Volatility in Foreign Capital Inflows and Economic Growth in Nigeria


  • Philip I. Nwosa Federal University Oye-Ekiti
  • Ephraim Ugwu Federal University Oye-Ekiti
  • Chris Ehinomen Federal University Oye-Ekiti


Volatility; Capital flows; ARDL; Nigeria


This study examines the relationship between volatility in capital inflows and economic growth in
Nigeria for the period 1986 to 2018. Specifically, this study address to research question “does volatility in
component of capital inflows (foreign direct investment, foreign portfolio investment and other investment
flows) affect economic growth differently?” This study employs the Auto-Regressive Distributed Lag
(ARDL) method and the result of the study showed that volatility in capital inflows (measured in aggregate
or component) negatively affected economic growth (albeit volatility in foreign direct investment was
insignificant). The result of the study also shows that volatility of component of capital flows influenced
economic growth differently (in terms of significance and magnitude). The study concludes that volatility in
short term capital flows (foreign portfolio investment and other investment flows) hindered economic growth
while volatility in long term capital flows (foreign direct investment) does not. Consequently, the study
recommends the need for sound macroeconomic policy management such as effective monetary supervision
and regulation capable of ensuring financial stability in both the banking and the capital markets which will
improve investors’ confidence and reduce the volatility of capital inflows in Nigeria.

Author Biographies

Philip I. Nwosa, Federal University Oye-Ekiti

Lecturer, PhD, Department of Economics

Ephraim Ugwu, Federal University Oye-Ekiti

Department of Economics

Chris Ehinomen, Federal University Oye-Ekiti

Department of Economics


Adeniyi, O.; Ajide, B. & Salisu, A. (2015). Foreign Capital Flows, Financial Development and Growth in Sub-Saharan Africa.
Journal of Economic Development, Vol. 40(3), pp. 85-103.
Adekunle, W. & Suliamon, M.D. (2018). A Re-examination of the Relationship between Foreign Capital Inflows and
Economic Growth in Nigeria. Munich Personal RePEc Archive (MPRA), 87754.
Aizenman, J.; Jinjarak, Y. & Park, D. (2011). Capital flows and economic growth in the era of financial integration and crisis,
pp. 1990-2010.
Aizenman, J. & Marion, N.P. (1993). Macroeconomic Uncertainty and Private Investment. Economics Letters, Vol. 41, pp.
Akinlo, A. E. (2004). Foreign Direct Investment and Growth in Nigeria: An Empirical Investigation. Journal of Policy
Modelling, 26(5), pp. 627-639.
Akinmulegun, S. O. (2019). Capital Market Development and Foreign Portfolio Investment Inflow in Nigeria (1985-2016).
Advances in Economics and Business, Vol. 6(5), pp. 299-307.
Allendorf, H.; O’Farrell, J.; Trefogli, J. & Coronado, J. (2011). Breaking the Mould: How Latin America is Coping with
Volatile Capital Flows. Bretton Woods Projects, London.
Anyanwu, J.C. (2011). Determinants of Foreign Direct Investment Inflows to Africa, 1980-2007. Working Paper Series, 136,
African Development Bank, Tunis, Tunisia.
Aurangzeb & UI Haq, A. (2012). Impact of Foreign Capital Inflows on Economic Growth in Pakistan. European Journal of
Economics, Finance and Administrative Sciences, Vol. 46, pp. 6-12.
Banerjee, A. & Newman, A. (1993). Occupational Choice and the Process of Development. Journal of Political Economy,
101(2), pp. 274-298
Bernanke, B. S. (1983). The Determinants of Investment: Another Look. American Economic Review, Vol. 73(2), pp. 71-75.
Borensztein, E.; De Gregoria J. & Lee J. W. (1998). How Does Foreign Investment Affect Economic Growth? Journal of
International Economics, Vol. 45(1), pp. 115–35.
Broto, C.; Diaz-Cassou, J. & Erce-Dominguez, A. (2011). Measuring and Explaining the Volatility of Capital Flows to
Emerging Countries. Journal of Banking and Finance, Vol. 35(8), pp. 1941-1953.
Broto, C.; Diaz-Cassou, J. & Erce-Dominguez, A. (2008). Measuring and Explaining the Volatility of Capital Flows Towards
Emerging Countries. Banco de España Working Paper Series, 0817.
Carkovic, M. & Levine, R. (2002). Does Foreign Direct Investment Accelerate Economic Growth? manuscript, University of
Chang, R. & Velasco, A. (1999). Liquidity Crises in Emerging Markets: Theory and Policy, in B. Bernanke and J. Rotemberg
(eds). NBER Macroeconomics Annual 1999. Cambridge. MA: MIT Press.
Choong, C-K.; Baharumshah, A. Z.; Yusop, Z. & Habibullah, M. S. (2010). Private Capital Flows, Stock Market and Economic
Growth in Developed and Developing Countries: A Comparative Analysis. Japan and the World Economy, Vol. 22, pp. 107-
Claessens, S.; Dooley, M. & Warner, A. (1995). Portfolio Capital Flows: Hot or Cold? The World Bank Economic Review, Vol.
9(1), pp. 153–174.
De Mello, L. (1997). Foreign Direct Investment in Developing Countries and Growth: A Selective Survey. Journal of
Development Studies, Vol. 34(1), pp. 1-34.
Durham, J. B. (2004). Absorptive Capacity and the Effects of Foreign Direct Investment and Equity Foreign Portfolio
Investment on Economic Growth. European Economic Review, Vol. 48, pp. 285-306.
Durham, J.B. (2003). Foreign Portfolio Investment, Foreign Bank Lending, and Economic Growth. Board of Governors of the
Federal Reserve System International Finance Discussion Papers, p. 757.
Edu, G. T.; Inaya, T. & Bassey, A.F. (2015). Foreign Private Capital Inflows and Economic Growth in Nigeria. European
Journal of Business and Social Sciences, Vol. 4(8), pp. 205-217.
Ewe-Ghee, L. (2001). Determinants of, and the Relation between, Foreign Direct Investment and Growth: A Summary of the
Recent Literature. IMF Working Paper, Middle Eastern Department, WP/01/175.
Fasanya, I. O. (2012). Capital Flows-Growth Nexus in Nigeria: Has Foreign Direct Investment Played a Role in Accelerating
Economic Growth? Journal of Sustainable Development in Africa, Vol. 14(8), pp. 34-52.
FitzGerald, E. V. K. (2008). Short-Term Capital Flows, the Real Economy and Income Distribution in Developing Countries.
QEH Working Paper Series, QEH/WPS/08, University of Oxford International Development Centre, Queen Elizabeth House,
Gallego, F.; Leonardo, H. & Klaus, S. (2002). Capital Controls in Chile: Were they Effective? Banking, financial integration,
and crises. Ed. Leonardo Hernandez and Klaus Schmidt-Hebbel. Santiago: Central Bank of Chile.
Ikpesu, F. (2019). Growth Effects of Capital Inflows and Investment in Nigeria. International Journal of Management,
Economics and Social Sciences, Vol. 8(1), pp. 5-19.
Johansen, S. (1998). Statistical Analysis of Co-Integrating Vectors. Journal of Economic Dynamics and Control. June-
September, pp. 231-254.
Kose, A.; Prasad, E.; Rogoff, K. & Wei, S‐J. (2006). Financial Globalization: A reappraisal. International Monetary Fund
Working Paper, p. 189.
Kyriakos, C. N. (2019). Volatile Capital Flows and Economic Growth: The Role of Banking Supervision. Journal of Financial
stability, Vo. 40, pp. 77-93.
Lee, H.; Park, C-Y. & Byun, H-S. (2012). Do Contagion Effects Exist in Capital Flow Volatility? Asia Development Bank
Economics Working Paper Series, p. 302.
Lensink, R.; Hong, B. & Sterken, E. (1999). Does Uncertainty Affect Economic Growth? An empirical analysis.
Weltwirtschaftliches Archiv, Vol. 135, pp. 942-963.
Lensink, R. & Oliver, M. (2001). Foreign Direct Investments: Flows, Volatility and Growth in Developing Countries.
Development Economics Study Group Conference 2001: University of Nottingham.
Mercado, R. & Park, C.-Y. (2011). What Drives Different Types of Capital Flow and their Volatilities in Developing Asia?
International Economic Journal, Vol. 25(4), pp. 655–680.
Narayan, P. & Narayan, S. (2003). Savings Behaviour in Fiji: An Empirical Assessment using the ARDL Approach to Cointegration.
Discussion Paper, Department of Economics. Monash University, 02/03.
Neumann, R. M.; Penl, R. & Tanku, A. (2009). Volatility of Capital Flows and Financial Liberalization: Do Specific Flows
Respond Differently. International Review of Economics and Finance, Vol. 18, pp. 488-501.
Nkoro, E. & Uko, A. K. (2012). Foreign Capital Inflows and Economic Growth in Nigeria: An Empirical Approach. Asian
Journal of Empirical Research, Vol. 2(5), pp. 149-161.
Olivier, J. & Anton, K. (2012). Excessive Volatility in Capital Flows: A Pigouvian Taxation Approach. NBER Working Paper
Series, 15927.
Okon, J. U.; Augustine O.J. & Chuku, C.A. (2010). Feedback or no Feedback: Understanding the Interaction between Foreign
Direct Investment and Economic Growth in Nigeria. Journal of Monetary and Economic Integration, Vol. 11(2), pp. 5-53.
Oteng-Abayie, E. F. & Frimpong, J. M. (2006). Bounds Testing Approach to Co-integration: An Examination of Foreign Direct
Investment Trade and Growth Relationships. American Journal of Applied Sciences, Vol. 3(11), pp. 2079-2085.
Oyinlola, O. (1995). External Capital and Economic Development in Nigeria (1970–1991). The Nigerian Journal of Economic
and Social Studies, Vol. 37, pp. 205–222.
Pesaran, M. H.; Shin, Y. & Smith, R.J. (2001). Bounds Testing Approaches to the Analysis of Level Relationships. Journal of
Applied Econometric, Vol. 16, pp. 289-326.
Prasad, E.; Rajan, R. & Subramanian, A. (2006). Patterns of International Capital Flows and their Implications for Economic
Development. Paper Presented at the Symposium, The New Economic Geography: Effects and Policy Implications, The
Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 24‐26.
Ramirez, M. D. (2000). Foreign Direct Investment in Mexico: A Co-Integration Analysis. Journal of Development Studies,
Vol. 37, pp. 138–162.
Sadik, A. T. & Bolbol, A. A. (2001). Capital Flows, FDI, and Technology Spillovers: Evidence from Arab countries. World
Development, Vol. 29(12), pp. 2111-2125.
Scott, A. & Uhlig, H. (1999). Fickle Investors: An Investment to Growth? European Economic Review, Elsevier, Vol. 43(7),
pp. 1345-1370.
Sethi, N. & Patnaik, U. S. K. (2007). International Capital Flows on India’s Economic Growth-in view of Changing Financial
Market. The Indian Journal of Economics, Vol. 45, pp. 348-.
Shahbaz, M.; Wahid, A.; Ahmad, K. & Chaudhary, A.R (2008). Capital Account Openness and Economic Growth Nexus: The
Case Study of Pakistan. EAST-WEST Journal of Economics and Business, Vol. XI (1;2), pp. 18-33.
Shen, C. H.; Lee, C. C. & Lee, C. C. (2010). What Makes International Capital Flows Promote Economic growth? An
International Cross-Country Analysis. Scottish Journal of Political Economy, Vol. 57(5), pp. 515-546.
Soto, M. (2000). Capital Flows and Growth in Developing Countries: Recent Empirical Evidence. OECD Development Centre
Working Paper, p. 160.
Xu, B. (2000). Multinational Enterprises, Technology Diffusion, and Host Country Productivity Growth. Journal of
Development Economics, Vol. 62(2), pp. 473-493.
Wei, S-J. (2000). Corruption, Composition of Capital Flows and Currency Crises. Policy Research Working Paper Series,
2429. The World Bank.