Submit your papersSubmit Now
For Enquiries: [email protected]
IIARD LogoIIARD

Hot Money or Growth Engine? The Nonlinear Impact of Foreign Portfolio Investment on Nigeria's Economic Growth

Omege, Ann Chizoba, Okpala C. S., Nkwagu Chibuike Christian

Abstract

This study investigated whether the impact of Foreign Portfolio Investment on Nigeria's economic growth is symmetric, or characterized by nonlinearities depending on capital shock directions. Utilizing time-series data (1985–2024), the study applied the Nonlinear Autoregressive Distributed Lag framework alongside Zivot-Andrews structural break testing. The bounds test confirmed stable long-run cointegrating relationship (F = 5.94). Short-run estimation revealed a rapid adjustment mechanism, where an error correction coefficient of -0.952 (p = 0.000) proved that 95.2% of macroeconomic disequilibria are corrected within a single year. In the long run, the individual coefficients for FPI expansions ( ) 072 .0 , 10 61 .3 _ 10 = − = − p POS FPI and contractions ( ) 362 .0 , 10 64 .1 _ 10 = − = − p NEG FPI remain weak. However, the Wald test decisively rejects long-run linearity (F = 5.525, p = 0.0251), demonstrating significant structural asymmetry. The overall model is robust (R2 = 0.5335, F = 21.1534, p = 0.0000). These metrics validate the "hot money" verdict, showing that the macroeconomic damage of capital flight completely eclipses transient inflow liquidity. Consequently, policy measures like minimum holding periods and enhanced FX buffers are recommended to mitigate sudden reversals.

References

Abubakar, A. (2024). Foreign portfolio investment, exchange rate, inflation and economic growth in Nigeria. Journal of Economic Studies, 12(3), 45-62. Agblobi, D. A., Akpalu, W., & Kwaku, I. (2016). Remittances, foreign portfolio investment, and economic growth in Sub-Saharan Africa. Journal of African Business, 17(3), 281–300. Akiri, S. E., & Ushie, H. E. (2020). Foreign portfolio investment and economic growth in Nigeria. Arabian Journal of Business and Management Review, 9(2), 63–70. Anyanwu, G. I., Chigbu, U. S., & Nnadozie, A. C. (2024). Foreign portfolio investment and Nigerian economic growth. International Journal of Banking and Finance Research, 10(2), 51–67. Asaleye, A. J., Popoola, O., Maku, O. E., & Inegbedion, H. (2021). Foreign portfolio investments, financial deepness, and economic growth Nexus: Evidence from Nigeria. Journal of Financial Economic Policy, 13(4), 481-498. Babarinde, G. F. (2022). Long term investment portfolio and economic growth in Nigeria: A causal inference. Journal of Risk and Financial Studies, 3(2), 163–174. Calvo, G. A. (1998). Capital flows and capital-market crises: The simple economics of sudden stops. Journal of Applied Economics, 1(1), 35–54. Central Bank of Nigeria . (2021). Central Bank of Nigeria annual report and statement of accounts for the year ended 31st December 2020. CBN. Central Bank of Nigeria . (2024). Monetary, credit, foreign trade, and exchange policy guidelines for fiscal years 2024–2025. Central Bank of Nigeria. Ehigiamusoe, K. U., & Lean, H. H. (2019). Foreign capital inflows and economic growth in Nigeria: Any nexus? Journal of African Business, 20(4), 455–471. Ezeanyeji, C. I., & Ifeako, M. (2019). Foreign portfolio investment on economic growth of Nigeria: An impact analysis. International Journal of Academic Management Science Research, 3(3), 24-36. Fama, E. F. (1970). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25(2), 383–417. Fefa, J., Adaudu, A., & Ijirshar, V. U. (2024). Oil revenue, portfolio investment and economic growth in Nigeria and United Arab Emirates. Journal of Economic and Social Research, 10(1), 92–103. Frank, A. G. (1966). The development of underdevelopment. Monthly Review, 18(4), 17–31. Iriobe, G. O., Obamuyi, T. M., & Abayomi, M. A. (2018). Foreign portfolio investment and the performance of the Nigerian stock market: A sectoral distribution analysis. International Business and Management, 16(1), 29-38. Jelilov, G., Celik, B., & Adamu, Y. (2020). Foreign portfolio investment response to monetary policy decisions in Nigeria: A Toda-Yamamoto approach. International Business Research, 13(3), 166-166. Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Review of Economics and Statistics, 47(1), 13–37. Lucas, R. (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3–42. Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(1), 77–91. P-ISSN 2695-186X Ndugbu, M. O., Otiwu, K. C., & Uzowuru, L. N. (2021). The effect foreign portfolio investment on economic growth in Nigeria. South Asian Journal of Social Studies and Economics, 11(3), 43–53. Obadan, M. I. (2004). Foreign capital flows and management: Look at Nigerian case. National Centre for Economic Management and Administration . Omotayo, V. A., Adewole, J. A., & Ogunlokun, A. D. (2022). Portfolio investment and banking sector growth in Nigeria. International Journal of Innovative Research in Accounting and Sustainability, 7(2), 85–94. Onyeisi, O. S., Odo, I. S., & Anoke, C. H. (2016). Foreign portfolio investment and stock market growth in Nigeria. Developing Country Studies, 6(11), 64–76. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289–326. Romer, P. M. (1986). Increasing returns and long-run growth. Journal of Political Economy, 94(5), 1002–1037. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(3), 425–442. Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In R. Sickles & W. Horrace (Eds.), Festschrift in honor of Peter Schmidt (pp. 281–314). Springer. Solow, R. M. (1956). A contribution to the theory of economic growth. Quarterly Journal of Economics, 70(1), 65–94. Stiglitz, J. E. (2000). Capital market liberalization, economic growth, and instability. World Development, 28(6), 1075–1086. Toyin, O. W., & Elijah, A. O. (2020). Dynamic effects of foreign portfolio investment on economic growth in Nigeria. Financial Markets, Institutions and Risks, 4(3), 5–12. World Bank. (2022). Nigeria development update: The resilience of a nation. World Bank Group. World Bank. (2024). World Development Indicators. Washington, DC: World Bank Group. Zivot, E., & Andrews, D. W. K. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. Journal of Business & Economic Statistics, 10(3), 251–270.

More Articles from IIARD INTERNATIONAL JOURNAL OF ECONOMICS AND BUSINESS MANAGEMENT