Abstract

This study investigates the dynamic relationship between exchange rate volatility and foreign private investment in Nigeria from 1980 to 2011. The rational for this study is the realization that a viable exchange rate regime that is stable and predictable presents rich vista for inflow of foreign investment. We employed the Error Correction Model (ECM) after a battery of preliminary investigations which include the Augmented Dickey Fuller (ADF) test for stationarity and the Engle and Granger two-step cointegration procedure. Our finding include among other things that; exchange rate volatility has a very weak effect on the inflow of Foreign Direct Investment (FDI) to Nigeria, both in the long run and in the short run and that exchange rate volatility has a weak effect on foreign portfolio investment in the short run but a strong positive effect in the long run. Based on our findings, an array of recommendation were made, which include the need for policy makers to develop sound exchange rate management system in the country, inter alia.

Keywords:

Cointegration, error correction model, exchange rate , foreign direct investment, foreign portfolio investment, Nigeria,

References

1. Alaba, O., 2003. Exchange rate uncertainty and foreign direct investment in Nigeria. Proceeding of the WIDER Conference on Sharing Global Prosperity. Helsinki, Finland.
   
2. Box, G.P.F. and G.M. Jenkins, 1978. Time Series Analysis: Forecasting and Control. 3rd Edn., Holden Day, San Francisco, U.S.A.
   PMCid:PMC1818711    
3. Caporale, G.M., F.M. Ali and N. Spagnolo, 2013. Exchange Rate Uncertainty and International Portfolio Flows. Discussion Papers 1296, German Institute for Economic Research. Retrieve from: https://www./diw.de/discussionpapers.
   
4. Dixit, A. and R. Pindyck, 1994. Investment Under Uncertainty. Princeton University Press, Princeton, U.S.A.
   PMCid:PMC1887235    
5. Dunning, J.H., 1977. Trade, Location of Economic Activity and the MNE: A Search for an Eclectic Approach. In: Ohlin, B., P.O. Hesselborn and P.M. Wijkman (Eds.), the International Allocation of Economic Activity. Macmillan, London and Basingstoke.
   
6. Dunning, J.H., 1993. Multinational Enterprises and the Global Economy. Addison Wesley, Wokingham, Berkshire.
   PMCid:PMC309901    
7. Edo, S.E., 2011. Capital market development in an emerging economy and the challenge of fostering foreign participation. Int. J. Monet. Econ. Financ., 4(2): 195-215.
   CrossRef    
8. Ellahi, N., 2011. Exchange rate volatility and foreign direct investment behaviour in Pakistan: A time series analysis with auto regression distributed lag application. Afr. J. Bus. Manag., 5(29): 11656-11661.
   
9. Engle, R.F. and C.W.J. Granger, 1987. Cointegration and error correction: Representation, estimation and testing. Econometrica, 55: 251-276.
   CrossRef    
10. Eun, C.S. and B.G. Rasnick, 1988. Exchange rate uncertainty, forward contracts and international portfolio selection. J. Financ., 43: 197-215.
    CrossRef    
11. Foad, H.S., 2005. Exchange Rate Volatility and Export Oriented FDI. A Paper from Emory University, Atlanta, GA, pp: 2-7.
    
12. Gordon, D.V., 1995. Optional lag length in estimating Dickey-Fuller statistics: An empirical note. Appl. Econ. Lett., 2(6): 188-190.
    CrossRef    
13. Granger, C.W.J., 1986. Developments in the study of cointegrated economic variables. Oxford B. Econ. Stat., 48: 213-228.
    CrossRef    
14. Han, H. and H. Ray, 2006. Exchange rates, equity prices and capital flows. Rev. Financ. Stud., 19: 273-317.
    CrossRef    
15. Kapur, B.K., 2005. Capital Flows and Exchange Rate Volatility: Singapore's Experience. National Bureau of Economic Research Working Paper No. 11369, National Bureau of Economic Research, Cambridge, M.A., pp: 1-37.
    
16. Levich, R.M., G.S. Hayt and B.A. Ripston, 1998. Survey of Derivative and Risk Management Practices by U.S. Institutional Investors. Survey Conducted by the NYU Salomon Center. CIBC World Markets and EPMG. Retrieved from: http://papers.ssrn.com/so13/papers.
    
17. Lucas, R. 1990. Why doesn't capital flow from rich to poor countries? Am. Econ. Rev., 80: 92-96.
    
18. Obiechina, M.E., 2010. Capital flows and financial crises: Policy issues and challenges for Nigeria. CBN Econ. Financ. Rev., 48(1): 93-112.
    
19. Ogunleye, E.K., 2008. Exchange rate volatility and foreign direct investment inflows in selected sub-Sahara African countries, 1970-2005. Ph.D. Thesis, University of Ibadan, Nigeria.
    
20. Osinubi, T.S. and L.A. Amaghionyeodiwe, 2009. Foreign direct investment and exchange rate volatility in Nigeria. Int. J. Appl. Economet. Quant. Stud., 6(2): 84-116.
    
21. Rugman, A.M., 1981. Inside the Multinationals: The Economics of Internal Markets. Columbia Press, New York, U.S.A.
    
22. Udoh, E. and F.O. Egwaikhide, 2008. Exchange rate volatility, inflation uncertainty and foreign direct investment in Nigeria. Botswana J. Econ., 5(7): 14-31.
    
23. Vernon, R., 1966. International investment and international trade in the product cycle. Q. J. Econ., 80(2): 190-207.
    CrossRef    
24. Yousaf, S., I. Shahzadi, B. Kanwal and M. Hassan, 2013. Impact of exchange rate volatility on FDI in Pakistan. IOSR J. Bus. Manage., 12(1): 79-86.
    CrossRef    

Competing interests

The authors have no competing interests.

Open Access Policy

This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.

Copyright

The authors have no competing interests.