1.7 DELIMITATION OF THE STUDY

The geographical scope of this research will concentrate on the Nigerian Economy, assessing the empirical relationship between foreign direct investment and trade openness. This study shall employ a yearly time series data spanning the period 2000-2016. The underlying reason for the choice of this time frame is the necessity to focus on current issues pertaining to FDI-trade openness nexus in Nigeria.

The variable of interest in this study shall include; trade openness (ratio of export and import to real GDP) as a stand in for trade liberalization, tariff rates or taxes on international trade as core variables and exchange rates and consumer price index or inflation rates as minor variables.

2 CHAPTER TWO. SURVEY OF RELEVANT LITERATURES

This section will appraise the theoretical construct on the relationship between foreign direct investment and trade liberalization. It summarises the perception of authorities in this subject matter as well as the empirical evidence on this discourse- lastly, it sets out current research into proper perspective after gapes in the existing literature must have been pinpointed.

2.1 CONCEPTVAL FRAMEWORK

TRADE LIBERALIZATION:This is the removal or reduction of restrictions or barriers on the free exchange of goods between nations Trade liberalization promotes free trade. Free trade allows countries to make commodity exchange without regulatory barriers or their associated costs. This suggests that trade openness is as a result of trade liberalization, meaning that the degree of openness could be used to proxy the level of liberalization in the economy. Hence, trade openness and trade liberalization are theoretically interchangeable. Henceforth, throughout the entirety of this study, trade openness would be used in place of trade liberalization because it can be statistically quantified.What is trade openness, then?

TRADE OPENNESS:This is mainly defined as the process of minimizing or removing restriction on international trade which may include the reduction or total dismantling of tariffs, abolishment of import quotas, removal of import duties, abolishment of multiple exchange rates, and the removal of requirements for import (Ozioko, 2016). Trade openness is really indeed a stretched hand of acceptance for globalization phantom. Hence, globalization according to fisher (2003) is the ongoing process of greater economic interdependence among countries reflected in the increasing amount of cross-border trade in Goods and service, the increasing volume of international financial flows and increasing flows of labour. Sequel to this, the researcher adds that globalization is the highest pinnacle for trades/economic openness. However, the trade openness of a country is dependent upon its trade policies as well as the economic features of that country.

TRADE BARRIERS:These are restrictions imposed on movements of goods between countries. Any deliberate attempt at restricting the cross-border movement of commodities is generally referred to as trade barrier. Meanwhile, trade barriers are of two broad categories namely:

1. Tariff barriers

2. Non-tariff barriers

However, tariff barriers are the most common barriers to trade

FOREIGN DIRECT INVESTMENT (FDI) AND FDI TERMINOLOGIES

Foreign direct investment is an investment in the form of a controlling ownership in a business in one country by another entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control. The parent enterprise and the foreign affiliate, together form a transnational or a multinational corporation. Broadly speaking, the origin of the investment does not impact the definition. As an FDI, the investment may be made either ‘inorganically’ by buying a company in the target country or ‘organically’ by expanding the operations of an existing business in that country.

However, the FDI terminologies include; Inward and Outward FDI. The former is when foreign capital is locally/domestically invested while the latter exists when local capital is invested abroad. There is also ‘horizontal and vertical’ version of foreign direct investment. Horizontal FDI arises when a firm duplicates its home country-based activities at the same value chain stage in a host country through FDI. While Vertical FDI takes place when a firm through foreign direct investment moves upstream or downstream in different value chain. That is, when firms perform value-adding activities stage by stage in a vertical fashion in the host country.

2.2 THEORETICAL LITERATURE

2.2.1 TRADE THEORIES

Since the degree of openness or the level of liberalization and the extent of foreign direct flows are theoretically consequent upon the trade status of such an economy, we are poised to explain various trade theories generally as it applies to the purpose of our study. Below are some of the relevant trade theories.

2.2.1.1 THE MERCANTILIST TRADE THEORIES (1500-1600)

Mercantilism is considered to be the very first international trade doctrine. Its famous disciples were Jean Baptist Colbert and Thomas Hobbes. This theory was championed by European Merchants who believed in National building, investment and expansion through the accumulation of wealth in form of Gold Bullions. This theory was of the view that the most important way for nation to become rich and powerful is to export more than it imports. This trade doctrine advocated for a reduction in imports by a nation through tariffs, quotas and other commercial trade barriers. This will protect a nation’s trade position. A critical interpretation of this doctrine would reveal that mercantilists are of the opinion that countries should actually manipulate or distort the degree of economic openness through the impositions of tariffs on international trade. To them, economy must not be liberalized for there to be increased inflows of capital They argued that rather than attract foreign capital, trade liberalization worsens the economy’s overall trade balance since it does encourage outflows of domestic capital. By this, mercantilism indirectly proposes an inverse (Substitution) association between economic liberalization and inflows of foreign investment. However, mercantilism received several serious attacks towards the end of the 18th century by its opponents who thought that mercantilism is actually an anti-free trade doctrine. For instance, David Hume said that the trade surplus that the mercantilist preached about is a short run phenomenon and would not survive the course of time because it might elicit retaliatory measures from other nations and hence mercantilist trade policy was referred to as ‘beggar thy neighbour policy’.

2.2.1.2 THE ABSOLUTE ADVANTAGE TRADE THEORY (1776)

In his book titled ‘an enquiry into the nature and cause of the wealth of nations’ published in 1776, Smith opined that different countries enjoyed absolute advantage in the production of some goods that formed the basis of trade between countries. He therefore criticized the mercantile doctrine heavily due to its static views of the world economy and contends that with free trade each nation could specialize in the production of those commodities which it can produce more efficiently than other countries and import those commodities in which it could produce less efficiently at a higher cost. This international specialization would not only benefit the trading nations but would also increase the world output.

Apparently, Smith indirectly vehemently proposed for a free trade and openness by disallowing any forms of barriers from distorting the free flows as well as cross border movement of capital in and out of an economy. This suggests that liberalization raises the level of both inflows and outflows of foreign investment, but the question of whether increased openness raises inflows of capital more than the outflows is still left unanswered. This means that, according to Smith, trade liberalization may either be positively or negatively related to foreign direct investment.

2.2.1.3 THE COMPARATIVE COST ADVANTAGE THEORY (1817)

David Ricardo in the 19th century expressed dissatisfaction with Smith’s absolute cost advantage since Smith put forward the case where a nation has absolute cost advantage in factor A and does not have in factor B whereas another country has absolute advantage in factor B but does not have in factor A. For this reason, they should trade. But Smith’s doctrine failed to tell if it’s still necessary for nation that has absolute cost advantage in both factors A and B simultaneously to still engage in trade with other nations or if a nation who has an absolute cost advantages in the production of two factors could still trade with other countries. David Ricardo through the comparative cost advantage theory demonstrated that external trade does not arise from differences in absolute cost advantages but from differences in comparative cost advantage. This means that a nation who does not have absolute cost advantage in any factor still have bases for mutual trade. However, for the mutuality to exist, there should be a free atmosphere that enable the undisturbed movement of goods. Hence, Ricardo still recognised the importance of trade liberalization in facilitating foreign investment flows.

2.2.1.4 THE HECKSHER-OHLIN MODEL

In the context of the 2x2x2 Heckscher-Ohlin trade model of factor endowment, commodity trade leads to international factor-price equalization and, as such, does not provide any incentive for international factor mobility. If we reverse this argument, international factor mobility, as in the form of FDI, should lead to international factor-price equalization without trade in commodities. In such a scenario, factor mobility and trade are substitute.

It has, however, been demonstrated that this symmetry of situation does not necessarily hold when one or more of the underlying assumptions of the Hecksher-Ohlin model are not satisfied. These assumptions are; the existence of identical production function across countries, market imperfections, factor distortions, impediment to trade (Markusen and Swenson, 1985 and Wong,1986 as cited in Martens, 2008). When there are, for instance, differences in technologies across nations, an increase in FDI may promote an increase in domestic investment which can be trade enhancing. In such a case, trade and FDI are complements.

2.2.1.5 THE NEW GROWTH MODEL

Prominent among the proponents of the new growth or endogenous theory were Robert Lucas, Paul Romer and Lev-Sheshinski in the mid 1980’s. The contending assumption of this new growth theory is that economies tend to grow when it is opened to international trade. The economy will develop by importing advanced machineries and study the process, then through human capital development these economies can replicate these machineries and by so, they tend to grow. In furtherance of this, Paul Romer cited the example of Japan having few natural resources but the economy was open to western ideas and technologies. It imported machines from the USA during the Meyer Era, dismantled them to see how they work and hence manufactured their better prototype.

Generally, these trade theories discussed above upholds vehemently that the growth and performance of an economy is greatly influenced by the degree of openness through the inflow of foreign direct investment in that economy and this happens dynamically typically through ‘the process of dynamic effect of trade liberalization’. Thus, inherently tracing the nature of the relationship between foreign direct investment, economic growth and the degree of trade/economic openness. Hence, according to trade theories, trade and FDI may be substitutive or complementary, meaning that policies for trade promotion could favour foreign direct investment and vice-versa.

2.3 EMPIRICAL LITERATURE

Economic theories have been very plain at providing a framework for understanding how the world works but empirical evidence helps to determine which economic theory is most accurate. Meaning that empirics validate and authenticate theories. This section reviews academic work that has both direct and indirect bearing to our discussion at hand.

Empirical works on the relationship between trade openness and foreign direct investment appear to be very scanty in economic literature. Nevertheless, there are similar related works on this discourse such as; empirical evidence on trade openness and economic growth, trade openness on inflation, impact of trade barriers on trade liberalization and economic growth, trade-fdi nexus as well as the determinants of foreign direct investment among others.

However, for the sake of simplicity and in line with the purpose of our study, such related works have been grouped into two different perspectives. First is the foreign studies and the second is the domestic / home studies.

2.3.1 FOREIGN STUDIES

The relationship between trade openness, foreign direct investment and growth has not until recently been examined by numerous studies, Liu et al. (2001) have analyzed the causal relation between trade openness, foreign direct investment and growth in China for the period 1984-1998. The authors used panel data for 19 regions of China and they concluded that the growth of China causes imports and foreign direct investment which in turn causes the growth of exports. Tracing the nexus between trade and foreign direct investment for the particular case of the European Union, Martinez et.al (2013) employed a yearly data from period 1995 to 2009. The gravity model for trade and FDI was estimated using the Poisson Pseudo-Maximum likelihood and the result showed that commercial integration and FDI reinforce each other indicating that liberalization and foreign direct investment are complements rather than substitutes. Nath (2009) examined the effect of trade and foreign direct investment on growth using data for ten transitional nations in the Central Eastern Europe. In the endogenous growth framework, the author explored the inter-linkages between FDI, trade and growth. The econometric result supports the hypothesis that export-oriented liberal trade regimes enhance the growth effect of foreign direct investment in transition economies. Moreover, both FDI and exports impacted positively on per-capita GDP dynamically.

Thanh and Honi, (2015) employed a panel data series which cuts across 22 Asia-Pacific developing countries.to analyse the empirical linkages existing among foreign direct investment, trade openness and economic growth over the period, 1990-2011. The study applied the System Generalized Method of Moments and the estimated result show that both foreign direct investment and trade openness positively impact on economic growth mainly through dynamic effect of economic liberalization. The result also revealed that Asia-Pacific developing countries may limit the conditional development in the absorptive capacity of FDI and trade openness. Hsiao and Hsiao, 2006 studied the causal relationship between GDP, Exports and FDI among China, Korea, Taiwan Hong Kong, Singapore, Malaysia, Philippines and Thailand. The result of their Multivariate Granger Causality showed that each country has different causality relationship and does not yield to general rules and that FDI does not have a bidirectional causality between GDP and Export, but there exists a bidirectional causation between Export and GDP for the group. In assessing the relationship existing among foreign direct investment, liberalization and trade in developing economies, Babatunde (2011) explored the relationship between trade openness, foreign direct investment, infrastructure and economic growth for Sub Saharan African countries. The empirical findings indicated that FDI inflows is determined by trade openness and GDP per capita. Besides that, the interaction between trade openness and infrastructure leads to an increase in FDI inflows. Marchant et.al (2002) examined the relationship between foreign direct investment and international trade, and found that there exists a complementary association between FDI and exports of processed food in East Asian developing countries. Their work emphasized that FDI leads to increased exports and exports also lead to increased FDI. Thus tracing a bidirectional causality between international trade and foreign direct investment. Similarly, Fontagne/ (1999) and Wilson and Cacho (2007) also concluded that trade and FDI have complementary linkages in OECD countries, while Aizemman and Noy (2006) provided empirical evidence that the linkage between FDI and trade is stronger in developing than developed countries and that the positive relationship between trade and FDI hinges on how trade and financial barriers are in those developing economies. In sharp contrast, Ponce (2006) confirms that the relationship between the degree of FDI and trade openness in developing countries of Latin America is positive. Those countries that signed more free trade agreements increased their effectiveness in attracting FDI inflows.

Furthermore, Mayanja (2003) examined whether foreign direct investment is important for accessing foreign technologies by using 205 industries in the United Kingdom and panel data from the period 1979-1991. The result of the study show that transfer of knowledge is more important than trade to the UK. Leitao (2006) examined the movements of foreign direct investment in Canada, Brazil, Japan and the EU. Applying the Systems Generalized Method of Moment estimator and fixed effect estimators, the result revealed that trade openness and market size are the most significant factors that influence the total inflows of foreign direct investment. Finally, Simionescu (2014) has examined the relationship between trade and foreign direct investment for G7 countries. The Granger causality tests for panel data reflected that for the period from 2002 to 2013 there is only short run causality between FDI and exports as well as between FDI and imports. Also, there is unidirectional causal relationship in the long run between FDI and trade.

2.3.2 DOMESTIC STUDIES

In assessing the beneficiary effect of either total or partial economic liberalization in Nigeria by a way of engaging in either multilateral or unilateral trade agreement with other countries, Ogujiubaet al(2004) employed the econometric method of co-integration for assessing the validity of trade openness in Nigeria’s long-run growth. Their result showed that there is no significant relationship between trade openness and economic growth and that unbridled openness could have implications for the growth of local industries, the real sector and government revenue.

Akinlo (2017) employed the maximum likelihood methodology of Markov Regime-Switching Model to investigate the various determinants of foreign direct investment in Nigeria. The results revealed that FDI process in Nigeria is governed by two different regimes and a shift from one regime to another regime depends on transition probabilities. The empirical results also showed that the main determinants of FDI are; GDP growth, macro instability, financial development, exchange rate, inflation and discount rate. This implies that liberalization that stems inflation and enhance the value of domestic currency will attract more FDI into the country.

Similarly, Olaifa, Subair and Biala (2015) adopted both the co-integration and OLS estimation technique on a time series data spanning the period 1970-2012 to investigate the dynamics between trade liberalization and economic growth in Nigeria. Result shows that liberalization supports economic growth in Nigeria with an evidence of a long run relationship. Strong evidence was found to support a structural change taking place in 1986 with the adoption of free trade policy. However, export was reported to be negatively related to growth. The study concluded by recommending that an enabling environment that will engender Further growth such as better infrastructural base, adequate financing support, adherence to international best practice in export and sound institutional structure be put in place for sustainability. Ijeoma (2013) examined the import and policy strategies of trade liberalization in Nigeria using the framework of OLS and ARDL reggression techniques. From the findings of her study, it was shown that implementation of trade instrument and strategies in Nigeria has been low over the years. Also, she claimed that policy directions for foreign trade has not been rigorously pursued in Nigeria. In determining the impact of trade liberalization on annual export trade in Nigeria using times series analysis, Ijeoma (2014) adopted the augmented. Dickey-fuller test, curve estimation analysis and the S-curve trend analysis to determine the trend of annual export in Nigeria and to ascertain the level of association between import and export promotion in Nigeria. It was revealed from the research finding that there is a strong association between import restriction and export promotion in Nigeria.

Summarily, few studies have examined FDI and its determinants in Nigeria. These studies include Obadan (1982), Aremu (1997), Anyanwu (1998), Ajakaiye (1995, 1997), Chette (1998), Wafure and Nurudeen (2010), Thaddeus and Yadirichukwu (2013), Abubakar and Abdullahi (2013) and Akenbor and Tennyson (2014). Many of these studies identified market size, exchange rate and natural resources availability as major determinants of FDI in Nigeria (Obadan 1982, Wafure and Nurudeen 2010, Abubakar and Abdullahi 2013 and Akenbor and Tennyson 2014). Some other factors identified in Nigeria as determinants of FDI are trade\ policies (Obadan 1982 and Anyanwu1998), interest rate, domestic credit and legal system (Akenbor and Tennyson, 2014) and stock market development (Wafure and Nurudeen, 2010). Few other factors identified by some Nigerian empirical evidences with negative effects on FDI are corruption, political risk and trade openness (Akenbor and Tennyson 2014). Thaddeus and Yadirichukwu (2013) show that interest rate, exchange rate and inflation rate have negative effect on FDI while Wafure and Nurudeen (2010) show that openness, inflation and infrastructural development do not have significant effect on FDI inflows in Nigeria.

In general, empirical evidence on the relationship between FDI and trade, openness however, is still inconclusive. The direction of FDI–trade nexus is also a matter of dispute (Hsiao and Hsiao, 2006). The relationship of trade and FDI is complementary (positive) between asymmetric countries and substitute (negative) between symmetric countries (Markusen and Venables, 1998).

2.4 SUMMARY, LIMITATIONS OF PREVIOUS LITERATURE AND VALUE ADDITION

As shown above, empirical literature review on the relationship between trade openness and foreign direct investment in both developed and developing nations has provided mixed results. Some studies showed a positive linkage between trade openness and foreign direct investment, thus suggesting a complementary relationship between trade and FDI (See; Grossman and Helpman, 1991: Marchant et.al, 2002: Martinez et.al, 2013: Babatunde, 2011 and Thanh and Honi, 2015) and some studies revealed negative/inverse relationship, thus suggesting a substitution effect (e.g; Akenbor and Tennyson 2014: Xu, 2000: Fortanier, 2007; Farshid et al., 2009). Whereas, other studies even showed insignificant or mixed results with respect to trade liberalization on foreign direct investment (See, Wafure and Nurudeen (2010: Belloumi, 2014) and Hsiao and Hsiao, 2006). This asymmetric impact of trade liberalization on export, imports and foreign investment is mainly because, studies differ across countries in their time horizon, estimation techniques, data set and theoretical models.

However, almost all the previous empirical studies focused mainly on the broad scope of investigating the determinants of FDI and had always employed more sophisticated estimation framework such as MSM and Sys GMM in obtaining their empirical results. Thus, making the research and investigation process very difficult for beginners to understand. This study contributes by designing a research investigation into the specific association between trade liberalization and FDI using the simple econometric methodology of OLS and a Pairwise granger causality test for better understanding.

[...]