A nation's high GDP, high exports, and influx of foreign direct investment all indicate its economic growth and stability; yet, exchange rate risk—that is, the possibility of a country's currency depreciating or appreciating—can also cause concern for international investors and the nation of origin. The uncertainty surrounding their currency exchange rate presents a formidable challenge: is it better for their economy to have low or high volatility, and does it have the potential to draw in or hinder FDI? The research used the Autoregressive Distributed Lag (ARDL) model to investigate the effect of exchange rate volatility on foreign direct investment inflows into Nigeria from 1986 to 2023. The study aims to determine whether the Nigerian government should impose more stringent measures on foreign direct investment flows while formulating strategies to ensure stable exchange rates. The ARDL bounds testing approach was utilized in the cointegration analysis to investigate the relationship between the variables in the model. The result of the analysis revealed that inflation and interest rates have a long-term negative effect on foreign direct investment inflows to Nigeria as a result of high currency volatility. Also, exchange rate fluctuations have a long-term, significant negative effect on foreign direct investment inflows into Nigeria, highlighting the concerns of international investors regarding currency instability in the country. The research recommends that Nigeria diversifies its economy in order to attract more Foreign Direct Investment.
Njoku et al. (Sun,) studied this question.
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