Influence of Real Exchange Rate and Volatility on FDI Inflow in Nigeria

Abstract

The purpose of this research is to ascertain the effect of real exchange rate fluctuation and its volatility on inward flow of FDI with Nigeria as a focal country, between 1970 to 2014. The research applied GARCH (1,1) to ascertain the level of volatility and ARDL model was used to determine the relevant results-these techniques were adopted for their robustness in estimation. It could be revealed that the effects of exchange rate and exchange rate volatility are more of a short-run phenomenon; while devaluation would increase inflow of FDI, volatility makes foreign investors more sceptical with increasing uncertainty. Increasing uncertainty could deter inflow of FDI into the country. Having captured the effect of political regime in the model, the paper reveals that a democratic regime should be the mainstay since it attracts more foreign investment compared to the military regimes. Therefore, even though devaluation is good, it would be better under civil government regimes.