Impact of Exchange Rate Shock on Foreign Direct Investment in Nigeria.

Abstract

This study examines the underlying forces of foreign direct investment (FDI) response to the exchange rate shock in Nigeria, covering the period 1981 to 2021. Including long-run analysis, this study employs the VEC model innovation accounting as an econometric analysis technique. The outcomes reveal that in the long run, exchange rate appreciation, a thriving domestic investment environment, and economic size positively drive foreign inflows. Conversely, rising economic instability, particularly associated with increasing price levels, negatively impacts foreign investment. The Innovation accounting analysis indicates that FDI positively responds to shocks in exchange rates, GDP, and capital. However, the strength of these responses diminishes over time. The relationship with consumer price index (CPI) shocks appears more complex, with varying reactions over the specified horizon. Hence, policymakers are urged to prioritize exchange rate stability, promote economic growth and innovation, and enhance the domestic investment environment. Addressing economic instability and inflation is crucial, necessitating robust policies to maintain economic stability. Continuous monitoring of CPI is advised, and long-term policy planning is recommended to ensure sustained positive impacts on FDI. Additionally, international collaboration is encouraged to foster a stable global investment environment.