IMPACT OF EXCHANGE RATE VOLATILITY ON FOREIGN DIRECT INVESTMENT IN NIGERIA (1986-2018)

Abstract

Arguments abound in literature as to whether exchange volatility can stimulate foreign direct investment in developing economies. The objective of the study is to examine the impact of exchange rate volatility on FDI in Nigeria for the period 1981-2018. Secondary Time series data were collected from CBN Statistical Bulletin. The time series data used were annual data. They include: foreign direct investment, exchange rate, trade openness, interest rate and dummy variable for economic recession. The study adopted Augmented Dickey-Fuller test to check for stationarity of the time series variables used in the study. The variables were integrated at order one I(1), except trade openness which was I(0). Engle-Granger cointegration analysis showed evidence of long run relationship among the variables. In order to examine the effect of real exchange rate volatility on FDI, the study conducted preliminary test to check for the presence of clustering volatility and ARCH effect in the residual. It was discovered that volatility does not exists in the residual. As a result, the parsimonious Error Correction Modeling was chosen as the estimation technique. Findings reveal that exchange rate volatility has no significant relationship with FDI since the probability of the t-statistic exceeds the 5 per cent critical value over the period under study (P(t)=0.7235 > 0.05). The result indicated that one per cent increase in exchange rate volatility leads -0.09 per cent decline in foreign direct investment.  In addition, it was discovered that a uni-directional causality relationship exists between exchange rate and foreign direct investment over the period under study (P(F) = 0.0034 < 0.05). Therefore, the study recommends an increase of monetary policy rate from the current 11.13 per cent in March 2021 to about 19 percent could go a long to attracting FDI, all other things being equal, for exchange rate to stabilize