Capital Inflow and Economic Growth Nexus in Nigeria : The Role of Trade Openness

The paper examined the effects of capital inflow on economic growth and also investigated the role of trade openness in foreign capital inflow/growth nexus in Nigeria. This is with a view to testing the modernization hypothesis in Nigeria. The paper adopted the Principal Component Analysis (PCA) technique to derive a unique index that captures the quantity and quality of the conventional measures of capital inflow along with trade openness. The method has been used in other studies but not yet applied to capital inflow versus growth analysis. The time-series properties of the data were examined and Autoregressive Distributed Lag (ARDL) bound testing methodology was used to analyze the time-series data. The result showed that capital inflow, when interacted with trade openness, had a significant impact on growth, thus providing empirical support for the modernization hypothesis that capital inflow and trade policy are complementary and growth-enhancing. The paper concluded that trade liberalization policies tend to enhance the effectiveness of capital inflow and jointly promote higher economic growth in Nigeria