Impact of Exchange Rate on Foreign Direct Investment in Nigeria: A Novel Dynamic ARDL Simulation Analysis
Keywords:
Exchange Rate, Foreign Direct Investment, Devaluation, RevaluationAbstract
This study assessed the impact of exchange rates on foreign direct investment in Nigeria for the period 1981–2023, using dynamic ARDL simulation analysis. The lack of evidence, particularly in the Nigerian context, justifies the study. The study found that the real exchange rate has a significant negative impact on foreign direct investment in both the short and long run. It shows that exchange rate devaluation or depreciation encourages FDI inflow in Nigeria, while revaluation or appreciation discourages it. The simulation graphs indicate that a 5% negative change in the real exchange rate will increase foreign direct investment to about 10.2% in the long run and vice versa. It indicates that a 5% devaluation or depreciation of the real exchange rate in Nigeria will boost foreign direct investment inflows by more than 10% in the long run and vice versa. The Granger causality results revealed a unidirectional causal relationship between the real exchange rate and foreign direct investment, with the latter leading to the former. Based on the findings, the study advocates for caution in devaluing or depreciating the naira to attract more foreign direct investment inflows in Nigeria. The simulation results should serve as a guide for policymakers to avoid the damaging consequences of over-devaluation or depreciation of the naira.
References
Abiodun et al (2016). Exchange rate pass-through to inflation in Nigeria, CBN Journal of
Applied Statistics, Vol. 7: No. 1, 2016.Abiodun et al (2016). Exchange rate pass-through to inflation in Nigeria, CBN Journal of Applied Statistics, Vol. 7: No. 1, 2016.
Adaora N. A. (2017), the impact of inflation on the manufacturing sector of the Nigerian economy
(1981-2011). Carister University, Amorji-Nike, Enugu State.
Adewale, A.M., Olopade, B.C., and Ogbaro, E.O. (2024). Effect of Exchange rate on foreign direct Investment in Nigeria. ABUAD Journal of Social and Management Sciences (AJSMS), 5(2): 302-318.
Adegoriola, A. E., & Agunbiade, O. (2019). Impact of foreign portfolio and direct investment on economic performance in Nigeria. 5th International Conference by Nigerian Society for Financial Research Conference Proceedings, 23rd – 25th July.
Adegoriola A.E., and Emmanuel S.C. (2022), Nexus between Exchange Rate Fluctuation and Foreign Direct Investment in Nigeria. African Journal of Economics and Sustainable Development 5(2), 21-37. DOI: 10.52589/AJESD-AYBGJFWJ
Adokwe, E, I., Agu, A. O. & Maduka, A. C. (2019). Exchange Rate Volatility and Foreign Direct
Investment in Nigeria. Journal of Business & Economic Policy, 6(4),
Aizenman, J. (1992). Exchange rate flexibility, volatility and patterns of domestic and foreign direct investment. International Monetary Fund, 39(4), 890-922.
Ajibola, A. A., Isiaka, M. A., Ogunleye, O. O., & Adeyemi, O. A. (2018). Foreign direct investment and economic growth in Nigeria revisited: A sector level analysis, Nile Journal of
Business and Economics 10, 69-85
Akinlo, A. E. (2004). Foreign direct investment and growth in Nigeria: An empirical investigation, Journal of Policy modeling, 26(5), 627-639.
Akinwolere, B. C. (2021). The impact of exchange rate volatility on economic growth in Nigeria:
A dynamic economic approach. African Journal of Business and Economic Development, 1(5) DOI: 10.46654/AJBED.1533
Blonigen, B. (1997). Firms-specific assets and the link between exchange rate and foreign direct
investment. The American Economic review, 87(3), 447-465.
Central Bank of Nigeria (CBN) Statistical Bulletin Volume 34, December 2023
Chiadikobi, O. J., Oladipo, J. & Umozurike, C. (2018). Impact of exchange rate volatility on
economic growth: Evidence from Nigeria. International Journal of Advances in Engineering and
Management. 4(11), 1063-1080.
Cushman, D. O. (1985). Exchange rate risk, expectations and the level of direct investment.
Review of Economics and Statistics, 67(2), 297-308.
Fleming, J.M. (1962) “Domestic financial policies under fixed and floating exchange rates”, IMF Staff Papers, Vol.9 (3), pp. 369-379.
Ijeyi, I. I. & Clement, U. (2017). Exchange rate volatility and economic growth in Nigeria.
International Journal of Economics, Commerce and Management, 5(7), 583-595.
Jayasekar, S. G. S. D. (2016). Exchange rate, exchange rate volatility and foreign direct investment
in Sri Lanka. Sri Lanka Journal of Advanced Social Studies 3(2), 75-96
Jhingan, M. L. (2012). The economics of development and planning 40th edition.
Jordan, S., & Philips, A. Q. (2018). Cointegration testing and dynamic simulations of autoregressive distributed lag models. The Stata Journal, 18(4), 902–923.
Jorgenson, D. (1963). Capital theory and investment behavior. American Economic Review,
53(7), 247 – 259.
Khan, G. S., & Mitra, P. (2014). A causal linkage between FDI inflows with select macroeconomic
variables in India–An econometric analysis. IOSR Journal of Economics and Finance, 5(5), 2321-
5933.
Keho Y. (2020) Linkages between foreign direct investment and financial development: Evidence from West African countries, Journal of Applied Finance & Banking, 10(6); 57-75
Lasbrey, A., Enyoghasim, M., Tobechi, A., Uwajumogu, N., Chukwu, B., & Kennedy, O. (2018).
Foreign direct investment and economic growth: Literature from 1980 to 2018. International
Journal of Economics and Financial Issues, 8(5), 309-318.
Mankiw, N.G. (2000) Macroeconomics (USA: Worth Publishers), 313-327
Martins, J.F.S. (2015). Impact of Real Exchange Rate Volatility on Foreıgn Direct Investment
Inflows in Brazil, Lisboa: ISCTE-IUL
Mundell, R.A. (1963) “Capital mobility and stabilization policy under fixed and flexible exchange rates” Canadian Journal of Economics, 29, 475-485
Murtala, Z. (2017). The Impact of Exchange Rate Fluctuations on Foreign Direct Investment in
Nigeria. Journal of Finance and Accounting. 5(4), 165-170.
10.11648/j.jfa.20170504.17.
Musah, A., Gakpetor, E. D., Kyei, S. N. K., & Akomeah, E. (2018). Foreign Direct Investment
(FDI), economic growth, and bank performance in Ghana. International Journal of Finance and
Accounting, 7(4), 97-107.
Ngele, D. O & Jason, U. I. (2021). Effect of exchange rate on growth of local businesses in Uyo
senatorial central district, Akwa Ibom state. National Open State University of Nigeria. 3(4), 217-225.
Ogadi, N. A., Amakor, I. C. and Anyawu, F. A. (2023). Real exchange rate volatility and
Nigeria productive sector. African Banking and Finance Review Journal, 2( 2), 168-179.
Okoro, C. U. & Charles, F. B. (2019). Naira exchange rate variation and Nigerian economic
growth: a time series study. American Economic and Social Review, 5(2), 13-36.
Okrinya, S.B., and Atamenwan, J. (2023). Determinants of foreign direct investment in Nigeria, Ye-Numu Journal of Economic and development Issues, 6(1), 128-138.
Oladeji, B. and Musa, M. (2022). The relationship between foreign direct investment and the
foreign exchange rate in Nigeria. Department of Economics, Obafemi Awolowo University
Ile-Ife, Nigeria.
Oludayo, A. O., & Omonijo, D. O. (2020). Work-life Balance: Relevance of social
support. Academy of Strategic Management Journal, 19(3), 1-10.
Omoke P. C. (2010). Inflation and economic growth in Nigeria. Journal of Sustainable
Development, 3(2), 159.
Onuoha, I. P., (2018). Impact of exchange rate variation and inflation on the economic growth of
Nigeria, Journal of Financial Accounting, ISSN 2222-1697, Vol.5, No. 22, 2014.
Osinubu, T. S. & Lloyd, A. A. (2019). The effect of exchange rate volatility on foreign direct
investment (FDI) in Nigeria. International journal of applied economics and quantitative studies, 6 (2).
Pesaran, M.H, Shin, Y, and Smith, R.J. (2001), “Bounds testing approaches to the analysis of level relationships,” Journal of Applied Econometrics, Vol.16, pp.289-326.
Rabiu, I. D., & Adaramola, A. O. (2021). Impact of International Trade and Foreign Direct
Investment on Economic Growth: The Nigerian Perspective.
Resmini, L. (2000). The determinants of foreign direct investment in the CEECs: new evidence
from sectoral patterns. Economics of transition, 8(3), 665-689.
Root, F. R., & Ahmed, A. A. (1979). Empirical determinants of manufacturing direct foreign
investment in developing countries. Economic development and cultural change, 27(4), 751-767.
Sahin, S. and Ege, I. (2015). Financial Development and FDI in Greece and Neighbouring Countries: A panel Data Analysis. Procedia Economics and Finance, 24, 583–588.
Sami, U., Syed, Z. H. and Parvez, A. (2017). The impact of exchange rate volatility on foreign
direct investment in Pakistan. Pakistan Economic and Social Review, 50(201).
Samuel, E. A. & Ferdinand, A. (2020). Exchange rate volatility and foreign direct
investment. Research in Applied Economics, 12(3)
Sebastian, V. J., & Gupta, R. (2018). Retail ecosystem in India—an overview of the regulatory
framework and the emerging paradigm. Theoretical Economics Letters, 8(03), 183.
Tom, Jand Thomas, P. K. (2019). The impact of exchange rate volatility on foreign direct
investment in India. Referred Journal of CMR College of Engineering & Technology, 8(1), 13-22
Toseef, A. Muhammed, J. & Aneela, K (2017). Impact of exchange rate volatility on growth and economic performance. Pakistan Development Review, 44(4), 749-777.
Uzoma, N., Damian, C. & Orekoya, S. (2019). Exchange rate volatility and foreign direct investment in Nigeria. Euro Economica, 38 (2), 227 - 242.
Zerim, J. (2020). The Impact of Exchange Rate Volatility on Foreign Direct Investment Inflows: Evidence from South Asia. International Journal of Finance, Insurance and Risk Management 5(3)
Zerim, J. (2020). The Impact of Exchange Rate Volatility on Foreign Direct Investment Inflows: Evidence from South Asia. International Journal of Finance, Insurance and Risk Management 5(3)
Yakub, M. O., Obiezue, T. O. & Aliyu, V. O. (2019). Empirical investigation of exchange rate volatility and trade flows in Nigeria. Central Bank of Nigeria Economic and Financial Review, 57(1),
World Bank (2022). The Continuing Urgency of Business Unusual: Nigeria Development Update. The World Bank Publications,
World Bank. (2025). World Development Indicators.
https://databank.worldbank.org/source/world-development-indicators