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EXCHANGE RATE VOLATILITY, STOCK MARKET PERFORMANCE AND FOREIGN DIRECT INVESTMENT IN NIGERIA

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ABSTRACT

Foreign Direct Investment (FDI) is an international flow of capital that provides a parent company or multinational organization with control over foreign subsidiaries. Basically, foreign capital flows refer to movement of financial resources from one country to another, thereby enhancing the economic growth and development of the host country. The host country is typically constrained by low domestic savings and investment (Obiechina, 2010). By 2005, inflows of FDI around the world rose to $916 billion, with more than half of these flows received by businesses within developing countries (World Investment Report, 2006). Foreign capital flows can be decomposed into official development assistant, export credits and foreign private flows. Foreign private investment is the stock of physical assets and financial securities held in one country by investors of another country. While the former is called Foreign Direct Investment (FDI), the latter is called Foreign Portfolio Investment (FPI). Foreign capital flows are influenced by an array of factors which include the stability or otherwise of macroeconomic variables, insecurity, corruption and other socio-political factors (Edo, 2011).  One of the many influences on FDI activity is the behavior of exchange rates. Exchange rates, defined as the domestic currency price of a foreign currency, matter both in terms of their levels and their volatility (Odili, 2014). Exchange rates can influence both the total amount of foreign direct investment that takes place and the allocation of this investment spending across a range of countries (Goldberg, 2006). When a currency depreciates, meaning that its value declines relative to the value of another currency, the exchange rate movement has two potential implications for FDI. First, it reduces that country’s wages and production costs relative to those of its foreign counterparts. All things being equal, the country experiencing real currency depreciation has enhanced “locational advantage” or attractiveness as a location for receiving productive capacity investments. By this “relative wage” channel, the exchange rate depreciation improves the overall rate of return to foreigners contemplating an overseas investment project in this country (Goldberg, 2006).

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