Exchange Rate Volatility and Foreign Direct Investment Flows: Evidence from Nigeria

Abstract

This study examines the influence of exchange rate volatility on foreign direct investment flows to the Nigeria economy. The study employs the ARCH, GARCH and EC models to analyze time series data for the period 1970 to 2016. The study established the stationarity of the data series and carried out the cointegration tests. The result of the study reveals that exchange rate volatility tends to persist throughout the study period. The findings of the study established empirical evidence to support the views that exchange rate volatility has a negative and significant influence on foreign direct investment inflows to Nigeria. The study demonstrates that increase in inflation exerts a negative effect on foreign direct investment inflows to Nigeria. The results of the analysis revealed that trade openness and interest rate have a positive influence on FDI in Nigeria. Thus, it is important for the government to muster the political will with efforts to create a stable environment to boost domestic production of export commodities and investment inflows. In addition, it is imperative for the government through its regulatory agencies to pursue a sound exchange rate regime with good policies and programs that would encourage investments in the economy.

Keywords

• exchange rate volatility
• fdi
• garch
• investment
• cointegration
• stationarity