Interest Rate, Foreign Direct Investment, and Economic Growth in Nigeria: A Re-evaluation of a Popular Paradigm

A popular paradigm among developing countries pursuing the goal of economic growth is the growth-enhancing potency of foreign direct investment (FDI) in underdeveloped countries. A favourable interest rate regime is one of the policy measures attracting FDI to these countries. This study re-evaluated the relationship between interest rate, FDI, and economic growth amidst the fluctuation of key macroeconomic variables in Nigeria from 1980 to 2022. The objective was to examine the impact of interest rate and FDI individually on economic growth and the duo's joint interaction impact on economic growth. The study adopted the autoregressive distributed lag (ARDL) model in the analysis. The findings showed that interest rate exerted a negative and insignificant impact on economic growth in the long run and a positive and insignificant impact on growth in the short run. FDI insignificantly impacted economic growth in Nigeria. The interaction between interest rate and FDI jointly impacted economic growth significantly in the short run. Gross domestic investment, index of openness, and labour force participation rate also exerted a significant impact on economic growth in Nigeria. Based on the findings, the paper recommended that policies that attract FDI inflow should be implemented for more interest rate-FDI interaction to stimulate economic growth, among others.