Abstract:: The Impact of Exchange Rate Fluctuations On Foreign Direct Investment in Nigeria

The Impact of Exchange Rate Fluctuations on Foreign Direct Investment in
Nigeria
Author : Murtala Zakari ,
Post Graduate School of Accounting and Finance, Leeds Beckett University, Leeds, UK
Email address: murhafs2010@gmail.com, murhab2015@gmail.com
To cite this article: Murtala Zakari. The Impact of Exchange Rate Fluctuations on Foreign
Direct Investment in Nigeria. Journal of Finance and Accounting. Vol. 5, No. 4, 2017, pp.
165-170. doi: 10.11648/j.jfa.20170504.17
Received: May 9, 2017; Accepted: May 22, 2017; Published: July 18, 2017
Abstract:This study seeks to find out the relationship between foreign exchange rate and
foreign direct investment (FDI) and the impact of FDI on the gross domestic product (GDP)
in Nigeria, this is important in view of the recent and past devaluation of Nigeria currency
as well as the exchange rate changes over the years to be précised 26 years coverage. This
underscores the need to assess how foreign investors through FDI respond to changes in
the exchange rate, and how this relationship affects GDP with a view to identifying gaps
and provide policy recommendations and direction to the policy makers and the Nigeria
government. To achieve this, data of FDI, exchange rate, and GDP were obtained from the
Central Bank of Nigeria (CBN) website for the period under review and analyzed using
regression and correlation analysis techniques. Findings from the analysis show that there
is a strong positive relationship between FDI and exchange rate in Nigeria on one hand and
there is a weak positive relationship between FDI and GDP on the other hand. The
researcher also found that there was a significant inflow of FDI from 2005-2014 due to rise
in exchange rate in the same period. The study concludes that exchange rate, FDI, and GDP
are positively correlated.
Keywords: FDI, Exchange Rate, GDP, Nigeria
1. Introduction
1.1. Background to the Study: Foreign direct investment (FDI) is an investment in
the form of a controlling ownership in a business enterprise in one country by an entity
based in another country. It is thus distinguished from foreign portfolio investment by a
notion of direct control. Foreign direct investment includes "mergers and acquisitions,
building new facilities, reinvesting profits earned from overseas operations and intra
company loans, a lasting management interest (10 percent or more of voting stock) in an
enterprise operating in an economy other than that of the investor. Foreign direct
investment has grown at a phenomenal rate since the early 1980s, and the world market
for it has become more competitive and developing countries are becoming increasingly
attractive investment destinations, because they can offer investors a range of "created"
assets. In total, 464 companies invested in the region in 2014 compared to 505 in 2013.
One of the many influences on FDI activity is the behavior of exchange rates.Economics,
investors and Policy makers focus on the exchange rate of countries and then invest their
money in those countries. higher yields and leading to strong the dollar against the
currency of the home.
US$3.08, and US$1.63 in 2012, 2013, 2014, and 2015 respectively. In 2015 the net inflow
after deducting the outflow was worst hit which stood at US$1.63 representing 47% decline
compare to 2014 and 80% decline in a row from 2011. The question that comes to mind is,
do these FDIs actually affected by exchange rate fluctuations in Nigeria? Do the FDIs
contribute to gross domestic product (GDP) in Nigeria? If FDIs are actually affected by
exchange rate and impacted on the GDP, then the sustainability of FDIs is a worthwhile
activity and the way to achieve this is by researching the variables responsible for these
impacts with a view to ensuring its development and improvement. However, most studies
and debates on FDI, exchange rate and economic growth are country specific. Previous
studies in Nigeria by examined only the importance of FDI on economic growth and the
channels.
1.2. Hypotheses :
1. There is a positive relationship between FDI and exchange rate 2. There is a positive
relationship between FDI and GDP.
2, literature review: Foreign Direct Investment (FDI) is an international flow of

capital that provides a parent company or multinational organization with control over
foreign affiliates. Foreign direct investment is investment of foreign assets into domestic
structures, equipment, and organizations. It does not include foreign investment into the
stock markets. Foreign direct investment is thought to be more useful to a country than
investments in the equity of its companies because equity investments are potentially "hot
money" which can leave at the first sign of trouble, whereas FDI is durable and generally
useful whether things go well or badly.For the development of the least developed
countries, these countries offer incentives to foreign investors in order to attract more
Foreign Direct Investments.Exchange rate means how the unit of domestic currency can be
change with the other nations’ currency unit. Simply it is change of one country currency
into the other country currency.. Yet, this positive effect is counterbalanced by the rising
variable cost and the higher price for imported capital. Theoretical models provide no clear
indication as to which effect is dominant.an increase in the variable cost of production and
the user cost of capital reduces the marginal profit of investment. Moreover, their
theoretical framework shows that investment in industries with weaker market power is
more likely to be affected by exchange rate movements. The following theoretical frame
work shows the relationship between exchange rate which is independent variable and
foreign direct investment as the dependent variable.
Indirect variable Direct variable
Exchange rates FDI

Figure 1. Theoretical Frame of the Study.
Previous studies on the Foreign Direct Investment (FDI) and economic growth in Nigeria
and other countries provided inconclusive results as follows; found the relationship
between Exchange rate and FDI in Pakistan. In correlation there is positive significant
relationship between Exchange rate and FDI.
3.Research Methodology
This research is based on secondary data and time series. Data were collected from the
website of Central Bank of Nigeria. The variables of this study are Foreign Direct
Investments (FDIs), Exchange Rate, and Gross Domestic Product (GDP). The study is long
term analysis. First, to check the impact of exchange rate on FDI in Nigeria using 26 years
data of exchange rates and FDIs for the period (1990 to 2015). Second, to check the
relationship between FDI and Gross Domestic Product (GDP) in Nigeria. The researcher
used the test of Correlation and regression in SPSS software to check the relationship
between the variables. This study will be descriptive because substantial year data is at
hand and how the exchange rate impacts FDI on one hand, and how the FDI affects GDP on
the other hand in the past. The type of investigation is co-relational study because the
researcher is interested in outlining the important variables associated with the problem.
Hence, the researcher gave detailed description of all the results and findings from the
study.
This method was adopted by previous researchers ( Bilawal, M., Ibrahim, M., Abbes, A.,
Squib, M., Ahmed,
M., Hussein, I., Fatima, ( 2014).
4.Data Analysis and Discussion

4.1.Correlation Analysis
Correlation analysis shows the relationship among different variables. The correlation
ranges from -1 to +1. The significant relationship among different variables lies from 0.01 to
0.05. The significance value more than 0.05 shows the insignificant relationship among the
variables. The Mathematical signs like +, - show the direction of relation. The +1value
shows the perfect Positive relation and -1 value shows the perfect negative relationship.
The zero value shows that there is no any relationship among the variables.
Table 1.Correlation.
GDP (₦'m) Fix (₦'m) R2 0.229 0.551 R 0.479 0.742 Relationship + vet + vet
Source: SPSS output of FX, FDI, and GDP data (1990-2015) obtained from CBN websites.
The above result in Table1 shows that there is a strong positive relationship between
foreign direct investment and foreign exchange rate in Nigeria with correlation coefficient r
(0.742). Furthermore, there is a weak positive relationship between foreign direct
investment and gross domestic product in Nigeria with correlation coefficient r (0.479)
4.2.Multiple Regression Analysis

Regression analysis is used to show the accuracy and appropriateness of model and how
much independent variable influence on the dependent variable in this study.
Table 2.Model Summary

Dependent variable: FDI (₦ 'm)
Parameter Estimate
Standard Error
T Statistic P-Value
CONSTANT -77213.683 100764.023 -0.766 0.451 GDP (₦'m) 0.009 0.478 0.018 0.986 Fx
(₦'m) 4619.960 11.39967 4.053 0.000 R-squared = 55.1 percent R-squared (adjusted for
d.f.) = 51.2 percent Standard Error of Est. = 266380.8
Source: SPSS output of FX, FDI, and GDP data (1990-2015) obtained from CBN websites.
The output in Table 2 shows the results of fitting a multiple linear regression model to
describe the relationship between Foreign Direct Investment and 2 independent variables.
The equation of the fitted model is FDI (₦ 'm) = 7721.683 + 0.009* GDP (₦'m) + 4619.960*
Fx (₦'m). Since the P-value in the ANOVA table is less than 0.01, there is a statistically
significant relationship between the variables at the 99% confidence level, this connotes
that the above model is statistically statistic indicates that the model as fitted explains
55.1% of the variability in Foreign Direct Investment in Nigeria. The adjusted R-squared
statistic, which is more suitable for comparing models with different numbers of
independent variables, is 51.2%. The standard error of the estimate shows the standard
deviation of the residuals to be 266380.8. Thus the model revealed that an increase in
foreign exchange rate is accompanied by an increase of ₦4619.960 million in foreign direct
investment in Nigeria.
Figure 2. Time series analysis of Federal Direct Investment.

The above figure explains the time series analysis of federal direct investment (₦’millions)
in Nigeria from year 1990-2014, thus it indicates that there was a high level of foreign
direct investment (FDI) from 1990-2014.
5. Conclusion: The finding of this study shows that there is a strong positive
relationship between FDI and exchange rate in Nigeria. This satisfied the first hypothesis of
this research, i.e. “There is a positive relationship between FDI and exchange rate”.
Furthermore, this research found that there is a weak positive relationship between foreign
direct investment and gross domestic product in Nigeria. This satisfied the first hypothesis
of this research, i.e. “There is a positive relationship between FDI and GDP”. The study
concludes that exchange rate, FDI, and GDP are positively correlated.

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The Impact of Exchange Rate Fluctuations on Foreign Direct Investment in

Keywords: FDI, Exchange Rate, GDP, Nigeria

2, literature review: Foreign Direct Investment (FDI) is an international flow of

Indirect variable Direct variable

Exchange rates FDI

4.Data Analysis and Discussion

4.2.Multiple Regression Analysis

Table 2.Model Summary

Figure 2. Time series analysis of Federal Direct Investment.

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