Macroeconomic instability and foreign direct investment in Nigeria

Abstract

This study empirically examines the impact of macroeconomic instability on foreign direct investment (FDI) in Nigeria, utilizing annual data spanning from 1980 to 2023. Secondary data were obtained from the Central Bank of Nigeria (CBN) and the World Development Indicators (WDI) database. To assess the relationship between macroeconomic instability and FDI, the study employs the Augmented Dickey-Fuller (ADF), Phillip Peron (PP) unit root test and the Autoregressive Distributed Lag (ARDL) model. The unit root test results indicate that the variables exhibit a mixed order of integration, I(0) and I(1), thereby justifying the application of the ARDL technique. Macroeconomic instability is proxied by inflation and exchange rate volatility, as these indicators capture price level fluctuations and currency uncertainty, which are critical determinants of investor confidence. The empirical results reveal that macroeconomic instability exerts a negative and statistically significant impact on FDI inflows in the long run. Specifically, persistent inflationary pressures and exchange rate volatility deter foreign investors due to heightened investment risks and uncertainty regarding future returns. Based on these findings, the study underscores the necessity of maintaining a stable macroeconomic environment to attract sustainable foreign investment. Policymakers should prioritize measures that mitigate inflationary pressures, stabilize exchange rates, and enhance investor confidence through prudent monetary and fiscal policies. Additionally, fostering institutional transparency and reducing policy uncertainty would further enhance Nigeria’s attractiveness as an investment destination.