An Examination of the Feldstein-Horioka Puzzle for Nigeria: The Mediating Role of Foreign Direct Investment

Abstract

The relationship between savings rate and the rate of investments in an economy has been studied under the Feldstein-Horioka hypothesis to detect whether a higher domestic saving rate in a country is correlated with a higher rate of domestic investment. In the case of Nigeria, these rates have been exhibiting a declining trend over the years. As such, this paper was geared towards ascertaining whether the Feldstein-Horioka hypothesis could be valid in Nigeria with a consideration of the influence of foreign direct investment (FDI). The study utilized data from 1981 to 2020 which were analysed using the ordinary least squares (OLS) approach, the autoregressive distributed lag (ARDL) bounds testing approach, and the ARDL error correction. Our findings from the OLS revealed that the without FDI, the saving-retention coefficient is 0.94 while it becomes 0.95 when the FDI is incorporated in the model. From the ARDL result which evidence of existence of long-run relationship was established, the conditional long-run elasticity was obtained to be 0.28 implying that a 1% increase in savings rate increases the rate of investment by 0.28%. Though this coefficient is low, it is still in line with the Feldstein-Horioka hypothesis that domestic investments are spurred by domestic savings.