Testing for Simultaneity

This work studied the relationship between foreign private investment (FPI), capital formation and economic growth. Given the likely simultaneity between FPI, capital formation and growth, we used the two-stage least squares (2SLS) method of estimation to examine the nexus between these variables using Nigerian data. We found that foreign private investment has a negative impact on capital formation in Nigeria. We also found that both foreign private investment and capital formation, in addition to other factors, significantly determine economic growth in Nigeria. The study finds that the long-run impact of capital formation, and foreign private investment on economic growth is larger than their short-run impact. There is, thus, a long-run equilibrium relationship among the variables as the error correction term is significant, but the speed of adjustment is small in both models. The 2SLS estimates are very close to the OLS estimates suggesting that OLS estimates are consistent and unbiased. Hence, endogeneity was not a problem in the estimated models. There is, therefore, no simultaneity between GDP growth and capital formation model. These findings, therefore, have some policy implications as discussed in the work.