A Disaggregated Analysis on the Effects of Foreign Investment Inflows on Exchange Rate: Evidence from Nigeria

Abstract

This study is an investigation of the effects foreign investments have on exchange rate in Nigeria. The work covered a period of 1987-2012 using annual data from Central Bank of Nigeria statistical bulletin. A growth model via the Ordinary Least Square method was used to ascertain the relationship between foreign investment inflows and exchange rate in Nigeria. Its main objective is to find the impact which foreign investments, decomposed into foreign direct investment (FDI) and foreign portfolio investment (FPI) have on exchange rate and the bidirectional influences between them. Of course, several studies have endeavored to examine the determinants of exchange rate in Nigeria. This study contributes to the literature by examining a possible determinant of exchange rate that has received less attention in the literature: foreign investment inflows. This paper examines this relationship with a view to determining the extent to which FDI and FPI effect exchange rate in Nigeria employing the Granger causality and OLS techniques. The Granger Causality test further provides insight on the causal direction of the variables. Whereas the causality tests suggest no statistical dependence between both FDI and FPI and exchange rate, the regression analyses reveals exchange rate follows FPI though not significantly while FDI has an insignificant inverse relationship with exchange rate.