Exchange Rate Volatility and Foreign Direct Investment in Nigeria

Abstract

Foreign direct investment (FDI) is an investment geared towards controlling ownership in a business enterprise in
domestic country by an entity based in a foreign country. It is one of the major sources of capital inflows to developing
countries, from the resource surplus countries and among developing countries themselves, and has been widely considered to
be important in contributing to growth in productivity in the receiving country. FDI is vital to any economy, it augments
domestic investment. Developing sub-Saharan African (SSA) countries and especially Nigeria has been a major beneficiary of
technological spill overs, job creation, improved managerial skills and other benefits from these inflows. The fluctuation of
exchange rate can lead to currency depreciation or appreciation. When exchange rate appreciates, it causes the cost of
production to rise in a country’s economy, and this will lead to low and volatile FDI. Poverty, high inequality and
underdevelopment also will ensue with the attendant huge deficit that will be recorded in the domestic country’s balance of
trade and of payment.