Foreign Direct Investment and Exchange Rate Volatility in Nigeria

Abstract

This study investigated the empirical evidence on the effect of exchange rate volatility on foreign direct investment (FDI) in Nigeria, using secondary time series data from1970 to 2004. In doing this, the study utilized the error correction model as well as OLS method of estimation. The results suggest, among others, that exchange rate volatility need not be a source of worry by foreign investors. Also, the study further reveals a significant positive relationship between real inward FDI and exchange rate. This implies that, depreciation of the Naira increases real inward FDI. Also, the results indicate that the structural adjustment programme (introduced in Nigeria in 1986) had a negative impact on real inward FDI, which could be due to the deregulation that was accompanied by exchange rate volatility. As such, a major challenge before the Central Bank of Nigeria therefore, is to attain a stable and realistic exchange rate that will boost domestic production, increase real inward FDI and maintain internal and external balance.