ABSTRACT

This study investigates the impact of macroeconomic volatility on foreign direct investment (FDI) inflow into Nigeria. FDI is decomposed by source, and the study examines whether macroeconomic volatility affects each source differently. Using the ordinary least squares method, the study finds that FDI from different sources does not respond differently to macroeconomic volatility in Nigeria, which implies that investors from all parts of the world consider the same set of factors before investing. Total FDI inflow into Nigeria is negatively and significantly affected by the volatility of GDP, and it is positively and significantly related to the volatility of the exchange rate. Interest rate volatility has a positive effect on total FDI inflow. Overall, GDP matters and is the chief driver of FDI inflow into Nigeria, which suggests that most FDI in the country is of the market-seeking type. The results also show that the interest rate has a positive and significant effect on FDI, and that this holds across the various sources of FDI. One policy implication is that measures to ensure steady and stable GDP growth will be fundamental to attracting large foreign investment inflows into Nigeria from all parts of the world.

Keywords: foreign direct investment, macroeconomic volatility, exchange rate, interest rate, output volatility, Nigeria

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Foreign direct investment (FDI) has become one of the most important sources of development finance, and it has attracted the attention of many scholars. Of the major private capital flows to developing countries, FDI is regarded as the most important for economic growth and development. In the international statistical standard, FDI is cross-border investment by a resident of one economy in an enterprise in another economy with the objective of establishing a lasting interest, and a lasting interest is evidenced when the direct investor owns at least 10% of the voting power of the enterprise (Organisation for Economic Co-operation and Development [OECD], 2008). FDI may take the form of greenfield investment, in which a new enterprise is established, or of mergers and acquisitions, in which an existing business is acquired.

Development economists have for decades emphasised the importance of FDI in breaking the vicious circle of poverty. Most of the theories involved do not deal directly with macroeconomic volatility, but their aggregate transmission effects help to explain how macroeconomic variables behave. Classical trade theory suggests that world production becomes more efficient when factors move from places of low productivity to places of high productivity, and the Heckscher–Ohlin framework suggests that cross-country differences in factor endowments should stimulate both trade and FDI. If commodity trade and factor movements are substitutes, trade and FDI should be negatively correlated. Others argue that foreign and domestic investment can be complementary, since foreign operations draw on functions performed by the parent firm. The growth of global FDI reflects firms’ decisions to serve foreign markets by investing there rather than by exporting to them.

The literature identifies several pull factors that direct FDI, among them market size, return on investment, infrastructure, production costs, agglomeration effects, fiscal incentives, the business climate and trade openness. Asiedu (2002) analysed 71 developing countries, about half of them in sub-Saharan Africa, and concluded that the factors that attract FDI to other regions do not have the same effect in Africa, so that Africa is different. The determinants of FDI in one region need not apply to another, and even within a region they may differ across countries and over time. Investors are also interested in the performance of specific sectors and in how changes in macroeconomic conditions affect competitiveness and expected profitability.

The effect of FDI on a host economy is complex, and the relationship between economic fluctuations and FDI remains unclear. One view holds that the globalisation of securities markets from the 1990s increased the volatility of capital flows, including FDI. Emerging economies have also experienced large and persistent fluctuations in aggregate activity. Capital-importing countries fear foreign control of domestic assets and the macroeconomic instability that rapid changes in foreign investment can bring. For developing countries with large macroeconomic fluctuations and frequent policy regime switches, macroeconomic risk can influence the type of FDI that arrives, whether vertical or horizontal.

The Nigerian experience illustrates the importance of the question. According to UNCTAD data, FDI inflows into Nigeria rose to $4.01 billion in 2025, a 148.4% increase from $1.61 billion in 2024 and the highest level in over a decade, but the increase was driven largely by oil and gas project finance, including one project of about $2 billion (BusinessDay, 2026). The inflows are far below their peak, and they are volatile from year to year. Ayoola (2024) examined the effect of inflation and exchange rate volatility on FDI inflows between 2013 and 2022 in the context of the exits of several multinational companies from Nigeria, and he concluded that macroeconomic instability weakens investor confidence.

1.2 Problem Statement

One of the most salient features of globalisation is the conscious encouragement of cross-border investment, especially by transnational corporations. Many countries, especially developing ones, regard attracting FDI as an important element of their development strategy, because it is seen as a source of capital, advanced technology, and marketing and management skills. The growth and development of Nigeria’s economy depends considerably on FDI, which is a major carrier of new knowledge and technological innovation. The need to step up industrialisation calls for technology spillovers through foreign investment, and African countries, Nigeria included, have sought to attract FDI, notably through the New Partnership for Africa’s Development (NEPAD), which made attracting foreign investment a major goal.

Yet African countries have been marginalised in terms of investment inflow, and Nigeria’s share of the continent’s FDI has declined sharply. Many studies have therefore investigated the determinants of foreign investment in Nigeria, and most have tried to link FDI with economic growth. They have not adequately addressed how macroeconomic volatility affects FDI inflows. The existing studies on the question have concentrated mainly on the exchange rate. Udoh and Egwaikhide (2008), for 1970 to 2005, found that exchange rate volatility and inflation uncertainty, both estimated with a GARCH model, had a significant negative effect on FDI in Nigeria. Jokosenumi and Adesete (2018), for 1990 to 2016, found a negative and significant relationship between exchange rate volatility and FDI in both the short and the long run, and a positive but insignificant long-run relationship between stock market volatility and FDI. Studies of FDI and growth in sub-Saharan Africa have also relied heavily on multi-country samples, whereas the relationship may be country-specific and period-specific (Asiedu, 2002).

Macroeconomic volatility is the constant fluctuation of key macroeconomic variables, such as the exchange rate, GDP and the interest rate, to the point that their behaviour becomes uncertain or unpredictable. Foreign investors worry about exchange rate risk, interest rate risk and political instability. The Nigerian macroeconomic environment has long been regarded as one of the most volatile among emerging markets, with large swings in inflation and the exchange rate. Many studies have explained macroeconomic instability in Nigeria through the effects of external shocks such as oil price changes, terms-of-trade shocks and exchange rate changes, and through the effects of monetary and fiscal policy, but few have linked macroeconomic instability directly to FDI.

Nigeria also faces an economic situation marked by inadequate resources for long-term development, a high level of poverty, low capacity utilisation and high unemployment, and it is increasingly difficult to meet the goals of the global development agenda, including ending poverty by 2030. Promoting technology transfer through FDI therefore occupies a prominent place in the strategies of policy makers because it is regarded as a key to bridging the technology and resource gap of developing countries and avoiding a further build-up of debt.

Justification of the Study

Understanding macroeconomic stability requires a clear understanding of macroeconomic instability and of how to measure it empirically. Conceptually, macroeconomic instability refers to anything that makes the domestic macroeconomic environment less predictable, and it is a concern because unpredictability hampers decisions on resource allocation, investment and growth. It focuses on the behaviour of outcome variables such as real output growth, inflation, the exchange rate and the current account balance.

This study departs from existing work by investigating how macroeconomic volatility, in the form of exchange rate, interest rate and output volatility, affects FDI in Nigeria. Existing empirical studies have focused mostly on the effect of exchange rate volatility on FDI (Udoh & Egwaikhide, 2008; Jokosenumi & Adesete, 2018). The study therefore adds to the literature by going beyond exchange rate volatility to include the volatility of other macroeconomic variables. This makes it possible to establish the extent to which the volatility of each variable affects FDI, which has important policy implications because most policies have focused on stabilising the exchange rate. The study also decomposes FDI by source, in order to see whether investors from different parts of the world respond differently.

1.3 Research Questions

The study specifically addresses the following research questions:

1. How does macroeconomic volatility affect aggregate non-oil FDI inflow in Nigeria?
2. Does the origin of FDI affect how it responds to macroeconomic volatility?

1.4 Research Objectives

The objectives of the study are to:

a. ascertain how the volatilities of the exchange rate, inflation, the interest rate and output affect FDI inflow into Nigeria; and

b. determine whether the origin of FDI affects how it responds to macroeconomic volatility.

1.5 Research Hypotheses

1. FDI inflow is adversely affected by macroeconomic volatility.
2. The origin of FDI matters in how it is affected by macroeconomic volatility.

1.6 Scope of the Study

The study covers the period 1960 to 2008. The period was chosen because data on FDI inflow into Nigeria began to appear more frequently from the beginning of the 1980s, and because Nigeria experienced its greatest macroeconomic turbulence during the period, which should allow the study to capture many events in the economy that are useful for testing the hypotheses. Extending the study period back to 1960 also makes it possible to capture the long-run properties of the data, which are important in econometric analysis.

References

Asiedu, E. (2002). On the determinants of foreign direct investment to developing countries: Is Africa different? World Development, 30(1), 107–119. https://econpapers.repec.org/RePEc:eee:wdevel:v:30:y:2002:i:1:p:107-119

Ayoola, D. (2024). Impact of macroeconomic instability on foreign direct investment (FDI) in Nigeria: An analysis of GlaxoSmithKline, Kimberly-Clark, and Procter & Gamble (P&G) exits. Journal of Business and Economic Development. https://salford-repository.worktribe.com/output/3529018/impact-of-macroeconomic-instability-on-foreign-direct-investment-fdi-in-nigeria-an-analysis-of-glaxosmithkline-kimberly-clark-and-procter-gamble-pg-exits

BusinessDay. (2026). Nigeria returns to Africa’s top five FDI destinations as inflows double to $4bn. https://businessday.ng/africa/article/nigeria-returns-to-africas-top-five-fdi-destinations-as-inflows-double-to-4bn/

Jokosenumi, S. O., & Adesete, A. A. (2018). Modelling the effect of stock market volatility and exchange rate volatility on foreign direct investment in Nigeria: A new framework approach. Asian Economic and Financial Review, 8(12), 1482–1505.

Organisation for Economic Co-operation and Development. (2008). OECD benchmark definition of foreign direct investment (4th ed.). OECD Publishing.

Udoh, E., & Egwaikhide, F. O. (2008). Exchange rate volatility, inflation uncertainty and foreign direct investment in Nigeria. Botswana Journal of Economics. https://ajol.info/index.php/boje/article/view/60304