Exchange rate, foreign direct investment inflows, and financial development in Nigeria

Abstract

This study examined the relationship among exchange rate movement, foreign direct investment (FDI) inflows and financial development in Nigeria using a vector autoregressive model and a vector error correction model method for the period 1981-2020. The results show that a depreciation of the nominal effective exchange rate decreases FDI inflows in Nigeria; Similarly, a depreciation of the real effective exchange rate decreases FDI inflows in Nigeria. On the contrary, FDI inflows causes an appreciation of the nominal effective exchange rate in Nigeria. The results show that financial development increases FDI inflows in the long run in Nigeria. The causality result shows that there is a bidirectional causality between exchange rate and FDI inflows in Nigeria. The study concludes that a depreciation of the naira to the US dollar reduces FDI inflows in Nigeria while financial development increases FDI inflows in Nigeria. Therefore, the study recommends that there is a need to implement policies that can cause an appreciation of the Nigerian currency to attract more FDI inflows. There is also a need to implement policies that can further develop the financial sector as this would facilitate more FDI inflows.