Exchange Rate Instability and Foreign Direct Investment in Nigeria: an Empirical Examination
CHAPTER ONE
Objectives of the Study
The broad objective of this study is to ascertain the determinants of foreign direct investment in Nigeria. In line with this, the following specific objectives will be actualized:
- To examine the effect of exchange rate fluctuation on Foreign Direct Investment.
- To examine the effect of interest rate on Foreign Direct investment
- To examine the effect of inflation on Foreign Direct investment
- To examine the impact of Gross fixed capital formation on Foreign Direct Investment.
- To examine the impact of economic growth on Foreign Direct Investment.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
CONCEPTUAL FRAMEWORK
Foreign Direct Investment is an investment made to acquire a lasting management interest, (normally 10% of voting stock) in a business enterprise operating in a country other than that of an investor, defined according to residency (World Bank, 1996). Such investors may take two forms, either “Greenfield” investment or merger and acquisition which entail the acquisition of existing interest rather than new investment.
Foreign Direct Investment is therefore a measure of foreign ownership of productive assets such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic integration and globalization (Gnansonuou, 2008).
In the past ten years, the classic definition of Foreign Direct Investment as noted above has changed considerably. This notion of a change in the classic definition however, must be kept in the proper context. Very clearly, over two third of Direct Foreign Investment is still in the form of fixtures, machinery, equipment and buildings.
Many governments, both in industrialized and developing nations, pay very close attention to Foreign Direct Investment because they believe that investment flows into and out of their economies may have a significant impact on growth (Asiedu, 2009). However there has been a dramatic increase in the number of technology start-ups and this together with the rise in prominence of internet usage has fostered increasing changes in foreign investment patterns.
CONCEPTUAL ISSUES IN EXCHANGE RATE FLUCTUATIONS
Risk in international commodity trade usually emanates from two main sources: changes in world prices or fluctuations in exchange rates. These may affect trade by increasing the uncertainties of trade or effecting a change in the cost of transaction, processing, etc. The state of the two major sources determines the eventual domestic trade price of a commodity over a period of time. In other words, a decision to produce for exports involves uncertainties about the prices in the foreign exchange that such sales will realize, as well as the exchange rate at which foreign exchange receipts can be converted into domestic currency. In a period of fixed exchange rates, the major source of concern in international trade for developing countries is the fluctuations that may arise from the world prices of primary commodities, which constitute the bulk of exports of these countries (Adubi, et al: 1999). With the increasing embrace of the structural adjustment programmes that have devaluation of currency or market determination of exchange rate and all prices as the fulcrum, the attention has shifted to the fortunes of the currencies at the foreign exchange market. Given the erratic pattern of the exchange rate in most developing countries as a result of devaluation, there has been increasing concern about the possible effects of exchange rate fluctuations on trade. In other words, for international traders with a given price, the major source of uncertainty is the exchange rate at which they can translate their sales revenue in foreign currency into local currency.
CHAPTER THREE
RESEARCH METHODOLOGY
This section describes the model specified for the problem, the variables used and their definition. It also describes the different test that is to be carried out. This test refers to the diagnostic test such as; autocorrelation test, stationarity test, co-integration test, e.t.c. It also talks about the hypothesis test, method of data analysis and sources of data.
CHAPTER FOUR
ANALYSIS OF DATA AND PRESENTATION OF RESULTS
INTRODUCTION
This section covers the analysis of data and presentation of results, the hypothesis tested and the findings of the study were also discussed.
CHAPTER FIVE
DISCUSSION OF FINDINGS, CONCLUSION AND RECOMMENDATIONDS
5.1 Discussion Of Findings
Exchange rate fluctuation has a positive relationship with foreign direct investment. This implies that an increase in exchange rate fluctuation will bring about an increase in foreign direct investment. This is not in consonance with the a priori expectations and also the findings of Chukwu (2007) who studied the effect of exchange rate volatility on foreign direct investment. Exchange rate fluctuation has no significant impact on foreign direct investment. This implies that Exchange rate fluctuation has no real impact on foreign direct investment. The findings agree with the findings of Odior (2012) who concluded that Exchange rate fluctuation has no significant impact on foreign direct investment.
Interest rate has a positive relationship with foreign direct investment. This implies that an increase in Interest rate will bring about an increase in foreign direct investment. This is not in consonance with the a priori expectations and also the findings of Rasheed (2010) who investigated the impact of macroeconomic variables and foreign direct investment. Interest rate has no significant impact on foreign direct investment. These findings agree with the findings of Ekpo and Umoh (2012) in their study of the impact of leading interest rate and foreign direct investment.
Inflation has a Positive relationship with foreign direct investment. This implies that an increase in inflation will bring about an increase in foreign direct investment. This is in not in consonance with the a priori expectations and also the findings of Kirandeep,(2014) who empirically investigated the relationship between inflation and FDI. Inflation has significant impact on foreign direct investment. This implies that inflation has real impact on foreign direct investment.
Gross fixed capital formation has a negative relationship with foreign direct investment. This implies that an increase in gross fixed capital formation will bring about a decrease in foreign direct investment. This is in not in consonance with the a priori expectations.
Gross Domestic Product which is used as a proxy for Economic growth has a negative relationship with foreign direct investment. Gross Domestic product has no significant effect on foreign direct investment.
5.2 Conclusion
This works attempts to ascertain the Exchange rate instability and foreign direct investment in Nigeria : an empirical examination. Data were obtained from Central Bank of Nigeria (CBN) statistical bulletin and World Development Indicators ranging from 1986-2016. Multiple regression models were used in which Exchange Rate Fluctuations, Inflation Rate, Interest Rate, Gross Fixed Capital Formation, Gross Domestic Product were used as the independent variable while Foreign Direct Investment was used as the dependent variable.
Ordinary least square method was used to estimate the parameters using E –View computer software. The results showed that Exchange Rate Fluctuation has a positive relationship with foreign direct investment and has no significant impact on Foreign Direct Investment in Nigeria. Variables such as: Gross Fixed Capital Formation and Gross Domestic Product have a negative relative with the inflow of Foreign Direct
Investment in Nigeria while Inflation and Interest rate have a positive significant effect on Foreign Direct Investment in Nigeria.
5.3 Recommendations
From the foregoing, we recommend the following;
- Break government monopoly that shuts foreign investment out. Nigeria has the potential to attract and retain significant inflows of Foreign Direct Investment into its large network of infrastructural sectors including rail transportation, gas pipeline and electricity transmission as it has successfully done in telecommunication. Nigeria stock of Foreign Direct Investment is currently concentrated into telecommunication, oil and gas. There are only two sectors in which the government has liberalized entry of Foreign Direct investment. Government monopoly in key infrastructure sectors like rail transportation, gas pipelines and power transmission obstructs beneficial Foreign Direct Investment inflows. The Nigerian government needs to take immediate measures to break government monopoly in critical infrastructure sectors to allow the inflow of needed foreign investment.
- Government should create stable and peaceful political environment so as to attract foreign investors and encourage domestic employment of resources which could enhance inflow of capital.
- There is need for the Nigerian government to formulate investment policies that will be favorable to local investors in order to complement the inflow of investment from abroad.
- The government in collaboration with the Central Bank and other policy making bodies in Nigeria should make policies that will help the economy attain a stable exchange rate regime. This will not only attract real inward FDI but will also boost domestic production as it will help the domestic firms compete favorably with the multinationals.
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