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 large 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 promote growth in developing economies that lack capital. Capital inflows of various kinds are therefore welcomed as a way of bridging the gap between domestic saving and investment and of speeding up growth. Finance is the lifeblood of any enterprise: with sufficient funds, an entrepreneur can obtain labour, machinery and technology, management and raw materials and carry on business.

The theoretical case for inflows is that they raise investment, spread technology and deepen domestic financial markets, and that larger inflows can lower interest rates, which in turn encourage investment and growth. Experience has also shown the risks. Inflows can appreciate the real exchange rate, finance imports and consumption rather than investment, and reverse suddenly in a crisis. Critics therefore argue that the growth effects of capital flows are weak or conditional, and that volatile flows may call for policy safeguards. The question is ultimately empirical and depends on the type of flow and on domestic conditions.

Foreign investment takes two main forms. Foreign direct investment (FDI) gives the investor a lasting interest and a measure of control over the enterprise, and often involves establishing new projects. Foreign portfolio investment (FPI) is essentially a financial transaction, the purchase of stocks, bonds and other financial assets without control of the issuer. Many developing countries have relied on both, together with official flows, to accelerate growth, and they favour private flows, especially FDI, as a source of foreign capital that does not create debt. How these inflows relate to the wider economy is conventionally assessed through key macroeconomic indicators: gross domestic product (GDP), the exchange rate, the inflation rate and the interest rate.

Recent Nigerian evidence shows that these relationships run in both directions. Onoh et al. (2026) examined 1990 to 2024 using an autoregressive distributed lag (ARDL) model and found a stable long-run relationship between inflation and FDI, with inflation having a negative and significant long-run effect on FDI inflows and exchange rate behaviour contributing positively, though modestly. Alalade et al. (2024), covering 1993 to 2023, found that interest rates were inversely related to FPI, contrary to expectation, and that the exchange rate significantly influenced FPI. Taken together, the studies show that the macroeconomic environment shapes the size and direction of foreign investment, and the same variables may in turn be affected by the inflows.

Nigeria is an import-dependent economy with large investment needs, and successive governments since the return to civil rule in 1999 have sought to attract foreign investors through investment-friendly laws, trade facilitation and better business conditions. The economy also relies heavily on crude oil for foreign exchange, which exposes it to swings in production and international prices and can leave it short of investment capital. Recent figures illustrate the volatility of inflows. UNCTAD's World Investment Report 2026, as summarised by BusinessDay (2026), shows that FDI into Nigeria more than doubled in 2025, rising 148.4 per cent from $1.61 billion in 2024 to $4.01 billion, a decade high, supported mainly by oil and gas project finance. Intelpoint (2025), drawing on UNCTAD data, reports that annual inflows fell from a peak of about $8.8 billion in 2011 to far lower levels by 2024.

Policy changes have also moved the macroeconomic environment in which foreign investors operate. The Central Bank of Nigeria's Monetary Policy Committee noted, in February 2025, the effects of recent exchange market reforms and an appreciation of the exchange rate (Central Bank of Nigeria [CBN], 2025a). By November 2025 it had held the Monetary Policy Rate at 27.0 per cent, citing the continued deceleration of headline inflation, which nonetheless remained in double digits (CBN, 2025b). Such conditions raise the question of how foreign investment inflows interact with growth, exchange rate, inflation and interest rate in Nigeria.

1.2 Statement of the Problem

Nigeria has been one of the larger recipients of foreign investment in sub-Saharan Africa, yet the effects of FDI and FPI on its macroeconomic performance are not fully established. Inflows are volatile, and they have moved sharply in recent years, as the swing in FDI between 2024 and 2025 shows (BusinessDay, 2026). Supporters stress the benefits for growth, while critics point out that volatile inflows can destabilise the exchange rate and interest rate and so harm macroeconomic performance.

Recent studies on Nigeria have largely examined one type of flow, or one relationship, at a time, and have usually treated foreign investment as the dependent variable. Onoh et al. (2026) examine how inflation affects FDI, and Alalade et al. (2024) examine how interest and exchange rates affect FPI. Much less attention has been given to the reverse question: how FDI and FPI together affect the main macroeconomic indicators. This study fills that gap by examining FDI and FPI jointly, alongside GDP, the exchange rate, the inflation rate and the interest rate, in order to assess the effects of foreign investment inflows on macroeconomic performance in Nigeria across the whole 2000 to 2024 period.

1.3 Objectives of the Study

The main objective is to examine the effect of total foreign investment inflows, disaggregated into FDI and 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 questions:

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

1.5 Research Hypotheses

The following null hypotheses are tested:

1. H01: FDI and FPI do not have a positive and significant impact on economic growth.
2. H02: FDI and FPI do not have a positive and significant impact on the exchange rate.
3. H03: FDI and FPI do not have a positive and significant impact on the inflation rate.
4. H04: FDI and FPI do not have a positive and significant impact on the interest rate.

1.6 Scope of the Study

The study examines the effect of FDI and FPI on macroeconomic performance in Nigeria over 25 years, from 2000 to 2024. The period begins shortly after the return to democratic governance in 1999, when successive governments pursued policies to attract foreign investors, and extends to the most recent year for which data are available. It therefore includes the years of the 2023 to 2025 exchange market and monetary policy adjustments. Only FDI and FPI are covered, and the macroeconomic variables examined are GDP, the exchange rate, the inflation rate and the interest rate, which are standard indicators of economic performance.

1.7 Significance of the Study

Macroeconomic variables act as indicators of the state of an economy, and this study will be useful to the following groups.

Policymakers and regulators. The study gives an overview of the relationship between FDI, FPI and key macroeconomic variables. This can help in designing policies that support growth with minimal conflict among objectives, in setting the stance of monetary policy, and in monitoring changes in macroeconomic fundamentals.

Government. The findings allow government to review past economic conditions against the policies adopted in the same period and to adjust fiscal and monetary policy for coming years.

Academia. The debate on the merits and demerits of foreign investment inflows continues, and recent Nigerian studies tend to concentrate on one type of flow or on what determines inflows (Alalade et al., 2024; Onoh et al., 2026). By examining the effect of both flows on several macroeconomic indicators over a recent 25-year period, this study offers a resource for researchers and a base for further work.

1.8 Operational Definition of Terms

Liberalisation: The relaxation of government restrictions, usually in economic and social policy. Trade liberalisation, for example, means removing tariffs, subsidies and other restrictions on the movement of goods and services between countries.

Globalisation: The growing interaction among national economic systems, marked by more integrated financial markets, expanding trade, higher mobility of factors, and faster flows of technology and knowledge across the world.

Foreign direct investment (FDI): Investment by a foreign investor that gives a lasting interest and a degree of control over the enterprise concerned.

Foreign portfolio investment (FPI): Foreign purchases of stocks, bonds and other financial assets that do not give control over the issuing enterprise.

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

Gross domestic product: The market value of all final goods and services produced within a country in a given period, regardless of whether the producers are domestic or foreign-owned.

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

REFERENCES

Alalade, Y. S. A., Oliyide, R. O., Okwu, A. T., Adebola, P. S., Ademola, O. C., & Ogunwale, O. (2024). Macroeconomic variables and foreign portfolio investments in Nigeria. Seybold Report Journal, 19(9), 123–152. https://doi.org/10.5281/zenodo.13646911

BusinessDay. (2026). Nigeria returns to Africa's top five FDI destinations as inflows double to $4bn [Analysis of UNCTAD, World Investment Report 2026]. https://businessday.ng/africa/article/nigeria-returns-to-africas-top-five-fdi-destinations-as-inflows-double-to-4bn/

Central Bank of Nigeria. (2025a). Monetary policy communiqué No. 156 (20 February 2025). https://www.cbn.gov.ng/Out/2025/CCD/Central_Bank_of_Nigeria_Comminique_No.156_20_February_2025.pdf

Central Bank of Nigeria. (2025b). Monetary policy communiqué No. 160 (25 November 2025). https://www.cbn.gov.ng/Out/2025/CCD/MPC%20Communique%20No.%20160%20%20November%2025%202025.pdf

Intelpoint. (2025). Nigeria's share of Africa's FDI collapsed from ~38% in 1994 to barely 1.1% in 2024 [Analysis of UNCTAD data]. https://intelpoint.co/?p=7710

Onoh, C. F., Chimezie, C. D., & Zubair, Z. A. (2026). Inflation indicators and foreign direct investment in Nigeria: An empirical analysis of multiple price-level effects. Journal of Economic and Social Research, 12(2), 1–25. https://bsum.edu.ng/journals/jesr/vol12n2/article.php?id=345