CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Globalisation is the process through which economies, societies and cultures become linked through trade, transport and communication. Economic theory points to substantial potential gains from cross-border capital flows. Neoclassical economists argue that such flows are beneficial because they add to the resources available for capital accumulation and stimulate growth in developing economies that face capital shortages. Foreign capital is therefore welcomed as a means of bridging the gap between domestic saving and investment. Finance is central to every enterprise, because with sufficient funds an entrepreneur can acquire the labour, technology, management and materials needed to operate.

The benefits of capital inflows are not guaranteed, however. Kundu et al. (2023) note that large inflows can generate macroeconomic overheating, reflected in higher inflation, real exchange rate appreciation and a wider current account deficit, and that the sudden reversal of flows can cause currency depreciation, higher inflation, interest rate increases, output losses and a loss of foreign exchange reserves. Their analysis of emerging market economies from 1992 to 2022 shows that global factors, such as global growth, risk, liquidity, long-term interest rates and policy rate changes, along with domestic growth and nominal exchange rate dynamics, drive capital flow reversals. These findings show why the effects of foreign investment on macroeconomic performance remain a subject of debate.

Foreign investment takes two main forms. Foreign direct investment (FDI) gives the investor a controlling or lasting interest in an enterprise and often involves establishing new projects. Foreign portfolio investment (FPI) is essentially a financial transaction, involving the purchase of shares, bonds and other financial assets without control of the enterprise. Many developing economies have relied on these flows to supplement domestic resources and accelerate growth, and macroeconomic conditions, notably the exchange rate, the inflation rate, the interest rate and economic growth, strongly influence how much foreign capital they attract. These variables are also the principal indicators of macroeconomic performance, since they show the direction of the economy.

Nigerian evidence on these relationships is mixed. Abubakar (2024), using data for 1986 to 2023, found that FPI Granger-causes GDP, and that FPI and the exchange rate have a positive and significant effect on GDP while inflation has a negative and significant effect. Kolawole and Seyingbo (2025) found that, in the long run, the exchange rate and inflation had no significant effect on economic growth, while FDI played a weak but positive role that was significant only at the 10 per cent level. Wandiya and Usman (2025), covering 1986 to 2023, report that inflation has a negative and significant short-run effect on growth and that FDI has mixed effects, negative in the current period but positive when lagged. Evidence also runs in the opposite direction, from macroeconomic conditions to foreign investment. Ezirim et al. (2022), using data for 1986 to 2019, found a long-run relationship between FPI and the exchange rate, inflation, the interest rate, real GDP and taxation, with the exchange rate exerting a negative and significant effect on FPI. Isibor and Akarueta (2026) found, for 1990 to 2023, that exchange rate stability and moderate inflation encourage FPI inflows, while GDP growth and interest rates have no significant effect, which suggests that FPI responds more to financial market conditions than to overall growth. Nzeh et al. (2024) examined the joint effect of the exchange rate and FDI inflows on the domestic interest rate in Nigeria over 1981 to 2022.

Nigeria is an import-dependent economy that relies heavily on crude oil for foreign exchange, which makes its external earnings vulnerable to swings in oil prices and output. For this reason, successive governments have sought to attract foreign capital by improving the investment climate, and foreign investment has become an important channel for supplementing domestic savings. This raises the question of how far these inflows have helped, or hindered, the performance of the economy.

1.2 Statement of the Problem

Nigeria is one of the main destinations of foreign investment in sub-Saharan Africa, yet the effects of FDI and FPI on its macroeconomic performance have not been fully established. Proponents argue that foreign investment raises investment, productivity and growth. Critics point to the volatility of these flows, especially portfolio flows, and to the risk that they can fuel inflation and exchange rate instability and reverse abruptly (Kundu et al., 2023). The Nigerian studies reviewed above reach different conclusions, depending on the period, the type of inflow and the variables examined.

Most existing studies also deal with only part of the question. Some examine FPI and growth (Abubakar, 2024), others examine FDI together with inflation and the exchange rate (Kolawole & Seyingbo, 2025), and others study how macroeconomic variables determine foreign investment rather than the reverse (Ezirim et al., 2022; Isibor & Akarueta, 2026), or concentrate on a single outcome, such as the interest rate (Nzeh et al., 2024). Few studies assess FDI and FPI together against the full set of macroeconomic performance indicators. This study addresses that gap by examining the effect of both FDI and FPI on economic growth, the exchange rate, the inflation rate and the interest rate in Nigeria, so that their simultaneous effects can be better assessed.

1.3 Objectives of the Study

The main objective of the study is to examine the effect of total foreign investment inflows, disaggregated into foreign direct investment (FDI) and foreign portfolio investment (FPI), on the macroeconomic performance of the Nigerian economy. The specific objectives are to assess:

1. the impact of FDI and FPI on economic growth;
2. the effect of FDI and FPI on the exchange rate;
3. the impact of FDI and FPI on the inflation rate; and
4. the effect of FDI and FPI on the interest rate.

1.4 Research Questions

The study is guided by the following research questions:

1. To what extent do FDI and FPI have a significant impact on economic growth?
2. To what extent do FDI and FPI have a significant impact on the exchange rate?
3. To what extent do FDI and FPI have a significant impact on the inflation rate?
4. To what extent do FDI and FPI have a significant impact on the interest rate?

1.5 Research Hypotheses

The following null hypotheses are tested:

H₀₁: FDI and FPI have no significant impact on economic growth.

H₀₂: FDI and FPI have no significant impact on the exchange rate.

H₀₃: FDI and FPI have no significant impact on the inflation rate.

H₀₄: FDI and FPI have no significant impact on the interest rate.

1.6 Scope of the Study

The study examines the impact of FDI and FPI on macroeconomic performance in Nigeria over a period of 25 years, from 2000 to 2024. The period begins at the start of the democratic dispensation and includes recent changes in exchange rate policy and macroeconomic conditions, which makes it suitable for assessing the effects of foreign investment under varying circumstances. Only FDI and FPI are covered among the forms of foreign capital flows. The macroeconomic indicators examined are gross domestic product (GDP), the exchange rate, the inflation rate and the interest rate, which are the variables commonly used in recent Nigerian studies of foreign investment and growth (Abubakar, 2024; Kolawole & Seyingbo, 2025).

1.7 Significance of the Study

Macroeconomic variables act as indicators of current trends in an economy, so the study is significant to several groups.

Policymakers and regulators. The study gives them an overview of the relationship between FDI, FPI and macroeconomic variables. This can inform the design of policies that support growth objectives with minimal conflict, guide the stance of monetary policy and help them to monitor changes in macroeconomic fundamentals.

The government. The study allows the government to review past economic conditions against the policies adopted in the same period, and to consider fiscal and monetary policy changes for coming years.

Academia. There is continuing debate about the merits and demerits of foreign investment inflows (Kundu et al., 2023), and Nigerian studies often examine only one type of inflow or one outcome. The study therefore provides a resource and a base for further research.

1.8 Operational Definition of Terms

The following terms are defined as they are used in this study.

Capital inflows: Funds that foreign investors, lenders or institutions move into a country, including FDI and FPI.

Economic growth: The increase in the amount of goods and services produced by an economy over time, normally measured as the percentage rate of increase in real gross domestic product.

Foreign direct investment (FDI): An investment by a foreign investor that gives lasting control or a significant interest in an enterprise, often through new projects.

Foreign portfolio investment (FPI): The purchase by foreign investors of financial assets, such as shares and bonds, without control of the enterprise.

Globalisation: The increasing integration of national economies through trade, financial markets, factor mobility and the flow of technology and knowledge.

Gross domestic product (GDP): The market value of all final goods and services produced within a country in a given period, irrespective of whether production is owned by residents or foreigners.

Liberalisation: The relaxation of government restrictions, usually in economic policy, for example the removal of tariffs, subsidies and other barriers to the flow of goods, services and capital.

Macroeconomic performance: An assessment of how well a country is achieving the main objectives of economic policy, commonly measured by growth, inflation, the exchange rate and the interest rate.

References

Abubakar, S. (2024). Foreign portfolio investment and economic growth in Nigeria: An empirical analysis. African Banking and Finance Review Journal, 18(18), 292–305.

Ezirim, C. B., Ezirim, U. I., Ogungbure, A., & Chekwa, C. (2022). Autoregressive distributed lag (ARDL) analysis of foreign portfolio investments determination in Nigeria. Journal of Applied Business and Economics, 24(4). https://doi.org/10.33423/jabe.v24i4.5354

Isibor, E., & Akarueta, A. U. (2026). Macroeconomic aggregates on foreign portfolio investment (FPI) in Nigeria. African Banking and Finance Review Journal, 21(5), 148–174.

Kolawole, K. D., & Seyingbo, O. A. (2025). The impact of foreign direct investment, inflation, and exchange rate fluctuations on economic growth in Nigeria. Oblik i Finansi, 3, 113–124. https://doi.org/10.33146/2518-1181-2025-3(109)-113-124

Kundu, S., Kumari, A., & Rawat, D. (2023). Cross-border capital flows and sudden stops: Lessons from emerging market economies. RBI Occasional Papers, 44(2).

Nzeh, I. C., Nwogwugwu, U. C., Uzonwanne, M. C., Kalu, C. U., & Akalazu, E. C. (2024). Investigating the joint impact of exchange rate and foreign direct investment inflows on domestic interest rate in Nigeria. Financial Economics Letters, 3(2). https://doi.org/10.58567/fel03020001

Wandiya, R., & Usman, M. A. M. (2025). Impact of exchange rate volatility and inflation on economic growth in Nigeria. ADSU International Journal of Applied Economics, Finance & Management.