Exchange Rate Volatility and Foreign Direct Investment in Nigeria: A Multivariate Analysis of Dynamic Effects and Policy Implications

Abstract

This study investigates the effect of exchange rate volatility on foreign direct investment (FDI) inflows to Nigeria for the period 1990-2024. The study applies a mix of GARCH (1,1) approach for exchange rate volatility modelling and ARDL bounds testing approach for estimating the dynamics in the short and long run, and Granger causality approach for testing the bi-directional causality. The results indicate that exchange rate volatility has stunted effects on FDI both in the short and long runs, though the long-term effect is greater. The GDP has a positive and significant effect on FDI, while inflation has a negative impact on investment inflows. The error correction mechanism implies a moderate speed to long run equilibrium. In addition, results from the causality test suggested unidirectional causality from exchange rate volatility to FDI. The study recommends that in Nigeria foreign investment is restricted by high exchange rate instability, and that there are policy measures that can be adopted to promote exchange rate stability and macroeconomic co-ordination.