Nexus between Exchange Rate Fluctuation and Foreign Direct Investment in Nigeria

Abstract

This study examined the nexus between exchange rate fluctuation and foreign direct investment in Nigeria from 1986 to 2020. The research was conducted using relevant econometric tools which include unit root test, co-integration test and Autoregressive Distributed Lag (ARDL) model. The results of ADF unit root test revealed that only interest rate is stationary at level while exchange rate, foreign direct investment, gross capital formation and inflation rate became stationary at first deference. The bounds test showed that there is a long run relationship between the foreign direct investment inflows, interest rate, exchange rate, gross capital formation and trade openness in Nigeria. The findings revealed a negative relationship between exchange rate and foreign direct investment in Nigeria and all the lagged value of exchange rate are statistical significant at 5% level of significant, which an indication of exchange rate importance on foreign direct investment inflows into Nigeria to a two standard error shock of exchange rate showed that exchange rate effect on foreign direct investment is persistence and significantly positive over the a period of up to 8 years after the shock. The exchange rate, though relatively stable, has a profound effect on foreign direct investment in Nigeria. The study recommended that given the perceived over-valued naira, a deliberate effort toward revaluation of the naira to reflect the true value of dollar to naira exchange rate will obviously increase the exchange rate and as such makes it cheaper to invest in Nigeria by foreign businesses.