International Remittances, Private Domestic Investment and Economic Growth in Nigeria

International Remittances, Private Domestic Investment and Economic Growth in Nigeria

Okeke, Izuchukwu Chetachukwu., Chukelu, Chukwudi

Department of Economics, Chukwuemeka Odumegwu Ojukwu University, Igbariam, Nigeria

DOI: https://dx.doi.org/10.47772/IJRISS.2024.8100273

Received: 30 October 2024; Accepted: 08 November 2024; Published: 23 November 2024

ABSTRACT

Investment is a key factor that determines economic progress in both developed and developing economies. Nigeria, a developing country characterized by low income and savings requires substantial investment in promoting and enhancing economic activities that guarantee better living conditions for the Nigerians. International remittances serve as development or foreign finance needed to bridge the gap between the available resources and what is required for their advancement.  This study examined the role of international remittances on economic growth-private domestic investment nexus in Nigeria using quarterly time series data from 1981 to 2022. The Two Stage Least Squares (TSLS) and Granger Causality Test were employed as methods of estimation. Findings reveal that international remittances are positively related to economic growth through the channels of private domestic investment and there exists a unidirectional causal relationship between Economic growth and Private domestic investment without feedback. Therefore, remittances should go beyond just transfer payments and social security to help family members and serve as investments to spur economic growth. Moreover, international trade should be strengthened by revamping the industrial sector by shifting production from primary products such as crude oil and agricultural produce to secondary products such as refined petroleum and industrial products.

Keywords: International remittances, Private Domestic Investment, and Economic Growth.

BACKGROUND TO THE STUDY

Economic growth can be defined as the persistent increase in the productive capacity of a nation within a given period of time, usually a year. It is used in analyzing the economic performance of a nation. Economic growth and the sources of economic growth have been seriously debated. Economic growth is said to be determined by various factors of which investment is one of them. Economic growth and investment are closely intertwined in Nigeria, where both foreign and domestic investments play a vital role in driving the economy forward. Investment, especially foreign direct investment (FDI), brings much-needed capital into Nigeria. This capital supports infrastructure projects, manufacturing, and technology sectors, which are essential for increasing productivity and GDP growth. For instance, investments in power, transport, and digital infrastructure directly improve business efficiency and foster growth. Investment in industries like agriculture, oil, telecommunications, and manufacturing generates employment opportunities. As businesses expand, they create jobs, increase household incomes, boost consumer spending, and drive further economic growth. Investments in technology and innovation bring in new techniques and processes that improve productivity across sectors. In Nigeria, this is especially relevant in areas like fintech and agro-tech, where investment drives efficiency and connects more Nigerians to economic opportunities. By investing in local industries, Nigeria can increase its capacity to produce exportable goods, which in turn strengthens the economy. Diversifying exports through investment in non-oil sectors can make Nigeria less dependent on oil revenue, enhancing economic stability and resilience. Both private and public sector investments are key to developing infrastructure, which is fundamental for sustainable economic growth. For Nigeria, investment in roads, ports, and electricity infrastructure can help reduce operational costs, attract more businesses, and improve economic conditions overall. Investment boosts business activities, which in turn raises corporate tax revenue. This increased revenue allows the government to invest more in social services and infrastructure, creating a positive feedback loop for economic growth.

Investment is one of the main components of aggregate demand and thus plays a critical role in the determination of equilibrium income (Iyoha, 2004). By investment, we mean real gross private domestic capital formation. Real gross private domestic capital formation is the measure of physical investment used in computing Gross Domestic Product (GDP) in the measurement of a nation’s economic activity. Changes in the growth rate of an economy are majorly caused by changes in investment. It is a well-known fact that an increase in investment will lead to an increase in productive capacity resulting in reduced unemployment, low poverty and a high standard of living. It is a major explanation of and contributory factor to long-run growth in the economy. Investment not only depends on economic factors but also on political and legislative factors. Investment is perhaps the most variable and volatile component of aggregate demand and fluctuations in its level are highly correlated with fluctuations in the Gross National Product. This is because it is affected by the cyclical behaviour of the economy. Businesses are always wary of changing expectations; it fall sharply during recessions and rise during booms.

Investment is financed from savings (domestic or foreign). While investment is financed from domestic saving in advanced economies, foreign saving is often used to supplement domestic saving in the financing of investment in many developing countries.   In many developing countries, the resources to finance the different business ideas are in short supply. This is because their economies are plagued with problems associated with low income, inadequate financial systems, low domestic savings; vicious levels of poverty, low tax revenue, macroeconomic instability, political instability, unstable exchange rate, limited foreign exchange earnings, and availability of natural resources amongst others. As a result of these, developing countries inevitably resort to policies that will enhance the flow of international migrant remittances or foreign finance to bridge the gap between the resources available to them and what is required for their advancement (Joseph, 2017). International Organization for Migration (IOM, 2006) broadly defined remittances as the financial flows associated with migration, in other words, personal cash transfers from a migrant worker or immigrant to a relative in the country of origin. Remittances are referred to as unrequited transfers sent by migrant workers back to relatives in their countries of origin (Juthathip, 2007).

Moreover, in the face of inadequate resources to finance long-term growth and development in developing economies and with unemployment and poverty reduction looking increasingly bleak or miserable, increasing the flow of international migrant remittances has assumed a prominent place in the strategies of developing countries. This is because, the experience of a small number of fast-growing East Asian newly industrialized economies (e.g. Bangladesh, Pakistan, India, etc..) has strengthened the belief that attracting international remittances could bridge the resource gap of low-income countries and avoid further build-up of debt while directly tackling macroeconomic problems (International Policy of Migration, 2004).

Unlike other sources of external finance, remittances tend to be more stable making them a reliable source of financing for developing countries (Biller, 2007). Remittances are often more effective than development aid since they are sent directly to the recipient thus making them less susceptible to bureaucratic bottlenecks and corruption. Moreover, because a large share of remittance inflows is sent through informal channels; they are therefore not captured in official tabulations (Cherono, 2013).

The significance of remittances as development finance for investment cannot be exaggerated. This is because it is an important stimulant to economic growth and development which creates a multiplier effect on other macroeconomic indicators like industrial output, gross domestic product, unemployment rate, and labour force participation rate. Presently, Nigeria like most other developing countries is tending towards relying much on international remittance inflows for its growth and development.

It is against this background that this study seeks to empirically examine the role of international remittances on private domestic investment-economic growth nexus in Nigeria’s economy.

Statement of the Research Problem

Economic growth is one of the most important macroeconomic policies of any nation. Economic growth is defined as the process whereby the real per capita income of a country increases over a long period. Economic growth is measured by the increase in the amount of goods and services produced in a country. Economic growth occurs when an economy’s productive capacity increases. Productive capacity can increase if capital assets used in production are purchased which can only occur through investment.

Investment is a key factor that determines economic progress in both developed and developing economies. Nigeria requires substantial investment in promoting and enhancing economic activities that guarantee better living conditions for the Nigerians. In development economics, the debate on the investment-growth nexus is still ongoing for developing countries to cash up with the developed economies. (Egbetunde and Fadeyibi, 2015).  Unlike other components of total expenditure in an economy like consumption expenditure in food, clothing, and entertainment; investment expenditure directly contributes to capital formation which is a precondition for economic growth. Private domestic investment involves an investment made by an individual in a particular country or country of residence in the form of establishing businesses such as small and medium scale enterprises. Thus, Nigeria has been considered to be one of the 20 poorest countries in the world with 70% of the population living below the poverty line and with an investment rate of barely 10% of GDP, which is below the minimum investment rate of about 30% of GDP required to reduce poverty and unemployment and put the country on the path of development through the inflow of foreign direct investment (Joseph, 2017).

This low level of investment may predominantly be as a result of low income and savings needed to finance different business plans and investment opportunities prevalent in the country, hence the need for foreign finance. An old phenomenon that is gaining increasing attention and importance in development finance as well as in international finance is the issue of migrant remittances. Yet, these international remittances by migrant workers from their employment income, particularly to developing countries, are usually overlooked in discussions on international financial flows.

The rapid growth of remittances in Nigeria highlighted before now raises the question of whether these money(s) are used towards investment and thus expansion of the productive capacity of the economy. Despite the significant flow of remittances into the country in the recent past, not much is known about the effect of remittances on private domestic investment-economic growth nexus. Empirical research from other countries shows that no research has been done in this area. Some studies suggest that remittances are primarily used for consumption purposes while other studies are of the view that remittances are used for investment rather than for consumption without explicitly ascertaining its impact on economic growth. In Nigeria, researchers have produced results on the effect of remittances on economic growth without examining the channels through which remittances contribute to economic growth. Since the link between remittances, private domestic investment, and economic growth have been overlooked over the years, this study intends to fill this gap.

Furthermore, those studies merely established correlations that do not necessarily imply causation. Many arguments underlie the role of remittances in the economic growth-investment nexus. Some scholars are of the view that it is the low level of investment that attracts migrants to remit part of their earnings to their country of origin to maximize or exploit the benefits of start-up firms where multinational enterprises are lacking to speed up the growth process of their economy. The motive of remitting money in most less-developed countries is to exploit untapped investment opportunities in the home country. Sequel to this, they believe that it is the low level of investment coupled with low productive capacity in the country of origin that attracts the inflow of remittances to the country of origin (Okeke, Chinanuife, and Muogbo, 2021). Others believe that the incessant flow of remittance is the rationale behind the increase in the rate of investment which has a significant effect on economic growth; hence this study will attempt to resolve this conflict among researchers by empirically investigating the direction of causality amongst remittance inflows, investment, and economic growth in Nigeria.

This study therefore intends to bridge the existing gaps in the literature by empirically investigating the role of international remittances on the economic growth-investment nexus in Nigeria; and the causal relationship amongst remittance inflows, investment, and economic growth in Nigeria.

Objectives of the Study

The broad objective of this study is to examine the link between remittances and economic growth-investment nexus in Nigeria. The specific objectives of the study are:

1. To evaluate the effect of remittance inflows on economic growth-private investment nexus in Nigeria;
2. To determine the causal relationship between remittance inflows, investment, and economic growth in Nigeria.

Scope of the Study

The study investigated the effect of remittance inflows on economic growth-private domestic investment nexus in Nigeria, covering the period of 41 years (1981-2022). This scope is considered more encompassing to cover changes in remittance inflows in the economy. Furthermore, the scope was considered because the period encompasses the military regime of General Sani Abacha and other military Heads of State when Nigerians migrated to other countries of the world because of unemployment, poverty, killings, insurgency, and other human activities. The dictatorship and high-handedness of the government of the day caused Nigerian citizens to migrate to other countries in search of greener pastures.

REVIEW OF THEORETICAL LITERATURE

Review of Basic Theories

The theories of economic growth enable one to understand the factors that pose as drivers of economic growth. These relevant theories may include the Solow growth theory, Harrod-Domar growth model, Altruism hypothesis, etc.

The Harrod-Domar Growth Model: Harrod-Domar model is a classical economic growth model that explains the relationship between economic growth, capital accumulation, and savings. It was developed by economists Roy Harrod and Evsey Domar in 1939 and 1946. This model shows how sufficient investment through savings can accelerate growth. Investments generate income and supplement productivity of the economy by increasing the capital stock. The Harrod-Domar model is based on the following assumptions:

• Laissez-faire; where there is no government intervention
• A closed economy; no participation in foreign trade
• Capital goods do not depreciate as they possess a boundless timeline
• Constant marginal propensity to save
• Interest rate remains unchanged, etc.

The Harrod-Domar model makes use of a Capital-output Ratio (COR). If the COR is low a country can produce more with little capital but if it is high, more capital is required for production and value of output is less. This can be denoted in a simple formula of K/Y=COR; where K is the Capital stock and Y is Output because there is a direct proportional relationship between both variables. The basic idea of the model is that economic growth depends on the amount of capital that is available for investment, and that the rate of capital accumulation is proportional to the rate of savings. Basically, the model suggests that the economy’s rate of growth depends on the level of national saving and the productivity of capital investment. There are several criticisms of the assumptions of this model. Let’s start with the assumption of laissez-faire. It is almost impossible for underdeveloped nations to undertake certain large projects without the help of the government. As a growing economy, the private sector has limitations to what they are able to contribute for the growth of its country and this is where the government intervenes. Also, as much as savings and investments are necessary for development, it is not enough. The savings ratio might be constant but low and cannot support the amount of productivity the country might want to undertake. There are other arrangements that have to be put in place to complement its savings and investment.

It is used to analyze the role of international remittances on investment-growth nexus in Nigeria. The idea behind the Harrod-Domar growth model is it assigned a key role to investment in the process of economic growth. It laid emphasis on the dual character of investment. Firstly, it creates income, and secondly it augments the productive capacity of the economy by increasing its capital stock. Therefore, so long as net investment is taking place, real income and output will continue to expand (Jhingan, 2010).

Empirical Literature Review

Economic Growth and Investment

Mba and Chijioke (2024) examined the importance of inflows of remittances and foreign direct investment on Economic development using OLS and ECM. Findings showed that remittances and foreign direct investment impacted positively and significantly on economic development and that exchange rate negatively influenced economic development.

Yusuf (2023) conducted a disaggregated analysis on the impact of various measures of investment on economic growth in Nigeria using ARDL approach. Short-run results revealed that economic liberalization, private sector credit, and port-folio investment all correlate positively with growth while foreign direct investment, infrastructure spending and inflation rate are negative. These variables also have a significant positive impact on long-term growth. Ogunjimi (2022) re-examined the impact of investment on economic growth. Using the ARDL estimator, the study found a long-run relationship existing between investment and economic growth in Nigeria. It also established that investment negatively impacted on economic growth in the short-run, whereas in the long-run, the relationship was not statistically confirmed.

Olusuiyi, Adedayo, Giwa and Araoye (2017) examined the dynamic impact of remittance on economic growth in Nigeria. Variables employed include: private consumption, government expenditure, domestic investment, import, and GDP. Using Generalized Method of Moments (GMM) estimation technique, the result of the study shows that all the coefficients of consumption, investment, and import are positive and significant. The short run or impact multiplier of private consumption, investment, import and income respectively are positive. Nwakoby and Alajekwu (2016) investigated the effect of private sector investment on economic growth in Nigerian economy using Johansen Cointegration technique. Cointegration test result indicated that Private Sector investment and economic growth have long-run significant effect on each other. Domestic private sector investment, FDI, Foreign Private Investment and Interest rate have a positive relationship with RGDP while Inflation rate and exchange rate have a negative relationship with RGDP.

Okorie, Orji and Ogueze (2015) investigated the impact of finance on investment and the impact of investment on economic growth in Nigeria. ECM and DL was used. Results suggest that increase in private sector credit leads to increase in economic growth of Nigerian economy. The result also showed that the saving level in Nigeria is not sufficient to match the investment opportunities as typified by non-significance of saving in the very short-run. However, the total domestic investment of Nigeria in the long-run had a positive impact on economic growth. Egbetunde and Fadeyibi (2015) investigated investment-growth nexus in Nigeria for the period 1981-2012 using VECM. Findings revealed that investment granger causes economic growth, and that there is a long-run relationship between investment and economic growth.

Eigbieriolen and Nnetu (2015) examined the role of remittance inflow on economic growth in Nigeria. Variables employed include real gross domestic product, remittance inflows, foreign direct investment and private investment. A pooled model reveals that remittance inflows have no effect on economic growth. However, when dynamics was accounted for and separate models estimated, allowing for the effect of remittance to vary across sub periods, findings reveal positive effect of remittance inflows was not only marginally bigger when compared to the pooled model, but it also became important for economic growth.

Odionye & Emerole (2015) investigated the impact of international remittances on the Nigerian economy. Having adopted Autoregressive distributed lagged (ARDL) model, the result of the study show that international migrant remittance inflow has positive and significant impact on the Nigerian economy. it further showed that there is a long run relationship between international remittance and the Nigerian economy.

Economic Growth and International Remittances

Afen-Okhai (2023) assessed the relationship between economic growth and remittances using causality approach and ARDL estimation technique. Results revealed that remittance has a positive and statistically significant impact on economic growth. Onyike, Ekeagwu and Alamba (2020) evaluated the effect of international remittances on economic growth of Nigeria using ARDL approach, cointegration and VECM. Findings indicated that in the long-run, remittance, human capital, and inflation rate had positive effect while GDP and interest rate had negative effect on economic growth of Nigeria. Moreso, in the short-run, remittances, human capital, GDP and inflation rate had positive effect while interest rate had negative effect on economic growth in Nigeria.

Okorie, Nwabufo and Oriaku (2022) investigated remittances and economic growth of Nigeria using OLS technique. Results revealed that remittances statistically significantly contribute positively to economic growth. Adeleye, Ologunwa and Ogunjobi (2021) investigated the effect of FDi and remittances on Economic growth in Nigeria using OLS. Results revealed that FDI has a negative relationship with economic growth and remittances have a positive effect on economic growth. Adewale, Ameji and Solomon (2021) assessed the impact of diaspora remittances on the growth of Nigerian economy using ARDL model. Results showed that diaspora remittances have a positive and significant impact on economic growth in Nigeria in the short-run, and long-run, however, its impact on growth was quite low for both periods.

Adenike (2021) examined the effect of migrants’ remittances on Economic growth in Nigeria using multiple linear regression and ANOVA. It was discovered that significant relationship exists between remittance and Gross Domestic Product, exports and imports in Nigeria while inflation has no significant relationship with remittances. Anetor (2019) examined the relationship between remittances, financial sector development and economic growth in Nigeria over the period 1981-2017. The study used the ARDL model to analyze the long-run and short-run relationships between the variables. The outcome of the study revealed that the variables are bound together in the long-run. The results also showed that remittances have a negative and significant effect on economic growth both in the long-run and short-run; financial development has a negative and significant effect on economic growth both in the long-run and short-run.

Adigun and Ologunwa (2017) analyzed remittances in Nigeria and its impact on economic growth. They employed time series data for the period and the results revealed that remittances remain positive source of economic growth and can help the poor finance some of the consumption and investment expenditure. Loto and Alao (2016) investigated the contributions of foreign remittances on economic growth in Nigeria using the Vector Error Correction Model (VECM) technique to analyze the long-run and short-run impact of disaggregated remittances i.e. Migrants’ remittances and Workers’ remittances. The results showed that migrants’ remittances component exhibit a long-run positive statistically significant impact on economic growth, short-run relationship was also established among the variables as the ECM was negative and statistically significant. Unidirectional causality from GDP per Capita to Migrants’ remittances was found with no evidence for Workers’ remittances and the growth of the Nigerian economy. Sebil and Abdulazeez (2015) examined the relationship between remittances and economic growth in Nigeria using an error correction modeling approach for the period, 1981-2011. Their results revealed that remittances positively impact on the economic growth of Nigeria.

Summary of Literature Review

In the course of this research work, effort was made to review both theoretical and empirical literatures that are related to remittances, economic growth and private investment. The purpose of the theoretical literature is to familiarize ourselves with the theories that link remittances, investment with economic growth that have been developed by scholars on the issue we are investigating. For instance, Harrod-Domar growth model argues changes in real output and income is brought about by changes in net investment, and investment can only change if savings (a source of finance) is constant. Therefore, remittances serve as a source of foreign development finance that augments domestic saving (if any). On the contrary, Altruism hypothesis points that remittances are sent to relations due to poor economic conditions of the home country.

A survey of the empirical literature revealed that there is a good number of literature on the impact of investment on economic growth in Nigeria. Yusuf (2023), Mba and Chijioke (2024), Nwakoby and Alajekwu (2016), and Okorie, Orji and Ogueze (2015) found that investment positively affects economic growth in Nigeria. Egbetunde and Fadeyibi (2015) found that investment granger causes economic growth. Ogunjimi (2022) findings differ from others, indicating that investment negatively impacted economic growth in the short run.

In the survey of the literature of international remittances and economic growth, Afen-Okhai (2023), Onyike et al (2020), Okorie et al (2022), Sebil et al (2015), Adeleye et al (2021), Adewale et al (2021), Adenike (2021), Adigun et al (2017), Loto et al (2016), Odionye et al (2015), Olusuiyi et al (2017), and Eigbieriolen et al (2015) found that there exist a positive and significant impact of international remittances on economic growth. However, Anetor (2019) discovered that international remittances have a negative and significant effect on economic growth in Nigeria. The divergent results from the empirical literature may not be unconnected with different techniques of analysis adopted by various authors.

Justification of the Study

Economic growth is a desirable goal of every nation. The growth can be achieved through increase in capital stock., however, the only way to finance the purchase of capital stock in a country with low level of domestic savings is through international capital flows. The flow of remittances is the least influenced by economic downturn, and remains a stable source of income for investment. Remittances have been identified as the third pillar of development as their volume is second to Foreign Direct investment and higher than overseas development assistance, hence serve as a source of foreign finance or capital for investment.

Previous studies examined the effect of remittances on economic growth and the impact of private investment on economic growth. None of these studies took into account the channels through which remittances affect economic growth, but rather concluded a direct relationship between remittances and economic growth. Moreso, those studies fail to examine remittances as a source of international capital flow for investment purposes. Sequel to that, the study departs from other studies by the role of remittances on economic growth-investment nexus in Nigeria. Thus, this study attempts to fill aforementioned gap in the existing literature.

This study will employ the granger causality test to resolve the conflict among researchers as regards to whether the low level of investment in the migrant’s country of origin is the cause of increase or the incessant flow of remittances or whether the flow of remittances is the rationale behind the increase in the rate of investment. The question; “Is it the low level of investment that causes the increase in the flow of remittances or is the flow of remittances the reason why investment has increased over the years?” will be answered in this study. The study intends to fill the gap in the existing literature by analyzing the causal relationship between remittance inflows and investment in Nigeria.

It should be noted that some studies used simple linear regression model in their analysis but this study will adopt the Three Stage Least Squares (3SLS). The rationale behind the use of Autoregressive distributed lag model is because it models relationship among variables as best linear unbiased estimators (BLUE) despite their order of integration. Other researchers produced spurious result in their modeling approach because they used Ordinary least squares and generalized least squares to model relationship among variables despite their order of integration.

Theoretical Framework

One of the principal strategies of development necessary for any takeoff was the mobilization of domestic and foreign saving in order to generate sufficient investment to accelerate economic growth. The economic mechanism by which more investment leads to more growth can be described in terms of the Harrod-Domar growth model (Todaro and Smith, 2020).

This study hinged on Harrod-Domar model of Economic Growth which highlights the importance of determining the rate of investment (S/Y), which is necessary to achieve a certain level of economic growth. Every economy must save a certain proportion of its national income, if only to replace worn-out or impaired capital goods (buildings, equipment, and materials). However, in order to grow, new investments representing net additions to the capital stock are necessary. The model shows the possibility of increasing the rate of growth by either reducing a factor (capital/income) or increase the rate of investment (savings/income). To optimally utilize capital (that comes from international remittances), private sector investment remains the engine of growth with the public sector providing the enabling environment. This theory thus captures the relationship between private sector investment and economic growth including the possible control variables such as interest, exchange and inflation rates which influence investor decision. The Harrod-Domar growth model is represented in the equation:

The above equation represents the rate of change or rate of growth of Gross Domestic Product. It is a simplified version of the famous equation in the Harrod-Domar theory of economic growth, and it states simply that the rate of growth (ΔY/Y) is determined jointly by the net national savings ratio, s, and the national capital-output ratio, c. More, specifically, it says that in the absence of government, the growth rate of national income will be directly or positively related to the savings ratio (i.e. the more an economy is able to save and invest out of a given GDP, the greater the growth of that GDP will be), and inversely or negatively related to the economy’s capita-output ratio (i.e., the higher c is, the lower the rate of GDP will be. Equation (1) is also often expressed in terms of gross savings, s^G , in which case, the growth rate is given by:

Where ∂ is the rate of capital depreciation.

Equation (2) above means that for an economy to grow, she must save and invest a certain proportion of her GDP. The more she can save and invest, the faster she can grow. But the actual rate at which she can grow for any level of saving and investment (how much additional output can be had from an additional unit of investment) can be measured by the inverse of the capital-output ratio, c, because this inverse, 1/c, is simply the output-capital or output-investment ratio. It follows that multiplying the rate of new investment, s= I/Y, by its productivity, 1/c, will give the rate by which national income or GDP will increase.

Note that c also plays a critical role in this equation; 1/c expresses the efficiency with which capital is utilized. The lower (more efficient) the value of c that an economy can attain, the greater the output that can be gained from additional investment. In other words, the rate of growth depends as much upon the efficiency with which investment is used as the amount of capital invested.

Model Specification

The main objective of this study is to examine the role of international remittances on economic growth-investment nexus in Nigeria. To clearly assess the role of international remittances on economic growth-investment nexus in Nigeria, the research adapted the model of Tolcha and Rao (2016) which is predicated on the theoretical framework of Harrod-Domar growth model, and thus modified the model;

Using Ordinary Least Squares, Tolcha and Rao (2016) estimated an empirical model, which was adapted and specified as follows:

RGDP_t = β₀ + β₁ PDI _t + β₂ IMR_t + β₃ NX_t+ β₄ INF_t + β₅ PSC_t + μ_t

Where:

β₀ = Constant intercept term

RGDP_t = Real Gross Domestic Product at time t

PDI_t = Private domestic investment at time t

IMR_t = International migrant remittances at time t

RIR_t = Real Interest Rate at time t

NX_t = Net Exports at time t

INF_t = Inflation rate at time t.

PSC_t = Private sector credit at time t

μ_t =  Stochastic error term

Knowing that nominal GDP, first, is a measure of economic size rather than economic growth, and second, is a poor economic indicator in the face of inflation, which might pose the problem of multicollinearity in the model, we introduced real GDP growth instead of nominal GDP. Also, investors are more likely to use real interest rate (rather than nominal interest rate) while making investment decisions in the face of inflation risks, we introduced real interest rate. Thus, the investment model is specified as:

PDI_t = β₀ + β₁ IMR_t + β₂ RIR_t + β₃ PSC_t + μ_t

α₀ = Constant intercept term

μ_t = Stochastic error term (the stochastic error term represents other determinants of private domestic investment not explicitly taken into account by the above model)

β₁ – β₃ = Parameters

Estimation Technique and Procedure

It has been noted that there is no direct relationship between remittances and economic growth; the study therefore employed a Two-Stage Least squares approach. Two stage Least Squares method of estimation is used to handle model with endogenous explanatory variables in a linear regression framework. An endogenous variable is a variable that have values determined or influenced by one or more independent variables in the model excluding itself. Using endogenous variables is in contradiction with the linear regression assumption of uncorrelation of variables with the error term to estimate the model parameters. Instrumental variable is used in regression analysis when you have endogenous variables – variables that are influenced by other variables in the model. These instrumental variables are correlated to the endogenous variables but not with the error term of the model.

Evaluation of Estimates: Evaluation of estimates consists of deciding whether the estimated coefficients are theoretically meaningful and statistically satisfactory. For this study, there is a need for all the results to satisfy both economic and statistical criteria (First order test) and econometric criteria (second-order test).

Evaluation Based on Economic Criterion: This criterion evaluates the generalized least squares regression results based on theoretical expectations concerning the relationship under review. This is to determine if the sign(s) associated with the estimated parameters conform to a priori expectations as noted earlier. Moreover, this has to do with the sign expectation set by economic theory. It looks at the signs and sometimes sizes of parameters of economic relationships. According to Koutsoyiannis (1979), the parameters in a given model are expected to have signs and sizes that conform to economic theory. If they do, they are accepted, otherwise they are rejected.

Evaluation based on Statistical Criterion: Three tests are conducted under the statistical criteria: namely the r-squared (R²) test, Z-test, and F-test.

Evaluation Based on Econometric Criteria

The serial correlation test (or autocorrelation), heteroscedasticity test, multicollinearity test, and normality test will be conducted under econometric criteria. These are set by the theory of econometrics and are aimed at investigating whether the assumption of the econometric method employed is satisfied or not.

Causality Test

According to Madueme (2010), a causality test is undertaken to investigate the degree of causation of one variable on the other. The test is conducted here to show whether it is private domestic investment that is causing economic growth whether it is economic growth that is causing private domestic investment, or whether both are causing each other or whether both of them are independent of each other. According to Gujarati and Porter (2003), for causality tests to be conducted certain assumptions must be fulfilled. The assumptions include:

• The disturbance term in the equation is uncorrelated.
• That the two variables are stationary
• The number of lagged terms which are expected to be included in the model should be determined.

The test expectations are:

RESULT PRESENTATION AND ANALYSIS

Descriptive Statistics

The descriptive statistics reveals that the economic growth and private domestic investment are very strong as they carry positive values. The mean value of economic growth and private domestic investment are 31688.40 and 3.591853. Inflation rate and Net Exports are also strong since they all have positive values. Their mean values are 19.67489 and 1771106. Apart from the first moment statistics of the series, the results of other statistics are also evident from the table. For instance, Jarque-Bera which measures whether the series are normally distributed or not, also rejects the null hypotheses of normality for all the variables in terms of their distribution. Kurtosis measures the peakedness or flatness of the distribution of the series. The statistics also concur with the fact that all the variables as being normally distributed. Lastly, skewness is a measure of asymmetry of the distribution of the series around the mean. The statistic for skewness shows that all the variables except government stability and real interest rate are positively skewed, implying that these distributions have long right tails.

Analysis of Result

Prior to the data analysis, the time series properties of the series such as stationarity and cointegration are investigated. The results of the stationarity and cointegration are presented in the following sub-sections.

Stationarity Test

Stationarity test was conducted using two traditional unit root tests to side step spuriousness of the regression result. The traditional test employed is Phillips-Perron (PP) test. Phillips-Perron test was chosen as a test of consistency because PP test have been made robust to serial correlation by using the Newey-West (1987) heteroscedasticity and autocorrelation consistent covariance matrix estimator. One advantage of Phipps-Perron over the Augmented Dickey-Fuller is that PP tests are robust to general forms of Heteroskedasticity in the error term. Another advantage is that the user does not have to specify a lag length for the test regression. The results are presented in table 4 of the appendix.

Evaluation of Estimates

The estimates obtained from the model of the study are evaluated as follows using economic criteria, statistical criteria, and economic criteria.

Evaluation of Economic Criteria

The economic criteria are used to evaluate the model estimates based on theoretical or a priori expectations concerning the relationships between the hypothesized variables in the model. the model is estimated with Two Stage Least Squares (TSLS). Result indicates that two of the variables conform to economic expectations except inflation rate. From a priori, it is expected that inflation rate will be positively related to economic growth. But this expectation is anchored on the assumption that rise in prices is inherent in the growth process.

Evaluation based on Statistical Criteria

The robustness of the hypothesized model and the validity of the research hypotheses are evaluated on the following statistical criteria. The overall test of statistical robustness and reliability was executed using the F-statistic (F-test). The test is implemented under the null hypothesis that the model is not statistically significant. The null hypothesis can only be rejected if F-statistic is less than F-critical value, otherwise do not reject.

Table 4.1: Summary of F-statistic

Source: Researcher’s Compilation from Eviews 12.0

Table 4.2 indicates that the null hypothesis of no statistical significance is rejected. This implies that the model has good fit or is statistically significant, hence reliable for inference purposes. Also, it also indicates that the values of the parameters (coefficients) maximize value of the likelihood function.

Evaluation based on Econometric Criteria

The robustness, appropriateness, and predictive power of the estimated econometric model is evaluated based on Ramsey Reset specification test, serial correlation test, multicollinearity variance inflation factor test, optimal lag length model selection criteria, and heteroskedasticity test.

Evaluation of Research of Hypotheses

Having established the robustness, predictive power and appropriateness of the model for inferences, we proceed to test the hypotheses of the study. The hypotheses are generally stated in the null form. The test of hypothesis is implemented using t-test at 5% level of significance. We reject the null hypothesis if and only if: the t-statistics of Xj ≥ 0.05, otherwise do not reject. The null hypotheses are restated as follows:

Hypothesis One (Ho₁): Remittance inflows do not have any significant effect on economic growth-private investment nexus in Nigeria’s economy.

Table 4.2- Summary of Remittance, Private Investment and Economic Growth Model (TSLS)

Source: Researcher’s Compilation from Eviews 12.0

Table 4.2 shows that there is no statistically significant effect of remittance inflows on economic growth of domestic investment nexus in Nigeria. Moreover, the relationship between economic growth and investment is by a priori expectation; a unit increase in private domestic investment through international remittances will lead to a 2067.671 increase in the productive capacity of our country, Nigeria.

Hypothesis Two (Ho₂): There is no causal relationship amongst international remittances, private domestic investment and economic growth.

Table 4.3- Granger Causality Test

Source: Researcher’s Compilation from Eviews 12.0

Decision Rule: Reject the null hypothesis if Prob. is less than critical P value of (0.05), otherwise do not reject. Since the Prob. is less than at 5% confidence interval in second models, we reject the null hypotheses and conclude that there is unidirectional causal relationship between economic growth and private domestic investment in Nigeria without feedback.

DISCUSSION OF FINDINGS

The main focus of the study is to examine the role of international remittances on economic growth-private domestic investment nexus in Nigeria. The study shows that international remittances are positively related to economic growth through private investment in Nigeria, at least within the period of this study, which suggests that as international remittances rise, the growth rate of the economy increases which is achieved through private domestic investment. In consonance, this study is in line with the studies that found a positive relationship between economic growth and private domestic investment which were conducted in Nigeria, example, Yusuf (2023), Mba and Chijioke (2024), Nwakoby and Alajekwu (2016), and Okorie, Orji and Ogueze (2015).

In line with to a priori expectation, the Net exports increase the rate of growth of the economy through the manufacture of goods for exports brought about by private domestic investment in our local manufacturing companies. A unit increase in net exports will bring about 0.007 increase in economic growth, holding all other factors constant. This finding supports that of Sani, Musa and Sani (2019). Net exports play an important role in economic growth especially in developing countries due to the importance of trade as a major source of foreign exchange earnings. An inference of this result was that factors that spur growth were important to enhance current account position in Nigeria. Also, investment in infrastructure will boost productivity and improve current account position in Nigeria.

Contrary to a priori expectation that the inflation rate decreases output in a country. The findings show that a nit increase in the inflation rate will bring about an 81% decrease in economic growth. This is in line with the study of Sani and Ismaila (2021) reported a negative and significant relationship between inflation and exchange rate. A high inflation rate hurts economic growth after it exceeds a certain limit. This result can be attributed to import restriction and foreign exchange constraints which led to severe shortages in the supply of goods and services.

Moreover, the causality model reveals that there is a unidirectional causal relationship between economic growth and private domestic investment in Nigeria without feedback. This means that the rate of growth of the economy boosts private domestic investment. Migrants desire to exploit new developing markets by establishing small and medium-scale enterprises where multinational corporations are scarce.

Summary

The study was basically undertaken to examine the role of international remittances on economic growth-private investment nexus in Nigeria from 1981 to 2021. Since the analysis is based on time series data and in order to avert the occurrence of spurious results and to determine the order of integration, the variables were investigated for their stochastic properties a modern unit root test i.e. Phillips-Perron (PP). The results of the unit root tests indicate that all the variables tend to be stationary in first difference except Real Gross Domestic Product (RGDP), Private Domestic Investment and Real Interest rate (INTR) which tend to be stationary at level in PP tests.

The findings of the study suggest that international remittances are positively related to economic growth through the channels of private domestic investment indicated by the econometric technique employed i.e. Two Stage Least Squares. Remittances serve as capital or development finance used for private investment which has a multiplier effect on the growth rate of the economy. Inflation rate has a negative but insignificant relationship with economic growth while Net exports is positively related to economic growth. Double digit inflation rate which is above the threshold of 11% is inimical to economic growth.

In addition, the findings of this study also reveal that there is unidirectional causal relationship between Real Gross Domestic Product (RGDP) and Private Domestic Investment without feedback since Prob. is less than F-critical value at 5% level of significance.

CONCLUSION

The main conclusion of the study is that international remittances is positively related to economic growth through private investment during the period under study. This implies that private domestic investment (which uses finance supplied by international remittances) increases economic growth in Nigeria. The study also concludes that there is unidirectional causal relationships exist between real gross domestic product and private domestic investment without feedback.

RECOMMENDATIONS

The aim of macroeconomic policy is the achievement of output stabilization in the short run and a diversified self-sustaining economic growth in the long run. This can only be achieved by maintaining the most important determinant of growth which is investment. The recommendations include the following:

• To improve the contributions of diaspora remittances to investment-growth nexus, remittances should go beyond just transfer payments and social security to help family members but serve as investments to spur economic growth;
• International trade should be strengthened by shifting production from primary products such as crude oil and agricultural produce to secondary products such as refined petroleum and industrial products by revamping the industrial sector;
• Single-digit inflation rate should be pursued which is believed to engender long-run sustainable growth;
• Monetary policy makers and other stakeholders should harness all pointers of inflation movements and/or expectations to ensure relative stability of general price changes due to seasonality and business cycles.

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