Trade openness, hydroelectric power production, foreign direct investment and economic growth nexus in Nigeria

Gold, Kafilah Lola; Tregenna, Fiona Article Trade openness, hydroelectric power production, foreign direct investment and economic growth nexus in Nigeria Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Gold, Kafilah Lola; Tregenna, Fiona (2024) : Trade openness, hydroelectric power production, foreign direct investment and economic growth nexus in Nigeria, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 12, Iss. 1, pp. 1-21, https://doi.org/10.1080/23322039.2024.2426538 This Version is available at: https://hdl.handle.net/10419/321668 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Economics & Finance ISSN: 2332-2039 (Online) Journal homepage: www.tandfonline.com/journals/oaef20 Trade openness, hydroelectric power production, foreign direct investment and economic growth nexus in Nigeria Kafilah Lola Gold & Fiona Tregenna To cite this article: Kafilah Lola Gold & Fiona Tregenna (2024) Trade openness, hydroelectric power production, foreign direct investment and economic growth nexus in Nigeria, Cogent Economics & Finance, 12:1, 2426538, DOI: 10.1080/23322039.2024.2426538 To link to this article: https://doi.org/10.1080/23322039.2024.2426538 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group View supplementary material Published online: 10 Nov 2024. Submit your article to this journal Article views: 1094 View related articles View Crossmark data Citing articles: 1 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 DEVELOPMENT ECONOMICS | RESEARCH ARTICLE Trade openness, hydroelectric power production, foreign direct investment and economic growth nexus in Nigeria Kafilah Lola Gold a,b and Fiona Tregenna a a DSI/NRF South African Research Chair in Industrial Development, University of Johannesburg, Johannesburg, South Africa; b Economics Department, Kwara State College of Education, Ilorin, Nigeria ABSTRACT This study examines trade openness, hydroelectric power production, and foreign direct investment (FDI) nexus on economic growth in Nigeria. Despite efforts toward trade liberalisation, Nigeria’s growth remains constrained due to heavy reliance on oil and minerals exports. Furthermore, electricity production challenges exacerbate these issues, hindering intra-African trade, FDI inflows, and overall economic growth. The study explores how trade openness and insufficient electricity production affects economic growth in the long run. The annual data from 1988 to 2022, sourced from the National Bureau of Statistics, Nigeria, Our World in Data, and the World Bank Development Indicator (WDI) database was used. The econometric techniques employed are the autoregressive distributed lag (ARDL) to examine long-run and short-run dynamics, while the dynamic ordinary least squares (DOLS) is used as a robustness to address potential endogeneity and serial correlation concerns. The findings indicate that trade openness positively affects long run economic growth, as supported by DOLS estimates. However, hydroelectric power production and FDI had mixed effects on Nigeria's economic performance. The study recommends prioritising investments in electricity infrastructure to enhance trade competitiveness and attract FDI. Moreover, diversifying exports beyond oil and minerals is crucial for strengthen economic resilience and drive sustainable development in Nigeria. IMPACT STATEMENT This study provides critical insights into sustainable economic development in Nigeria by examining key factors affecting its growth. Through an in-depth analysis of trade openness, hydroelectric power production, and foreign direct investment (FDI), the research highlights both the drivers and barriers within Nigeria’s economic trajectory. Findings show that trade liberalisation, enhanced electricity infrastructure, and targeted FDI are essential for supporting long-term economic expansion. These insights align with Nigeria’s goals of economic diversification and energy security. The implications of this study are substantial, offering policymakers guidance for strategies that promote both growth and inclusive development. By uncovering the interconnected effects of trade, energy, and investment policies, this work provides a framework for informed national and regional economic planning. The research has the potential to shape decisions on resource allocation, regulatory reforms, and investment priorities, positioning Nigeria towards sustainable industrialisation and resilient economic transformation. ARTICLE HISTORY Received 6 June 2024 Revised 25 October 2024 Accepted 3 November 2024 KEYWORDS Trade openness; hydroelectric power production; FDI; economic growth; Nigeria; ARDL; DOLS JEL CODES F14; Q42; F21; O55 SUBJECTS Economics; Economics and Development; Development Policy Introduction Nigeria, one of Africa’s largest economies, substantially impacts the region’s economic performance. Despite being richly endowed with abundant oil, minerals, and other natural resources, Nigeria paradoxically experiences low economic growth. This stagnation is largely attributed to a lack of robust manufacturing and agricultural industries that drive broader economic expansion. While exchanging goods and services offers significant potential benefits, Nigeria’s non-oil export performance falls short CONTACT Kafilah Lola Gold [email protected],[email protected] DSI/NRF South African Research Chair in Industrial Development, University of Johannesburg, Johannesburg, South Africa ß2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. COGENT ECONOMICS & FINANCE 2024, VOL. 12, NO. 1, 2426538 https://doi.org/10.1080/23322039.2024.2426538 compared to oil-producing countries such as the UAE, Russia, and Saudi Arabia, where manufacturing and agriculture thrive alongside oil production. Previous research has attributed this underperformance to several factors, including overreliance on oil exports, insufficient trade openness, recent border closures and lack of political will to pursue aggressive diversification of non-oil exports. This study, however, posits that effective trade openness is contingent upon substantial improvements in infrastructure, particularly electricity supply and distribution, that will enhance manufacturing. The World Bank (1994) identifies infrastructure as a key determinant of manufacturing and agricultural success. Consequently, this research concentrates on the pivotal role of trade openness in enhancing a country’s growth potential, a notion widely discussed in theoretical literature on growth and trade (Fetahi-Vehapi et al., 2015;Islam,2024). Based on this notion, developing nations, including Nigeria, have pursued export promotion and openness, particularly during the trade liberalisation era, aiming to foster trade, knowledge exchange, technology transfer, labour specialisation, investment, improved welfare, efficient resources allocation, and overall development (Gold & Rasiah, 2022). However, the trade openness, economic growth impact is subject to debate and lacks conclusive evidence. Some studies, like those by Samimi et al. (2012)and Cooke (2010), reason that trade openness will hinder economic growth, potentially leading to persistently higher commodity prices and lower exchange rates. Similarly, Malefane and Odhiambo (2021)andMusila and Yiheyis (2015) suggest an insignificant trade openness and economic growth nexus. In addition, Ogudu et al. (2023), Rakshit (2022), and Khobai et al. (2018) find a significantly negative impact of trade openness on economic growth. Contrarily, Sunde (2023), Malefane (2020), Ma et al. (2019), and Khobai et al. (2018) findings indicate a significant and positive relationship between trade openness and economic growth. Moreover, Esaku (2021), Islam (2021), Sriyana and Afandi (2020), Islam et al. (2022) and Kong et al. (2021) identify a positive correlation between trade openness and economic growth in various countries. These studies suggest that increased international competitiveness, productivity and export revenue are integral to economic growth and directly and significantly affect trade openness. Likewise, Keho (2017)and Brueckner and Lederman (2015) argue that trade openness encourages domestic firms to invest and transfer technology, thereby increasing GDP. However, owing to the increasing realisation of the fact that Nigeria – ‘the giant of Africa’(Ozughalu & Ogbuefi, 2022, p.37181) contribution to global markets in terms of manufacturing is low despite its trade liberalisation reforms, except for its dominance in oil and minerals export, which account for over 70% of its total foreign earnings (Khobai et al., 2018). This overreliance on oil and minerals underscores Nigeria’s struggle with challenges and shortages in electricity 1 production. These limitations hinder intra-African trade, foreign investment and impede growth, as illustrated in Figure 1. This electricity infrastructure is crucial to socio-economic activities across industrial, manufacturing, agricultural, commercial, residential and transportation sectors (Yakubu et al., 2015). It is considered a cornerstone of energy banks in both developing and developed nations. However, Nigeria’s unreliable power generation and epileptic power supply have led to numerous business closures, prompting some companies to relocate to countries with more accessible and reliable electricity supply (Adenikinju, 2005; Figure 1. Nigeria’s GDP and electricity production computation from World Bank (2024); Statistics (2022). 2 K. L. GOLD AND F. TREGENNA Egbichi et al., 2018; Ozughalu & Ogbuefi, 2022). Many individuals and firms in Nigeria also use generators for electricity, which is costlier than the national power supply (Kennedy-Darling et al., 2008; Musibau et al., 2024). Invariably, the inadequate electricity supply imposes additional costs on production, leading to inflation in the prices of goods and services (Adenikinju, 2005; Musibau et al., 2024). More so, infrastructure, including electricity, constitutes a significant portion of the total capital stock (Carlsson et al., 2013), and foreign investors prefer to invest in countries with constant, reliable, and sufficient electricity supply to increase productivity and maximise profits. As shown in Figure 2, Nigeria’s GDP growth tallies with a dwindling trend in FDI. Additionally, FDI is crucial for enhancing the manufacturing sector’s functionality, which impacts export volume and resource refinement, fostering growth through technology and knowledge transfer. Undoubtedly, it is evident that Nigeria requires foreign capital inflow, particularly in the form of FDI, partly to finance its electricity infrastructure, which is grossly deficient and to enhance trade competitiveness (Musibau et al., 2024). Akin to the studies on openness-economic growth, previous research on electricity-economic growth and FDI-economic growth yields mixed results. Aydin and Bozda g(2018), Qazi et al. (2021), Apinran et al. (2022), Nasreen and Anwar (2014), Nchege and Okpalaoka (2023) and Lawal et al. (2020) find a direct relationship between electricity and economic growth, indicating that electricity is vital for sustainable growth and leads to increased economic output. However, Egbichi et al. (2018) and Rahman and Mamun (2016) argue that no causal relationship exists between energy consumption and growth. Likewise, Ogudu et al. (2023), Qabrati (2021), Al-Harbi and Shaheen (2021), Musibau et al. (2019); Qazi et al. (2021), Kumari et al. (2023) suggest a positive impact of FDI on growth, whereas, Musibau et al. (2024) and Tran et al. (2023) find a negative relationship. Moreover, these studies focus on opennesselectricity-growth, energy (electricity)-FDI-growth, or FDI-openness-growth nexus. Given the above, the lacuna studied here specifically is to determine the link between trade openness, electricity production, and FDI and economic growth in Nigeria, as no existing literature arguably investigates all four linkages simultaneously. By doing so, we aim to provide policymakers with insights for creating an environment conducive for industrial development. The findings are expected to inform policies that enhance manufacturing sector efficiency and competitiveness, ultimately contributing to a more diversified and resilient Nigerian economy. Secondly, this study deviates from the previous studies and uses data on electricity production instead of electricity consumption. The notion is that the power supply from the national grid generated by the government, which is not supplemented by alternatives from firms and individuals, is best captured and better measured with electricity production data than consumption. This approach provides a unique perspective on the country’s energy challenges. Furthermore, Nigeria’s primary energy source, hydroelectric power, adds significance to this choice. Thirdly, utilising robust econometric techniques such as ARDL and DOLS over an extensive secondary data spanning from 1988 to 2022, the study offers comprehensive insights into longrun and short-run effects, which contribute to a deeper understanding of Nigeria’seconomicgrowthdynamics, Figure 2. Nigeria’s GDP and FDI computation from World Bank (2024). COGENT ECONOMICS & FINANCE 3 while highlighting important policy implications. The structure of the paper is as follows: the literature, the methodology, the results and discussion, and the last section contains the conclusions. The review of related literature Theoretical review on trade openness, electricity, FDI and economic growth nexus Neo-classical economists argue that no nation is self-sufficient to cater for all the required resources needed for economic development. Instead, nations should specialise and concentrate on areas with greater factor endowment, strong technical capacity to produce exports at a lower cost advantage, benefit from economies of scale to expand the industrial base and import resources that are either scarce, unavailable or have high-cost disadvantage to accelerate economic growth. For this reason, achieving a favourable trade balance and a positive trade is a mirage for many developing nations lacking abundant resources, technology that includes labour and capital and a low degree of openness (Keho, 2017;Khobaietal.,2018;Omoke&Opuala–Charles, 2021; Sriyana & Afandi, 2020). The export-led growth hypothesis states that increasing exports boosts productivity and market access, leading to economic growth (Gold & Rasiah, 2022;Islam,2021). The hypothesis found a significant correlation between export level and economic performance (Dreger & Herzer, 2013). A critical component of this process is electricity infrastructure, which is vital for global economic activities, as it underpins the functioning of industries and services worldwide. According to Nurkse (1953) theory, inadequate electricity infrastructure poses a major obstacle to economic progress, particularly in less developed nations. Thus, ensuring a reliable and high-quality electricity supply is pivotal for determining a country’s success in trade, poverty alleviation, and environmental improvement (Estache, 1994). Furthermore, the Grossman and Helpman (1991) and Romer (1990) endogenous growth models, emphasise technological advancement, innovation, and knowledge transfer as primary catalysts for economic growth. In which FDI acts as a conduit for knowledge dissemination, stimulating employment, heightening growth rates, expanding market access, improving trade quality, and facilitating economic integration and globalisation in developing nations (Gold, 2022;Tranetal.,2023). In addition, the Solow-type neoclassical growth models indicate that FDI enhances capital stock and fuels economic growth through capital formation (Brems, 1970;Gold,2019). Combined with the empirical findings, these theories are the basis for model specification. Empirical review Trade openness - economic growth In countries that open up to trade and export to other countries, their domestic industries will produce more, which will drive growth (Krueger, 1998). According to Alwafi (2017), low-income nations with higher trade openness leverage the abundant technological advancements from developed nations to develop local industries and promote growth. The former will grow quicker than the latter. Other explanations suggest that trade openness might negatively affect growth in emerging and low-income economies (Gonc¸alves et al., 2021). This alternative view is based on the notion that their structural attributes and trade policies incline to change the terms of trade at their disadvantages, particularly for countries specialising in low-quality products (Alwafi, 2017). Despite these differing views, this study maintains that trade openness and economic growth positively affects each other in developing countries, including Nigeria, as summarised in Table 1. Electricity Production - Economic growth Samli (2010)andMusibauetal.(2024) stress the critical role of electricity in national growth and development. The development of electricity infrastructure yields several benefits, including increased manufacturing output, expanded trade opportunities, job creation, and improved living standards. However, Nigeria’ssituation presents a stark contrast. Despite substantial government investments and incentives in the electricity sector, adequate electricity supply remains challenging. The production-consumption gap is significant, exemplified by Nigeria’s need for 40,000MW of electricity in 2020, while only 7,500MW was supplied. Moreover, access to electricity is unevenly distributed, with only 55% of urban dwellers having access, while rural areas face greater challenges, with just 36% having access. Approximately 40% of Nigeria’s over 210 million population lack electricity access (Apinran et al., 2022;Egbichietal.,2018). Certainly, Table 2 presents additional studies examining 4 K. L. GOLD AND F. TREGENNA Table 1. Empirical review summary of trade openness - economic growth. Source Sample / Duration Variables Estimation Technique/ Model Main findings Tripathi (2023) G20 developed countries (2004-2019) Trade openness (trade share of GDP) Simultaneous equations and dynamic policy simulation models Trade openness-GDP (correlate positively). Dynamic policy simulations: Policies to increase exports, reduce inflation, and FDI need to be stronger and more practical to enhance per capita growth. Sunde et al. (2023) Namibia (1990-2020) Trade openness (trade % GDP) Autoregressive distributed lag (ARDL) Trade openness-exports-GDP (positive); Imports-GDP (negative); Openness-exports-imports ¼growth in shortrun. Esaku (2021) Uganda (1983-2019) Trade openness ARDL Export indices proxy ¼insignificant. Openness and imports indexes ¼significantly positive in longrun. Omoke and Opuala– Charles (2021) Nigeria (1984-2017) Total trade, import trade, and export trade (trade openness) ARDL Trade openness-economic growth (export trade ¼significantly positive in the long run; import trade ¼significantly negative in the long run. Good governance increases economic growth. Nwadike et al. (2020) Nigeria (1970-2011) Trade openness (trade divided by GDP) ADF and ordinary least squared (OLS) Trade openness-GDP (significantly positive impact); GDP and exchange rate respond to the shock of trade openness. Udeagha and Ngepah (2021) South Africa (1960-2016) Trade openness (trade % GDP; (trade size % global trade) Nonlinear ARDL Trade openness-economic growth (long and short-run asymmetric effects). Islam (2021) Saudi Arabia (1985-2019 Trade, Gross fixed capital formation (GFCF) and labour ARDL; Toda-Yamamoto Granger causality test Trade openness and labour have positively significant on GDP in the short and long run; GFCF has no significance impact on GDP in all estimates. Malefane and Odhiambo (2021) Lesotho (1979-2013) Trade openness index; 3 trade-based proxies ARDL Trade openness-economic growth (no significant impact in the long run and short run). Malefane (2020) Botswana (1975-2014) Trade openness ARDL Imports/GDP ratio proxy (not significant). Trade/GDP ratio, exports/GDP ratio, and trade openness index proxies (significantly positive). Ijirshar (2019) ECOWAS (1975-2017) Trade openness (trade % GDP) Pooled mean group (PMG) Trade openness-economic growth (long-run ¼positive impact; short-run ¼mixed effect). Khobai et al. (2018) Ghana and Nigeria (19802016) Trade (imports þexports) ARDL; Augments Dickey-Fuller; DF-GLS Trade openness-GDP in Ghana (positive longrun/shortrun). Trade openness-GDP in Nigeria (negative-longrun; positiveshortrun). Keho (2017) Cote d’Ivoire (1965-2014) Trade openness (real trade per capita) ARDL; Granger causality approaches Openness-growth (positive). Openness-capital formationgrowth (positive/complementary). COGENT ECONOMICS & FINANCE 5 Table 2. Empirical review summary of electricity production - economic growth. Source Sample / Duration Variables Estimation Technique/ Model Main findings Nchege and Okpalaoka (2023) Nigeria (1981-2018) Electricity Production; electric power consumption ARDL Hydroelectric power production and GDP ¼negative long-term effect; Electric power consumption and GDP ¼positive. GDP rises (1.3%) as hydroelectric power is used for electricity production. Apinran et al. (2022) Nigeria (1981-2019) Electricity consumption (kwH) ARDL and novel dynamic ARDL Electricity consumption, labour, and capital ¼positive impacts on growth; Carbon emissions ¼significantly negative impact on growth. Ozughalu and Ogbuefi (2022) Nigeria (1970-2018) Electricity consumption; FDI ARDL, Granger causality and vector error model Electricity to GDP per capita ¼neutral causality/short run; unidirectional causality/long run. FDI to electricity ¼unidirectional causality both; FDI to GDP per capita ¼neutral causality in both. Qazi et al. (2021) Pakistan (1971-2017) Electricity consumption ARDL Electricity consumption and GDP ¼a significantly positive long-run relationship. Lawal et al. (2020) SSA (1971-2017) Electric power consumption GMM estimation techniques A positive and significant relationship between electricity consumption and economic growth. Egbichi et al. (2018) Nigeria (1986-2016) Electric power consumption Symmetrical ARDL approach Electricity consumption-growth ¼No significant impact Wada (2017) Nigeria (1971-2013) Energy production ARDL and Granger causality There is no significant long-run integration between the variables examined in the model. 6 K. L. GOLD AND F. TREGENNA electricity’s impact on economic growth and other economic variables. These studies contribute to understanding how electricity infrastructure influences economic development and trade dynamics. Foreign direct investment - economic growth According to Kumari et al. (2023), Alwafi (2017) and Ogudu et al. (2023), factors influencing the inflows of FDI include the host country’s economic and political environment, innovation, technological development, exchange rates, infrastructure, and trade openness. Krugman and Obstfeld (2000) and Alwafi (2017) stated that with FDI, capital flows from multinationals in developed countries to establish subsidiaries or acquire controlling interests in host markets, catalysing economic development through capital accumulation and project financing in the host and home countries. However, with its enormous natural and human resources, Nigeria lacks capital accumulation primarily due to insufficient domestic savings, exchange rate volatility and infrastructural deficits (electricity, road, etc). This shortage in electricity supply particularly restricts businesses and discourages the inflow of FDI in critical sectors where reliable electricity infrastructure is required (Musibau et al., 2024; Musibau et al., 2019; Ogudu et al., 2023). Hence, FDI is pivotal in driving economic growth, especially in developing countries, Nigeria inclusive, as shown in the summary of the review in Table 3. The study addresses a critical gap in the existing literature by analysing the intricate relationships between trade openness, hydroelectric power production, FDI, and economic growth in Nigeria. Unlike previous research, which often focused on individual factors or broader economic trends, this study examines how these elements shape Nigeria’s economic landscape. The research also highlights the importance of infrastructure, particularly electricity supply, in facilitating trade and industrial activities, thereby contributing to a more comprehensive understanding of the country’s economic challenges and opportunities. Research methodology Data source and variables descriptions The study uses data with yearly observations at the country level, obtained from the WDI database, supplemented by electricity generation data from the National Bureau of Statistics, Nigeria, and Our World in Data. The available datasets cover from 1988 to 2022. It measures trade openness, electricity production, and FDI’s impact on economic growth in Nigeria. The key variables for the study are grouped into dependent, independent, and controlled variables. Economic growth is the dependent variable; it measures the GDP growth of a country (annual %). GDP growth effectively captures dynamic economic relationships, offers better statistical properties (such as improved stationarity and reduced heteroscedasticity), and aligns more closely with growth theories (Duramany-Lakkoh et al., 2022;Julius,2018). Trade openness measures the sum of imports and exports as a % share of a country’s GDP (Tripathi, 2023); Electricity production measured in megawatts (MW), is the energy derived from hydroelectric power (Nchege & Okpalaoka, 2023); and FDI is the net inflow from foreign investors’economy to the host economy in the percentage of GDP (Gold, 2022) are independent variables. The controlled variables are fixed capital formation, measured as the net change in a nation’s physical capital stock, calculated as investment minus disposals of assets over a defined period (Al-Harbi & Shaheen, 2021; Islam & Alhamad, 2023), total labour force, and bank credit to private investors, measured in US$ (Adeusi & Oke, 2013). Model specification and estimation techniques In line with the theoretical and empirical reviews which justify the relationships and the aprior expectations between gross domestic product growth (GDPG), trade openness (TOP), electricity production (EPP), foreign direct investment (FDI), fixed capital formation (FCF), total labour force (LBR) and bank credit to private investors (DCPSBB) in Nigeria, the study modified the models of Malefane and Odhiambo (2021), Egbichi et al. (2018) and Sunde (2023); and employ autoregressive distributed lag (ARDL) bounds model by Pesaran and Shin (1995) and Pesaran et al. (2001) and dynamic ordinary least squares (DOLS) by Engle and Yoo (1989) to analyse the specified Eqs. (3) and (4). The benefit of the COGENT ECONOMICS & FINANCE 7 Leone and Onwioduokit and O’Neill (2023) on Nigeria, which posit that efficient allocation of credit fosters long-term economic growth by facilitating investment in productive sectors. The results generally indicate that trade openness is influential in promoting economic growth in Nigeria only in the long term; electricity production is influential in promoting economic growth only in the long term; FDI is detrimental to economic growth both in the short and long runs; The explanatory variables DCPSBB enhances economic growth only in the long term; capital formation is weakly detrimental to economic growth in the long run; while labour force is not potent in promoting Nigeria’s economic development both in the short and long terms. Moreover, the model also fits well with R-squared and adjusted R-squared values of 0.742 and 0.542, respectively, and has an F-statistic value of 3.71 with a p-value of 0.005. Discussion of ARDL results The TOP and economic growth results are particularly important given that Nigeria is one of Africa’s largest economies, with crude oil exports making up 70% of its total exports (Khobai et al., 2018). Trade openness results confirm the a prior expectations that openness facilitates market liberalisation and provides crucial access to international markets, which is essential for Nigeria’s economic expansion (Dreger & Herzer, 2013; Islam & Alhamad, 2023). The positive relationship between trade openness and economic growth suggests that fostering an open trade environment can lead to technological advancements and improve resource allocation efficiency (Omoke & Opuala–Charles, 2021; Sriyana & Afandi, 2020). As Nigeria continues integrating into the global economy, enhancing trade openness will be key to sustaining its economic growth and competitive edge in the international market. The short-run findings indicate that insufficient electricity production profoundly impacts GDP growth and hinders Nigeria’s overall development. This situation is particularly concerning given the country’s poor state of electricity generation. Due to the unreliable supply from the national grid, many individuals and businesses have been forced to rely on their generators for power. This alternative is considerably more expensive than the electricity provided by the national grid, leading to higher production costs and, consequently, increased prices for goods and services. The economic repercussions of this energy crisis are far-reaching. Over 800 companies have relocated from Nigeria to countries with more reliable electricity supplies, and numerous others have shut down (Adenikinju, 2005;Egbichietal.,2018). This exodus and closure of businesses highlight the critical need for a stable and sufficient electricity supply to maintain economic activities and support growth. The report underscores the severity of the issue by revealing that Nigeria requires 40,000 megawatts of electricity to meet its demands, yet the country currently only supplies 4,600 megawatts. This massive shortfall severely holds back the operations of manufacturing companies, which require around 2,500 megawatts but only have access to 267 megawatts (Apinran et al., 2022; Musibau et al., 2024; Statistics, 2022). The inadequate electricity supply leads to a significant decrease in the production of goods, negatively impacting trade and resulting in stunted economic growth. Considering these challenges, immediate and effective policy interventions are required to address the shortfall in electricity supply. These policies should focus on improving the infrastructure for electricity generation and distribution, encouraging investments in renewable energy sources, and enhancing the efficiency of existing power plants. By addressing these critical electricity issues, Nigeria can create a more conducive environment for economic growth, attract and retain businesses, and improve the living standards of its population. FDI is detrimental to Nigeria’s economic growth. FDI significantly and negatively affects economic growth in all the estimates. These include the negative inflow of external resources, which are crucial for financing development projects, creating employment opportunities, and facilitating technology transfer (Grossman & Helpman, 1991;Romer,1990). Foreign investors are particularly interested in investing in Nigeria’s electricity supply to ensure access to adequate and reliable power, essential for increasing productivity and fostering economic growth. The role of electricity in economic development cannot be overstated. A reliable electricity supply enhances productivity, boosting economic activities and growth. As productivity increases, it encourages trade openness, opening new markets and fostering international trade relations (Musibau et al., 2024;Oguduetal.,2023). This interconnectedness benefits Nigeria by reducing trade barriers and integrating its economy with global markets. The study’s findings on the relationship between explanatory 14 K. L. GOLD AND F. TREGENNA variable DCPSBB and GDP growth has a nuanced impact on Nigeria’s growth. The current provision of credit to the private sector may not support immediate economic expansion, likely due to inefficiencies in the financial sector, high interest rates, or inadequate access to credit for productive investments. The insignificant impact of bank credit on the private sector in the short term could be attributed to factors such as high levels of non-performing loans, stringent lending conditions, or a lack of affordable credit for small and medium-sized enterprises (SMEs) (Adeusi & Oke, 2013;Amooetal.,2017). However, in the long run, the positive and significant coefficient indicates that improvements in credit provision over time contribute to sustained economic growth (Duramany-Lakkoh et al., 2022; Onwioduokit & O’Neill, 2023). To address these short-term issues, policymakers should focus on enhancing the efficiency of the financial sector and implement regulatory reforms to address the attributed factors. The capital formation and the labour force either contributed negatively or do not significantly contribute to Nigeria’s GDP growth in the short and long term. This suggests that factors traditionally linked to economic growth, like infrastructure investments and workforce size, are underperforming in Nigeria. Several potential capitals are underutilised (investments bypassing productive areas, existing infrastructure like electricity underutilised), technological stagnation limiting the impact of capital investments, a skills gap between the workforce and job demands due to the education system not equipping workers with the right skills and structural bottlenecks like bureaucracy or lack of competition hindering overall efficiency. To address these challenges, a multi-pronged approach is crucial. First, boosting capital utilisation is essential. This means promoting technological advancement and innovation through research and development incentives. Second, fostering partnerships between businesses and educational institutions can bridge the skills gap. Third, investments in modern infrastructure that supports high-tech industries are vital. The labour market also needs an efficiency upgrade. Reforming the education system to focus on skills relevant to modern industries is critical, including updating curricula, expanding vocational training programs, and promoting lifelong learning opportunities. In addition, increasing job creation by supporting entrepreneurship and removing barriers to business development is crucial. The solution lies not in isolated fixes but in a comprehensive policy approach that considers financial sector efficiency (reducing non-performing loans, fostering competition among banks, and providing affordable credit) and coordinated efforts among government, private sector players, and international partners to address these multifaceted challenges. Diagnostic statistics To verify the validity and robustness of the regression results, this study follows Yusuf et al. (2023) and Islam et al. (2022) and carried out some diagnostic tests. These included the heteroskedasticity, serial correlation, normality, and stability tests reported in Table 9. Using the Breusch-Pagan-Godfrey heteroskedasticity test procedure, the study established that a heteroskedasticity problem is absent in the result, with an F-statistic of 0.712 and p-value of 0.737, which means that the statistic is insignificant and the test’s Ho of homoskedasticity is accepted. Therefore, the residuals of the model have an equal spread. Employing the Breusch-Godfrey serial correlation test procedure established that the regression result is free from serial correlation problem given that the F-statistic has a value of 3.027 and a p-value of 0.076, which signifies that the test is insignificant (at 5%). Its Ho of no serial correlation is accepted. Also, the Jarque-Bera normality test statistic value of 0.361 and its p-value of 0.834 indicate that the normality statistic is insignificant, and its Ho of residual normality is not rejected; hence, the model residuals Table 9. diagnostic Tests. Breusch-Pagan-Godfrey Heteroskedasticity Test F-statistic 0.712 p-value 0.737 Breusch-Godfrey Serial Correlation LM Test F-statistic 3.027 p-value 0.076 Jarque-Bera Normality test Stat 0.361 p-value 0.834 Ramsey’s RESET Stability test F-statistic 0.104 p-value 0.751 COGENT ECONOMICS & FINANCE 15 are normally distributed. Ramsey’s RESET test was used to verify the stability of the model specification. Its F-statistic value of 0.104 and p-value of 0.751 signify correctly specifying the model. Furthermore, the recursive residuals (CUSUM and CUSUM of Squares) methods were used to examine the stability of the model (Pesaran & Pesaran, 1997). From the CUSUM and CUSUM of squares plots in Figure 4, it was established that the model is stable. The CUSUM plot is shown to not diverge significantly from its zero-mean value, verifying the stability of the model. This is supported by the plot not falling outside the two red lines representing the 5% significance level. Similarly, the CUSUM of the squares plot is located within the red lines for all the periods considered, further buttressing the stability of the model. Overall, all the diagnostic tests indicate that the estimated model is valid for explaining the factors that determine economic growth, as shown in the result. DOLS estimates To validate the consistency of the findings, the Engle and Yoo (1989) dynamic ordinary least squares (DOLS) technique was employed as an alternative estimation method. This approach is particularly useful in addressing potential endogeneity and serial correlation issues, providing more reliable long-run estimates. The results, as presented in Table 10, indicate that trade openness (TOP) and electricity production (EPP) continue to exhibit a positive and statistically significant influence on Nigeria’s economic growth, thus reinforcing the initial ARDL findings. These robust outcomes suggest that promoting trade liberalisation and enhancing electricity infrastructure should remain central to Nigeria’s growth strategy. Foreign direct investment (FDI), on the other hand, still shows a negative coefficient in the DOLS model, but it is no longer statistically significant. This suggests that while FDI may not directly enhance economic growth, the negative impact observed in the ARDL model may be more nuanced, possibly influenced by institutional weaknesses or misalignment with growth-oriented sectors. This finding underlines the need for reforms aimed at improving the effectiveness of FDI in contributing to long-term development. Furthermore, the negative influence of capital formation (GFCF) is confirmed in the robustness analysis, which points to inefficiencies in how capital is being utilised in the Nigerian economy. Labour force Figure 4. CUSUM and CUSUM of squares plots. Table 10. Robustness estimate with dynamic OLS. Variable Coefficient Std. Error t Prob TOP 0.286 0.060 4.747 0.002 EPP 0.984 0.110 8.893 0.000 FDI −1.177 1.033 −1.139 0.291 GFCF −0.218 0.092 −2.357 0.050 LNLBR 10.964.687 2.340 0.051 DCPSBB 1.030 0.388 2.652 0.032 C−212.8 84.27 −2.525 0.039 Obs. 33 R-squared 0.964 Adj. R-squared 0.842 Note. ,, and signify significance at 1%, 5%, and 10%. 16 K. L. GOLD AND F. TREGENNA participation (LNLBR) was found to be significantly positive (10.96, p <0.1), only in the DOLS robustness estimation, indicating that increases in the labour force can enhance GDP growth in Nigeria. The dynamic structure of the DOLS model is particularly effective in capturing long-term relationships and mitigating short-term fluctuations, which may explain why the effect of labour is more pronounced in this method compared to the ARDL. This result suggests that, in the long run, a growing labour force, combined with appropriate economic conditions, could significantly contribute to economic expansion. The finding is consistent with Islam (2021) and Islam et al. (2022) long-run ARDL results on Saudi Arabia. It also aligns with Neo-classical and labour-led growth theories (Khobai et al., 2018; Omoke & Opuala–Charles, 2021), which emphasise the importance of human capital in driving productivity and fostering future growth. In contrast, the positive impact of bank credit (DCPSBB) on economic growth remains robust across estimation techniques, highlighting the importance of financial sector development in driving growth. Overall, the DOLS robustness analysis solidifies the policy implications of the study, particularly the significance of trade openness and electricity production in fostering sustainable economic growth. These findings suggest that policy efforts should focus on improving trade conditions and addressing electricity generation challenges to stimulate long-term growth. Conclusion and policy recommendations This study investigates the impact of trade openness, hydroelectric power production, and FDI on Nigeria’s economic growth from 1988 to 2022, using the ARDL bounds model and DOLS to assess both long-term and short-term relationships. The findings confirm that trade openness positively influences Nigeria’s economic growth in both the long run and the DOLS estimates. In contrast, electricity production has a notably positive effect on long-term growth and in DOLS but shows a negative and insignificant impact on GDP growth in the ARDL short-term estimate. Nigeria’s electricity infrastructure characteristics might have contributed to the mixed result. FDI, while significant in both the short and long-run ARDL estimates, consistently exhibits a negative relationship with economic growth. This suggests that FDI is not contributing effectively to the country’s growth, potentially due to inefficient resource allocation, institutional weaknesses, or inadequate infrastructure. These findings underline the importance of creating policies that address these structural challenges to better leverage FDI for economic development. The study also incorporates control variables such as capital formation, labour, and bank credit to private sectors to ensure robustness. These variables provide additional insights into the drivers of growth beyond the baseline variables. Hence, the following recommendations are proposed based on the findings of this study: Firstly, to enhance international trade and economic growth, the government should prioritise eliminating trade barriers like tariffs and quotas. In addition, policymakers and stakeholders should focus on simplifying customs procedures, improve logistics, and ensure a stable economic environment for smoother trade relations with other countries. As enhancing trade competitiveness is essential for boosting growth and integration into global markets. Secondly, the government must focus on a two-part plan to guarantee a consistent, reliable and efficient electricity supply. This involves repairing and upgrading faulty hydroelectric power infrastructure and investing in modern technologies to expand and improve the national grid. Electricity is the primary energy source enabling mass production and is essential for exports and domestic consumption. Thirdly, the government should create a conducive environment for foreign investors, particularly in Nigeria’s electricity sector, as external resources are required to implement its projects. External resources are crucial for development and economic growth, providing capital, technology, and expertise essential for progress. By attracting FDI, a country can access the necessary tools to enhance its electricity infrastructure, support industrial growth, and drive overall development. Lastly, while this study focuses on trade openness, electricity production, and FDI, it excludes other potentially influential factors like institutional quality, environmental factors, technological advancements, and the sectoral impacts of electricity and foreign investment. Future research could explore the limitations to provide a more nuanced view of Nigeria’s economic growth for practical policy recommendations. COGENT ECONOMICS & FINANCE 17 Note 1. For a detailed discussion on energy use in Nigeria, see Musibau et al. (802024). Disclosure statement No potential conflict of interest was reported by the author(s). Author’s contributions Author contributions: Conceptualization, GKL and FT; methodology, GKL; formal analysis, GKL; data curation, GKL; writing—original draft preparation, GKL; writing—review and editing, GKL and FT; supervision, FT; project administration, FT. All authors have read and agreed to the published version of the manuscript. About the authors Kafilah Lola Gold is a Postdoctoral Research Fellow with the DSI/NRF South African Research Chair in Industrial Development at the University of Johannesburg, South Africa, and a Lecturer in the Economics Department at Kwara State College of Education, Ilorin, Nigeria. She obtained her Ph.D. in International Economics from Universiti Malaya, Malaysia. Fiona Tregenna is a Professor of Economics and holds the DSI/NRF South African Research Chair in Industrial Development at the University of Johannesburg, Johannesburg, South Africa. She earned her Ph.D. in Economics from the University of Cambridge. Her research focuses on structural change, industrialization and deindustrialization, innovation, and technological upgrading. ORCID Kafilah Lola Gold http://orcid.org/0000-0002-0018-2153 Fiona Tregenna http://orcid.org/0000-0001-5584-5842 Data availability statement The data supporting the findings of this study are readily accessible, as stated in the data sources above. References Adenikinju, A. (2005). Analysis of the cost of infrastructure failures in a developing economy: The case of the electricity sector in Nigeria. Adeusi, S., & Oke, M. (2013). Impact of bank consolidation on Nigeria economy growth. International Journal of Innovative Research and Development,2(5), 1196–1212. Al-Harbi, W. S., & Shaheen, R. (2021). 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