Effect of exchange rate dynamics on trade openness and foreign direct investment; Empirical evidence from Nigeria.

Abstract: This work examines the effect of exchange rate dynamics on trade openness and foreign direct investment in regards to Nigeria. This work examines Exchange rate as a pivotal macroeconomic variable used as a parameter for determining international competitiveness and it serves as an indicator of competitiveness for any country’s currency. The study employed ex-post facto design, data spanning from 1986-2023 was gotten from the CBN statistical bulletin and the study employed the Robust Least Square model, alongside other econometric tools, like the, Jarque-Bera statistic and Augmented Dickey fuller, in testing the following variables, exchange rate, trade openness and foreign direct investment. The findings revealed that exchange rate has a significant negative effect on trade openness in Nigeria and a significant positive effect on foreign direct investment (FDI) in Nigeria. The work concludes that the negative relationship between exchange rate and trade openness suggests that currency depreciation reduces trade openness in Nigeria, indicating that as the Naira depreciates, international trade declines while the positive relationship between exchange rate and FDI confirms that Naira depreciation attracts more foreign direct investment into Nigeria. It was based on the findings that the following recommendations were made; Trade Policy reforms in Nigeria should focus on improving trade facilitation through better infrastructure, streamlined customs procedures, and reducing trade barriers. Creating a stable and investor-friendly environment is crucial, this includes protecting property rights, enhancing the rule of law, reducing bureaucracy, and ensuring stable electricity and transportation infrastructure.

exchange rate, trade openness, foreign direct investment, macroeconomic variables, trade policy

1. Adejoke M. A., Bosede C. O., and Eyitayo O. O., (2024). Effect of Exchange Rate on Foreign Direct Investment in Nigeria. ABUAD Journal of Social and Management Sciences (AJSMS), 5(2), 302-318. [Google Scholar] [Crossref]

2. Adokwe, E. I., Agu, A. O. and Maduka, A. C. (2019). Exchange rate volatility and foreign direct investment: The Nigerian experience. Journal of Business & Economic Policy, 6(4), 1078-1098. [Google Scholar] [Crossref]

3. Alade, O. T., and Adeleke, A. O. (2021). Exchange rate dynamics in Nigeria: Evidence from the foreign exchange market. International Journal of Economics, Commerce, and Management, 9(5), 1-17. [Google Scholar] [Crossref]

4. Alagidede, P., and Muazu, I. (2016). An analysis on the causes of real exchange rate volatility and its effect on economic growth in Ghana. International Growth Center. [Google Scholar] [Crossref]

5. Ayuba, K. (2022). Determinants of Exchange Rate Fluctuations in Nigeria (Unpublished Master's thesis). Kwara State University, Nigeria. [Google Scholar] [Crossref]

6. Bakoulas, J.T., Baum, C. and Caglayan, M. (2012). Exchange rate effect on the volume and volatility of trade Flows. Journal of International Money and Finance. 21(1): 481-486. [Google Scholar] [Crossref]

7. Benson, E., Eya, C. I., and Yunusa, A. (2019). Effect of exchange and interest rates on foreign direct investment in Nigeria 2006-2018. International Journal of Contemporary Research and Review, 10(7), 8-19. [Google Scholar] [Crossref]

8. Bhaskar, G. (2005). “Trade Liberalization in Agriculture Lessons from the First 10 Years of the WTO” AERC Nairobi: Initiatives Publishers. [Google Scholar] [Crossref]

9. Cassel, G. (1918). Abnormal deviations in international exchanges. Economic Journal, 28(112), 413-415. [Google Scholar] [Crossref]

10. Central Bank of Nigeria (CBN) (2021). Annual Economic Report 2021. [Google Scholar] [Crossref]

11. Dabwor, T. D., Ezie O., and Tukur, D. M. (2019). Effect of Nominal Exchange Rates on Nigeria’s Balance of Payments: 1986-2016. Benue Journal of Social Sciences, 6(10), 35-52. [Google Scholar] [Crossref]

12. Danmola, R. A. (2013). The impact of exchange rate volatility on the macro economic variables in Nigeria. European Scientific Journal, 9(7), 152-165. [Google Scholar] [Crossref]

13. Emeje, Y. S., and Sunday, A. A., (2019). Impact of Exchange Rate on Selected Macroeconomic Variables in Nigeria, 1986- 2017. , 2(1), 32-54. [Google Scholar] [Crossref]

14. Fleming, J. M. (1962). Domestic financial policies under fixed and floating exchange rates. IMF Staff Papers, 9(3), 369-380. [Google Scholar] [Crossref]

15. Githaiga, P. N., & Kilong’i, A. W. (2023). Foreign capital flow, institutional quality and human capital development in sub-Saharan Africa. Cogent Economics & Finance, 11(1), 2162689. [Google Scholar] [Crossref]

16. Huber, P. J. (1981). Robust Statistics. John Wiley & Sons. [Google Scholar] [Crossref]

17. Kelikumw, I. and Nwani, S., (2019). A Vector Autoregression Analysis of the Efficacy of External Reserves Management on Exchange Rate Stability: Evidence from Nigeria. Journal of Economics Management and Trade, 24(5), 1-11. [Google Scholar] [Crossref]

18. Krugman, P., & Obstfeld, M. (2009). International Economics: Theory and Policy. Pearson Education. [Google Scholar] [Crossref]

19. Latif, R and Lefen, L., (2018). The effect of exchange rate volatility on international trade and foreign direct investment (FDI) in developing countries along “one belt and one road”. International journal of financial studies. 6(86), 1-22. [Google Scholar] [Crossref]

20. Maronna, R. A., Martin, R. D., & Yohai, V. J. (2006). Robust Statistics: Theory and Methods. John Wiley & Sons. [Google Scholar] [Crossref]

21. Moayed, M., Haghighat, A., Zare, H., and Khodaparast shirazi, J., (2023). The effects of trade openness and some macroeconomic variables on exchange rate volatility in Iran. International journal of nonlinear analysis and application (IJNAA), 14(1), 2351-2360. [Google Scholar] [Crossref]

22. Mundell, R. A. (1963). Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economics and Political Science, 29(4), 475-485. [Google Scholar] [Crossref]

23. Nelson, C.N., Fredrick, O.A., and Nathaniel, E.U., (2016). Trade Openness and Exchange Rate Fluctuations Nexus in Nigeria. European Journal of Scientific Research, 138(3), 139-144. [Google Scholar] [Crossref]

24. Nwanji, T. I., Howell, K. E., Faye, S., Otekunrin, A. O., Eluyela, D. F., Lawal, A. I., and Eze, S. C. (2020). Impact of foreign direct investment on the financial performance of listed deposit banks in Nigeria. International Journal of Financial Research, 11(2), 323-347. [Google Scholar] [Crossref]

25. Obstfeld, M., & Rogoff, K. (1995). Exchange rate dynamics redux. Journal of Political Economy, 103(3), 624-660. [Google Scholar] [Crossref]

26. Ojo, M.O. (2012). The Role of the Autonomy of the Central Bank of Nigeria (CBN) in promoting macroeconomic stability. Central Bank of Nigeria Economic and Financial Review, 38(1); 1-27. [Google Scholar] [Crossref]

27. Okonkwo, J. J. (2019). Exchange rate variation and Nigeria's balance of trade. Discovery Journal, 55(283), 361-366. [Google Scholar] [Crossref]

28. Okonkwo, J.J., Osakwe, C.I., and Nwadibe, C.E., (2021). Exchange rate and foreign direct investment in Nigeria, 1981-2018. International journal of academic research in business and social sciences. 11(1), 213-232. [Google Scholar] [Crossref]

29. Oriavwote, V.E. and Oyovwi, D.O. (2012). The Determinants of Real Exchange Rate in Nigeria. International Journal of Economics and Finance. 4 (8): 150-161 [Google Scholar] [Crossref]

30. Oyejide, T. A., (1990). “Supply response in the context of structural adjustment in sub-Saharan Africa”, AERC Special Paper 1 Nairobi: Initiatives Publishers. [Google Scholar] [Crossref]

31. Rasaq, A.D. (2013).The Impact of Exchange Rate Volatility on the Macro Economic Variables in Nigeria European. Scientific Journal, 9(7), 1857 – 7881 [Google Scholar] [Crossref]

32. Rodrik, D. (2018). Straight Talk on Trade: Ideas for a Sane World Economy. Princeton University Press. [Google Scholar] [Crossref]

33. Rogoff, K. (1996). The purchasing power parity puzzle. Journal of Economic Literature, 34(2), 647-668. [Google Scholar] [Crossref]

34. Rousseeuw, P. J., & Leroy, A. M. (1987). Robust Regression and Outlier Detection. John Wiley & Sons. [Google Scholar] [Crossref]

35. Sachs, J., & Warner, A. (1995). Economic reform and the process of global integration. Brookings Papers on Economic Activity, 1995(1), 1-118. [Google Scholar] [Crossref]

36. Willwamson, J., (1994). Estimating Equilibrium Exchange Rates.https://econpapers.repec.org/RePEc:iie:ppress:17 [Google Scholar] [Crossref]

• Patriarchy and Gender Roles in Shobhaa De's Second Thoughts and Easterine Kire’s Life on Hold
• Comparative Effects of Zeolite and Fly Ash on Soil Properties and Agricultural Productivity
• Assessing Interrelationships among Banking Satisfaction, Cooperative Perspectives and Rural Service Beliefs in Cooperative Banking in Northern Nigeria
• High-Performance Alloys and Composites’ Applications in Production Engineering
• Integrating Tidal Energy into Sub-Saharan Africa’s Power Mix: A Strategic Framework for Renewable Energy Expansion