Revisiting the Trade Openness–FDI Relationship in Nigeria: Asymmetric Evidence from an ARDL/NARDL Framework

Abstract

Despite decades of trade liberalisation, Nigeria's record of attracting foreign direct investment (FDI) remains inconsistent and structurally fragile. This paper revisits the trade openness–FDI nexus in Nigeria over the period 1986–2022, drawing on annual time-series data from the Central Bank of Nigeria (CBN), the World Bank World Development Indicators, and UNCTAD. Departing from conventional symmetric frameworks, the study employed the Nonlinear Autoregressive Distributed Lag (NARDL) model alongside the standard ARDL bounds testing approach to examine whether positive and negative trade shocks exert asymmetric effects on FDI inflows. The study further accounts for structural breaks using the Zivot–Andrews single-break unit root test and control for real GDP growth, inflation, real effective exchange rate, and institutional quality. The bounds test confirms long-run cointegration between trade openness and FDI. ARDL estimates indicate a statistically significant positive long-run elasticity of FDI with respect to trade openness, while NARDL results reveal pronounced asymmetry: episodes of trade contraction depress FDI more severely than equivalent expansions stimulate it, consistent with an investor risk-aversion channel. Robustness checks using the Chinn–Ito financial openness index and Dynamic Ordinary Least Squares (DOLS) confirm the baseline findings. The results carry strong policy implications for Nigeria's engagement with the African Continental Free Trade Area (AfCFTA) and for the design of trade-investment policy complementarities within ECOWAS.