Analysis of the relationship between Exchange Rate, Interest Rate, Oil Price Shocks and Foreign Direct Investment on Economic Growth In Nigeria: 1985- 2017

Abstract

The study examined the effects of economic growth, exchange rate, interest rate, and oil price shocks on foreign direct investment in Nigeria between 1985 and 2017.The result of Var estimates of FDI is associated with 39.07% increase in FDI on average all things being equal (ceteris paribus). A percentage increase in economic growth (ECGT) account for 2.08% increase in FDI. A percentage increase in oil price (OILP) account for -2.80% decrease in FDI on average all things being equal (ceteris paribus). The FDI to sudden changes in the independent variables inPanel 2 shows that the response of ECGT to a shock in FDI; from the response of FDI to a shock in FDI initially has a noticeable impact on ECGT in period 1. From the 2 period the response gradually declined above its steady states value and remain positive in the position region. Meaning that shock to ECGT will have a positive impact on FDI both in short and long run. The Variance decomposition indicates the amount of information each variable contributes to the other variables in the model. It determines how more of the forecast error variance of each of the variables can be explained by exogenous shocks to the other variables. It identifies the predominant shocks that contribute more to the changes in the dependent variables in the model, in the short run one year forecast error, medium term 5 year forecast error and in the long run 10 year forecast error. The variability of FDI to changes in ECGT, EXCHR, INTR and OILP. ECGT contributes the most to changes in FDI both in the short run, medium and long run; followed by EXCHR and INT while OILP contributes the least to FDI. In conclusion: innovation and response must be consistent with intuition, economic theory expectation. For instance, our results are consistent because with good economic growth like infrastructure, investors tend to invest more, and this leads to more economic development and creation of jobs, creating demand for production, investment goes up leading to economic growth.The study recommended that there is need to improve the FDIs climate to take advantage of the new global interest in the affairs of the country by implementing sound macroeconomic policies, spurring innovation, improving the investment climate, establishing a transparent legal framework that does not discriminate between local and foreign investors and improving the provision of infrastructure and the government should implement policies that will make the foreign investment on oil sector more efficient and re-position it for economic growth in Nigeria.