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Product Category: Projects
Product Code: 00004669
No of Pages: 58
No of Chapters: 5
File Format: Microsoft Word
Price :
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The
study seeks to empirically analyze the impact of exchange rate instability on
foreign direct investment in
1.2 Statement
of the Problem 6
1.4
Objectives of the Study 10
1.5 Hypotheses
of the Study 10
1.6 Significance
of the Study 11
1.7 Scope
and Limitation of the Study 11
2.1.1 The Optimal Currency Area (OCA) Theory
2.1.2 The Elasticity Theory of Trade and Exchange
2.1.4 The Flow Theory of Capital Movement
2.2.2 The Behavioural Pattern of Foreign Direct Investment and Exchange
Rate in Nigeria
2.2.4 Trends under the Exchange Control Era
2.2.5 Trends under the Flexible Exchange Rate
2.2.6 Trends under the Deregulated, Fixed and Dual Exchange Rate
Regimes
2.2.7 Exchange Rate Movements and Foreign Direct Investments
3.3.3 Error
Correction Mechanisms (ECM) 58
PRESENTATION AND ANALYSIS OF
RESULTS
4.3 Error
Correction Mechanism (ECM) 66
4.4 Implication
of the Study 68
SUMMARY OF FINDINGS,
CONCLUSION AND RECOMMENDATION
Table
4.1: Augmented Dickey Fuller Unit Root Test
Table
4.2: Johansen cointegration test for the series; FDI, EXC, RGDP & OPEN
The
developing countries of the world face a number of problems. The one of the
major problems is scarce financial resources, with the passage of time
investment needs to increase along with other things, these ne
eds
in the LDCs are fulfilled by the capital inflow from the developed nations
either in the form of aid or foreign direct investment (Ellahi and Ahmad,
2011). FDI is therefore, the key determinant of capital inflow that brings
technological spill over in the less developed countries (LDCs) by introducing
better production methods.
Exchange rates is defined as the domestic currency price
of a foreign currency, matter both in terms of their levels and their
volatility. 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.
Exchange
rate instability refers to the erratic fluctuation in exchange rate, which
could during periods of domestic currency appreciation or depreciation.
Exchange rate changes may lead to a major decline in future output, if they are
unpredictable and erratic. The exchange rate is therefore, an important
relative price as it has influence on the external competitiveness of the
domestic economy. Volatility of exchange rate is a sort of risk challenged to
international traders and investors engaged in FDI. So, we may conclude that
volatility of exchange rate is a factor that curtails the trade volume and
reduces the investment. This volatility when appears in developed nations
causes instability all over the world (Chege, 2009). It is a wide recognized
fact that exchange rate volatility in LDCs is the key factor to bring economic
instability all over the world (Chege, 2009).
The 1980s witnessed increased flows of investment around
the world. Total world outflows of capital in that
decade grew at an average rate of almost 30%,
more than three times the rate of world exports
at the time, with further growth experienced in the 1990s (Kosteletou and Liargovas, 2000). Despite the increased
flow of investment, especially, to developing
countries, Sub-Saharan Africa (SSA) countries
still lag behind other regions in attracting foreign direct investment. The uneven dispersion of FDI is a cause
of concern since FDI is an important source of
growth for developing countries. Not only can
FDI add to investment resources and capital formation,
it can also serve as an engine of technological development
with much of the benefits arising from positive spill
over effects. Such positive spill overs include transfers of production technology, skills, innovative capacity, and
organizational and managerial practices.
Given these significant roles of FDI in developing
economies, there have been several studies that tried
to determine the factors that influence FDI
inflows into these economies. One of such factors
that recently have been a source of debate is exchange rate and its volatility. The existing literature has been split
on this issue, with some studies finding a
positive effect of exchange rate volatility on
FDI, and others finding a negative effect. A positive effect can be justified with the view that FDI is export substituting.
Increases in exchange rate volatility between
the headquarters and the host country induce a
multinational to serve the host country via a local production facility rather than exports, thereby insulating
against currency risk (Foad 2005).
Justification for a negative impact of exchange rate volatility
on FDI can be found in the irreversibility literature
pioneered by Dixit and Pindyck (1994). A
direct investment in a country with a high
degree of exchange rate volatility will have a more risky stream of profits. As long as this investment is partially
irreversible, there is some positive value to
holding off on this investment to acquire more information.
Given that there are a finite number of potential direct investments, countries with a high degree of currency risk
will lose out on FDI to countries with more
stable currencies (Foad 2005). One of the
countries that fall into this category (countries with a high degree of currency risk) is
Except for some years prior to the introduction of the Structural
Adjustment Programme (SAP) in 1986, gross capital
formation as a proportion of the GDP was
dismally low on annual basis. It was observed
that aggregate investment expenditure as a share
of GDP grew from 16.9% in 1970 to a peak of 29.7% in 1976 before declining to an all-time low of 7.7% in 1985. Thereafter,
the highest was 11.8% of GDP in 1990, before
declining to 9.3% in 1994. Beginning from
1995, investment/GDP ratio declined significantly
to 5.8% and increased marginally to 7.0% in 1997 and remained there about till 2004 when 7.1% was recorded. On
the average, about four-fifth of
Since
the world has moved towards higher financial integration, a degree of openness
for foreign investments in many countries becomes higher. As both developed and
emerging economies continue to open their markets to attract foreign capital
flows and investors are becoming interested in diversifying their fund flows internationally, the role of foreign
investment is increasingly important.
The
exchange rate level effects on FDI through this channel relying on a number of
basic considerations. First, the exchange rate movement needs to be associated
with a change in the relative production costs across countries, and thus
should not be accompanied by an offsetting increase in the wages and production
costs in the destination market for investment capital. Second, the importance
of the “relative wage” channel may be diminished if the exchange rate movements
are anticipated. Anticipated exchange rate moves may be reflected in a higher
cost of financing the investment project, since interest rate parity conditions
equalize risk-adjusted expected rates of returns across countries. By this
argument, stronger FDI implications from exchange rate movements arise when
these are unanticipated and not otherwise reflected in the expected costs of
project finance for the FDI.
The sub-optimal investment ratio in
Consequently, the premium between the official and parallel market remained wide throughout the
period. This high exchange rate volatility in
Despite
all efforts, volatility in exchange rate still persists. Could the persistence
of the problem due to inappropriate policies or gaps in the studies already
carried out? This is what this study seeks to address and in this regards,
provide evidence of the impact of exchange rate instability on foreign direct
investment in
This research work
will seek to answer the following questions;
Ø Is
there any significant impact of exchange rate instability on foreign direct
investment in
Ø Could
there be bi-directional relationship between exchange rate instability and
foreign direct investment in
Ø Does
long-run relationship exist between exchange rate instability and foreign
direct investment in
The objectives of this research work are stated as follows:
1.
To ascertain how the Nigerian exchange rate instability has
contributed in the optimization of output and stabilization in the Nigerian
economy.
2.
To evaluate the degree of
causality existing between exchange rate instability and foreign direct
investment in
3.
To ascertain the extent
to which long-run relationship exists between exchange rate instability and
foreign direct investment in
H0 There is no significant impact of
exchange rate instability on foreign direct investment in
H0: There is no bi-directional relationship
between exchange rate instability and foreign direct investment in
H0: There is no long-run relationship existing
between exchange rate instability and foreign direct investment in
This
research work is multifaceted in purpose and significant in:
Helping
to document and analyse the current trend in the role of foreign direct
investment and exchange rate instability in the growth of the Nigerian economy
and evaluating the progress made from it during the past decade in attaining
long-term objectives of sustainable economic growth and improvement in the
quality of living future populations.
This research work
will be of great intellectual value to students of economics and other
discipline who would want to make further research on the impact of foreign
Direct Investment on the economic growth of
Lastly, it will
add to already existing body of knowledge on this topic as it will provides a
new window for further research.
The study would
cover the impact of exchange rate instability on foreign direct investment
(FDI) in
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