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.
Highlights
Exchange rate fluctuation and its volatility has become a topical issue among policy makers and scholars alike in that it does impinge on profitability of firms that operate internationally, but is influential in determining investment by foreign firms
This paper extended the framework of analysis adopted by Kiyota and Urata (2004), Klein and Rosengren (1994) and Froot and Stein (1991), but employed GARCH (1,1) model to examine the extent and nature of volatility of Nigeria’s currency (Naira)
Recall that Nigeria made some huge decision in their exchange rate regimes which was momentously devaluation at the beginning of 1999, introducing uncertainty to the Naira mostly at that time
Summary
Exchange rate fluctuation and its volatility has become a topical issue among policy makers and scholars alike in that it does impinge on profitability of firms that operate internationally, but is influential in determining investment by foreign firms. Kiyota and Urata (2004) would reason that both investing and host countries do benefit from FDI. While the former benefit from market share increase through locational comparative advantage, strategic assets in R&D and stabilizing economic relation, the latter will gain from transfer of financial resources, technological and managerial know-how as well as offer healthy competitiveness to local firms and other spill-over advantages. From the early 70s, FDI inflow to Nigeria was marginally stable until the policy of indigenisation/nationalization which forced
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