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Impact Of Foreign Direct Investment, Interest Rate And Exchange Rate On Economic Growth In Nigeria

This paper
 seeks to assess the impact of foreign direct investment (FDI), Interest rate and exchange rate on economic growth in Nigeria on the basis manual data from 1986 to 2014 The empirical analysis starts by analyzing the time series properties of the data which is followed by examining the nature and sign of leant relationship, existing among the variable. Furthermore, OLS Multiple Regression model and correlation analysis technique arc adopted and analysis is made based on Thinning eclectic theory of FDI and Mundel-Fleming of interest rate and exchange rate.

Results from multiple regression model and correlation show that the parameter of FDI and exchange rate GDP are positive and statistically sign significant, while parameter of interest rate GDP is negative and statistically insignificant. That a very strong positive correlation exists between FDI inflow, exchange rate and GDP respectively, while interest rate on the other hand is weak and negatively related to GDP. The study recommends FDI inflow, controlling interest rate and production drive depreciation of exchange rate as important tools in fostering economic growth in Nigeria therefore, it becomes very important and urgent for Nigerian government to courageously and sincerely address this menacing insecurity situation and corruption in both public and private sectors. So that foreign investors see Nigeria as an investment friendly environment; where they can operate their businesses with peace of mind and make their contribution to economic growth of our great nation.  


Cover Page
Table of Contents

1.1 Introduction
1.2 Statement Of The Problem
1.3 Aim And Objectives Of The Study
1 .4 Research Hypothesis
1.5 Scope And Limitations Of The Study
1.6 Significance Of The Study

CHAPTER TWO: Literature Review and Theoretical Framework
2.1 Introduction
2.2 Concept of Foreign Direct Investment and Economic Growth
2.3 Concept of Interest Rate and, Economic Growth
2.4 Concept Of Exchange Rate And Economic Growth
2.4.1 Determining An Exchange Rate Regime
2.4.2 Driving Force for the Naira Exchange Rate Movement in Nigeria
2.5 Empirical Studies
2.6 Theoretical Framework
2.6.1 The Eclectic Paradigm Of Dunning
2.6.2 The Mundell-Fleming Model Connection

CHAPTER THREE: Research Methodology        
3.1 Introduction
3.2 Type and Source of Data
3.3 Method of Measurement
3.4 A Priori Expectations
3.5 Technique for Analysis

CHAPTER FOUR: Result Presentation and Analysis
4.1 Introduction
4.2 Estimate Results
4.3 Result Interpretation
4.4 Testing of Hypothesis
4.5 Limitation Inherent in the Computation

CHAPTER FIVE: Summary, Conclusion and Recommendations          
5.1 Summary 
5.2 Conclusion
5.3 Recommendations


The question of how foreign direct investment (FDI), interest rate and exchange rate are interlinked and affect economic growth of developing nations has recently become a “hot topic” in the international debate on globalization. Meanwhile, a widespread belief within policy circle is that Foreign Direct Investment (FDI) enhances the productivity of host countries and promotes economic development. This notion stems from the fact that FDI may not only provide direct capital financing, but also create positive externalities via the adoption of foreign technology and know-how (Alfaro et al, 2009). In view of this, FDI Inflow has been described as investment made so as to acquire a lasting management interest (minimum of 10% of voting stocks) and at least 10% of equity shares in an enterprise operating in another country other than that of investors’ country (Mwillima, 2003; World Bank, 2007).

There is no doubt that the Nigerian economy has been relatively open over the years as a result of increasing economic relations with the rest of the world. Nigeria as a country endowed with natural resources and attribute of large market size, is one of the top three leading African countries that constituently received FDI in the past decade from United Kingdom, United State of America and Western Europe among others. however, the FDI inflows to Nigeria are spread across various sectors such as; mining and quarrying, manufacturing and processing, agriculture, transport and communication, building and construction, trading and business services, and miscellaneous services.

The historical review of interest rate, on one side, shows that the Nigerian macro- economy saw different interest rates for different sectors in 1970s through the mid 1980s under regulation (1960-sss1985). The preferential interest rates were based on the assumption that the market rate, if universally applied, would exclude some of the priority sectors. Interest rates were, therefore, adjusted periodically with ‘visible hands’ to promote increase in the level of investment in the different sectors of the economy. For example agriculture and manufacturing sectors were accorded priority.

Thereafter, in 1986, the inception of interest rates deregulation, the government of Nigeria commenced a market determined interest rates regime. With the adoption of SAP in 1986 the financial sector was gradually liberalized and domestic interest rates were deregulated. In the course of this process the focus has shifted from the impact of interest rate deregulation to the determination of interest rates in a deregulated economy. On 31 July, 1987, The CBN announced the deregulation of interest rates, that is, abolished (with effect from 1 August 1987) all controls on interest rates (Anyamvu, 1990).

Exchange rate management, on the other side, has been a topical issue among academicians and policy makers for a very long time. This started predominantly when the Gold standard collapsed in the 1930’s and subsequent emergence of the Bretton wood system of adjustment peg from the 1940’s, through the espousal of flexible exchange rate given by the developing nation in 1970 and those carrying out structure reforms in the 1980’s as well as in the wake of the currency crises in developing economics in the 1 990’s. In Nigeria, the management of the exchange rate is carried out by the Central Bank of Nigeria. Following the adoption of Structural Adjustment Policy (SAP) in 1986, the country moved from a peg regime to a flexible exchange rate regime.

Based on this background to the study, this research seeks to examine the impact of FDI Inflow, Interest rate and Exchange rate on Economic Growth in Nigeria over a period of 26 years (1986-2011).


Over the years, Nigeria government has been spending heavily on national defence and security in order to create business enabling environment for foreign investors among other objectives (2012 budget is enough to prove this assertion). Despite this generous investment made by the federal government of Nigeria to attract FDI inflow and allow exchange value of’ naira to be determined in foreign exchange market by the forces of the demand and supply, foreign investors still consider investing into Nigerian economy as highly risky due to inadequate power supply and insecurity; ethnic conflict, kidnapping, vandalism and presently the menacing activities of Boko Haram. These have tarnished the image of Nigeria in International financial market, hence foreign investors always demand for high cost of capital (interest rate) on successful capital inflow to the country.

Analyzing Nigerian economic growth in global context based on foreign direct investment (FDI) inflow to the economy; Nigeria is one of the economies with great demand for goods and services and has attracted some FDI over the years. The amount of FDI inflow into Nigeria has reached US$2.23 billion in 2003 and it rose to US$5.31 billion in 2004 (a 138 % increase) this figure rose again to US$9.92 billion (a 87% increase) in 2005.

The figure however declined slightly to US$9.44 billion in 2006 ( While the lending rate of deposit money banks has reached 20.71% 2003 and declined slightly to 19.18% in 2004, as at 2011 the weighted average lending rate of deposit money banks was 16.02%. On the exchange rate, despite various efforts by the government to maintain a stable exchange rate, the naira has depreciated throughout the 80’s. It depreciated from NO. 61 in 1981 to N2.02 in 1986 and further to N7.901 in 1990, all against the US dollar. The policy of guided or managed deregulation pegged the Naira at N21.886 against the US dollar in 1994. Further deregulation pushed it to N92.693=$1.00 in 1999.

It depreciated further to N120.97 in 2002 and N133.5 in 2004. Thereafter, the exchange rate appreciated to N132.15 in 2005 and later N118.57 in 2008. Towards the end of 2008 when the Global Financial Crisis took its toll, the naira depreciated to N150.0 124 at the end of 2009. As at the end of 2010 and 2011 the naira depreciated to N156 and N165 respectively.
Presenting all these analyses, the questions that come to mind are:

v  Do these FDIs, interest rates and exchange rates actually contribute to economic growth in Nigeria?

v  To what extent the FDI inflow, interest rate and exchange rate influence economic growth in Nigeria1?

v  Can attracting FDI inflow, controlling interest rate and flexing exchange rate be employed as important tools in fostering economic growth in Nigeria?

v  • What are the trends and composition of FDI in Nigeria from (1986-2011)?

v  What are the trends and determinants of Interest rate and exchange rate in Nigeria from (1986-2011)?

v  How can Nigeria create a secured and friendly investment environment to attract foreign investors and achieve favourable exchange rate and interest rate?

Therefore, if FDI, interest rate and exchange rate actually contribute to growth, then the sustainability of them is a worthwhile activity and a way of achieving their sustainability is by identifying the factors contributing to their growth with a view to ensuring their enhancement.

The main aim of the study is to examine interlink relationship that exists between FDI inflows, Exchange rate, Interest rate and economic growth in Nigeria over a period of 30 years (1986-2014).
Other specific objectives are:

  1. Toassess the impact of FDI inflow, Exchange rate and Interest rate on economic growth in Nigeria from (1986-2014).
  2. To explore the determinants of exchange rate and interest rate in the global economy in relation to Nigeria.
  3. To assess the trends and compositions of FDI as well as the trends of interest rate and exchange rate from (1986-2014).

4.To offer concrete recommendations based on the research findings.


This research is conducted to confirm or disconfirm some tentative statements.
And these tentative statements are presented in hypothetical form (as below).
HoFDI Inflow, Interest rate and exchange rate do not have significant impacts on economic growth in Nigeria. Thus, much emphasis should not be placed on them in fostering Nigerian economic growth.

The study covers periods of 30 years (from 1986 to 2014) to assess inflow of FDI, trends of interest rate, exchange rate and economic growth in Nigeria.
While the limitations and challenges of the study are:

Applicability of the recommendations: Since the recommendations are made based on the findings obtained from data collected on economic situations in Nigeria about the selected variables, therefore the recommendations may not be applicable to a country other than Nigeria.

  • Difficulty in having access to recent statistical data:One of the challenges to this study was having access to recent statistical data on the variables under study.
  • Finance:Considering the fact that research work is resource consuming, therefore the little resources available was used to get as much information as possible.
  • Time constraints:There was also time constraints as other academic work needed to be given attention.
    However, to accomplish the aims and objectives of the study, the challenges were strategically tackled and overcome.

On completion, this research will assist in knowing whether or not FDI, controlling interest rate and flexing (depreciating) foreign exchange rate can be employed as important tools in fostering economic growth in Nigeria. The findings of this study will also help the federal government of Nigeria to know how important is the need to address this present insecurity situation, corruptions and massive importation of foreign goods at detriment o[ domestic productivity and device the best way of addressing them. 


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