Exchange Rate Volatility and Foreign Direct Investment in Nigeria: An Econometric Investigation (1981–2023)

Abstract

This investigation analyses the nexus between exchange rate volatility and foreign direct investment (FDI) inflows into Nigeria across the 1981–2023 period. Despite an extensive body of literature addressing exchange rate dynamics and the determinants of FDI, relatively few studies have examined the interactive channels through which exchange rate volatility influences FDI in developing economies when viewed within a long-term historical context. Grounded in Real Options Theory, the study evaluates whether volatility in Nigeria’s exchange rate discourages or stimulates FDI inflows. Annual secondary data sourced from the Central Bank of Nigeria statistical bulletin were used for the analysis. The econometric framework incorporated the Augumented Dickey fuller test for the stationarity ARCH/GARCH modeling for estimation, the Johansen cointegration approach, granger causality test and an error correction mechanism (ECM) to examine the short run and long run relationship. The empirical findings indicate the presence of exchange rate volatility, though its influence on FDI is statistically insignificant as revealed by the GARCH estimation. Evidence of long run cointegration is detected among the variables, confirming a linear relationship between exchange rate volatility, FDI and economic growth. The ECM confirms long run adjustment toward equilibrium. The study concludes that persistent exchange rate instability poses risks to Nigeria’s investment climate and recommends policy reforms aimed at macroeconomic stability, infrastructural development, institutional strengthening and security enhancement.