Effect of Exchange Rate on Foreign Direct Investment in Nigeria
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Published:
Jul 1, 2024
Keywords:
Exchange Rates, FDI, Inflation Rates, Interest Rates, Trade Openness
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Abstract
This study investigates the relationship between exchange rates and Foreign Direct Investment (FDI) in Nigeria from 1981 to 2021. Employing a Fully Modified Ordinary Least Squares (FMOLS) regression analysis, the study reveals a significant positive correlation between exchange rates and FDI. Conversely, the study finds a positive but statistically insignificant association between trade openness and FDI. Finding on interest rates (INTR coefficient: -0.104) indicates a negative relationship with FDI, lacking statistical significance. Similarly, inflation rates (INFR coefficient: 0.012) exhibit a positive yet statistically insignificant link with FDI. Notably, the study highlights a substantial and statistically significant negative relationship between human capital (HC coefficient: -77.787) and FDI, signifying the importance of human capital development in attracting foreign investment. In summary, the research findings indicate a substantial impact of exchange rates on FDI in Nigeria. It suggests that policymakers should proceed with caution to avert possible depreciation of the exchange rate, which could deter foreign investors. Furthermore, adopting a comprehensive strategy for macroeconomic stability could foster a more conducive atmosphere for foreign investment.
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How to Cite
Adewale, Adejoke M., Bosede C. Olopade, and Eyitayo O. Ogbaro. 2024. “Effect of Exchange Rate on Foreign Direct Investment in Nigeria”. ABUAD Journal of Social and Management Sciences 5 (2), 302-18. https://doi.org/10.53982/ajsms.2024.0502.05-j.
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References
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Alfaro, L., Chari, A., & Kanczuk, F. (2020). Foreign investment and domestic productivity: Identifying knowledge spillovers and competition effects. Journal of International Economics, 122(2), 122 -141.
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Chenery, H. B., & Adelman, I. (1966). Foreign assistance and economic development. The American Economic Review, 56(4), 679-733.
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Okonkwo, J. J. (2019). Exchange rate variation and Nigeria's balance of trade. Discovery Journal, 55(283), 361-366.
https://doi.org/10.2139/ssrn.3477106
Okonkwo, J. J., Osakwe, C. I., & Nwadibe, E. C. (2020). Exchange rate and foreign direct investment in Nigeria 1981-2018. International Journal of Academic Research in Business and Social Sciences, 11(1), 213-232.
Oladeji, B., & Musa, M. (2022). Effect of exchange rate volatility on foreign direct investment in Nigeria. ScienceOpen Preprints. 14 (2), 195-222
https://doi.org/10.6007/IJARBSS/v11-i1/8466
Pikoulakis, E. (1995). Approaches to the balance of payments and the exchange rate: the case of capital immobility. In International Macroeconomics Palgrave, London, 5(2), 5-31. https://doi.org/10.1007/978-1-349-24295-5_2
https://doi.org/10.1007/978-1-349-24295-5_2
Rashid, L., & Lin, L. (2018). The effect of exchange rate volatility on international trade and foreign direct investment (FDI) in Developing countries along "One Belt and One Road" International Journal of Financial Studies, 6(86), 1-22.
https://doi.org/10.3390/ijfs6040086
Sokang, K. (2018). The impact of foreign direct investment on economic growth in Cambodia: Empirical evidence. International Journal of Innovation and Economic Development, 4(5), 31-38.
https://doi.org/10.18775/ijied.1849-7551-7020.2015.45.2003
United Nations Conference on Trade and Development (UNCTAD), (2020). World Investment Report 2020. Retrieved from https://unctad.org/publication/world-investment-report-2020 on May 30, 2023
Uzoma-Nwosu, D., & Orekoya, S. (2019). Exchange rate volatility and foreign direct investment in Nigeria. EuroEconomica, 38(2), 6.
World Bank. (2015). World Development Indicators 2015. The World Bank Group. Retrieved from https://elibrary.worldbank.org/doi/abs/10.1596/978-1-4648-0440-3
Zakari, M. (2017). The impact of exchange rate fluctuations on foreign direct investment in Nigeria. Journal of Finance and Accounting. 5(4), 165-170. Retrieved from http://www.sciencepublishinggroup.com/j/jfa on May 30, 2023.
https://doi.org/10.11648/j.jfa.20170504.17
https://doi.org/10.4236/ajibm.2021.1112071
Adokwe, E. I., Agu, A. O. & Maduka, A. C. (2019). Exchange rate volatility and foreign direct investment: The Nigerian experience. Journal of Business & Economic Policy, 6(4), 1078-1098.
Alabi, K. O. (2019). The impact of foreign direct investment on economic growth: Nigeria experience. Open Journal of Applied Sciences, 9(5), 372-385.
https://doi.org/10.4236/ojapps.2019.95031
Alade, O. T., & Adeleke, A. O. (2021). Exchange rate dynamics in Nigeria: Evidence from the foreign exchange market. International Journal of Economics, Commerce, and Management, 9(5), 1-17.
Alfaro, L., Chari, A., & Kanczuk, F. (2020). Foreign investment and domestic productivity: Identifying knowledge spillovers and competition effects. Journal of International Economics, 122(2), 122 -141.
Ali, Y. S., Mohamed, I. I., & Zahir, M. O. (2017). Impact of change in exchange rate on foreign direct investment: Evidence from Somalia. Journal of Economics and Sustainable Development, 8(8), 47-54.
Asamoah, M. E., Alagidede, I. P., & Adu, F. (2022). Exchange rate uncertainty and foreign direct investment in Africa: Does financial development matter? Review of Development Economics, 26(2), 878-898.
https://doi.org/10.1111/rode.12858
Asiedu, E. (2002). On the determinants of foreign direct investment to developing countries: Is Africa different? World Development, 30(1), 107-119.
https://doi.org/10.1016/S0305-750X(01)00100-0
Asmae, A., & Ahmed, B. (2019). Impact of the exchange rate and price volatility on FDI inflows: Case of Morocco and Turkey. Applied Economics and Finance, 6(3), 5-6.
https://doi.org/10.11114/aef.v6i3.4218
Benson, E., Eya, C. I., & Yunusa, A. (2019). Effect of exchange and interest rates on foreign direct investment in Nigeria 2006-2018. International Journal of Contemporary Research and Review, 10(7), 8-19.
https://doi.org/10.15520/ijcrr.v10i07.717
Cambazoğlu, B., & Güneş, S. (2016). The relationship between foreign exchange rate and foreign direct investment in Turkey. Economics, Management, and Financial Markets, 11(1), 284-293.
Chenery, H. B., & Adelman, I. (1966). Foreign assistance and economic development. The American Economic Review, 56(4), 679-733.
Dabwor, T. D., Ezie O., Tukur, D. M. (2019). Effect of Nominal Exchange Rates on Nigeria's Balance of Payments: 1986-2016. Benue Journal of Social Sciences, 6(10), 35-52.
Dunning, J. H., & Rugman, A. M. (1993). The influence of Hymer's dissertation on the theory of foreign direct investment. The American Economic Review, 75(2), 228-232.
Ekanayake, E. M., & Dissanayake, A. (2022). Effects of Real Exchange Rate Volatility on Trade: Empirical Analysis of the United States Exports to BRICS. JRFM, 15(2), 11-28.
https://doi.org/10.3390/jrfm15020073
Eregha, P. B. (2017). Exchange rate policies and FDI flow in WAMZ. Working paper series No. 254, African Development Bank, Abidjan, Côte d'Ivoire.
Gastanaga, V. M., Nugent, J. B., & Pashamova, B. (2019). The effect of FDI on economic growth: A meta-analysis. World Development, 124(3), 174-197.
Githaiga, P. N., & Kilong'i, A. W. (2023). Foreign capital flow, institutional quality and human capital development in sub-Saharan Africa. Cogent Economics & Finance, 11(1), 2162689.
https://doi.org/10.1080/23322039.2022.2162689
International Monetary Fund. (2013). Balance of Payments and International Investment Position Manual. Retrieved from https://www.imf.org/external/pubs/ft/bop/2007 /pdf/bpm6.pdf on May 22, 2023
Ismaila, M. (2016). Exchange rate depreciation and Nigeria's economic performance after structural adjustment programs (SAPs). Journal of Social Development, 5(2), 122-132.
https://doi.org/10.12816/0031175
Kenny, V. S. (2019). Effect of foreign direct investment and exchange rate on economic growth of Nigeria. Available at SSRN: https://ssrn.com/abstract=3357520 or http://dx.doi.org/10.2139/ssrn.3357520
https://doi.org/10.2139/ssrn.3357520
Kunofiwa, T. (2015). FDI location and exchange rates. Is there really a relationship between the two? Corporate Ownership & Control, 13(1), 6-14.
https://doi.org/10.22495/cocv13i1c6p3
Morrissey, O., & Udomkerdmongkol, M. (2014). Foreign direct investment and exchange rates: A case study of US FDI in emerging market countries. Retrieved from https://www.researchgate.net/publication/5199997
Nwanji, T. I., Howell, K. E., Faye, S., Otekunrin, A. O., Eluyela, D. F., Lawal, A. I., & Eze, S. C. (2020). Impact of foreign direct investment on the financial performance of listed deposit banks in Nigeria. International Journal of Financial Research, 11(2), 323-347. https://doi.org/10.5430/ijfr.v11n2p323
https://doi.org/10.5430/ijfr.v11n2p323
Obi, K. O., Oniore, J. O., & Nnadi, K. U. (2016). The impact of exchange rate regimes on economic growth in Nigeria. Journal of Economics and Sustainable Development, 7(12), 116-127.
Okonkwo, J. J. (2019). Exchange rate variation and Nigeria's balance of trade. Discovery Journal, 55(283), 361-366.
https://doi.org/10.2139/ssrn.3477106
Okonkwo, J. J., Osakwe, C. I., & Nwadibe, E. C. (2020). Exchange rate and foreign direct investment in Nigeria 1981-2018. International Journal of Academic Research in Business and Social Sciences, 11(1), 213-232.
Oladeji, B., & Musa, M. (2022). Effect of exchange rate volatility on foreign direct investment in Nigeria. ScienceOpen Preprints. 14 (2), 195-222
https://doi.org/10.6007/IJARBSS/v11-i1/8466
Pikoulakis, E. (1995). Approaches to the balance of payments and the exchange rate: the case of capital immobility. In International Macroeconomics Palgrave, London, 5(2), 5-31. https://doi.org/10.1007/978-1-349-24295-5_2
https://doi.org/10.1007/978-1-349-24295-5_2
Rashid, L., & Lin, L. (2018). The effect of exchange rate volatility on international trade and foreign direct investment (FDI) in Developing countries along "One Belt and One Road" International Journal of Financial Studies, 6(86), 1-22.
https://doi.org/10.3390/ijfs6040086
Sokang, K. (2018). The impact of foreign direct investment on economic growth in Cambodia: Empirical evidence. International Journal of Innovation and Economic Development, 4(5), 31-38.
https://doi.org/10.18775/ijied.1849-7551-7020.2015.45.2003
United Nations Conference on Trade and Development (UNCTAD), (2020). World Investment Report 2020. Retrieved from https://unctad.org/publication/world-investment-report-2020 on May 30, 2023
Uzoma-Nwosu, D., & Orekoya, S. (2019). Exchange rate volatility and foreign direct investment in Nigeria. EuroEconomica, 38(2), 6.
World Bank. (2015). World Development Indicators 2015. The World Bank Group. Retrieved from https://elibrary.worldbank.org/doi/abs/10.1596/978-1-4648-0440-3
Zakari, M. (2017). The impact of exchange rate fluctuations on foreign direct investment in Nigeria. Journal of Finance and Accounting. 5(4), 165-170. Retrieved from http://www.sciencepublishinggroup.com/j/jfa on May 30, 2023.
https://doi.org/10.11648/j.jfa.20170504.17