THE IMPACT OF MACROECONOMIC UNCERTAINTY ON FOREIGN INVESTMENT INFLOWS IN NIGERIA

Abstract

The study estimates the effect of macroeconomic uncertainty on foreign investment inflows into the Nigerian economy. An annual times series data spanning the periods of 1970 – 2013 was used to specifically estimate the extent to which macroeconomic uncertainties have affected foreign direct investment (FDI) and foreign portfolio investment (FPI) inflows into the Nigerian economy. Also estimated was the price elasticity of macroeconomic uncertainties on foreign investment inflows. The estimation model adopted for the study follows the Real Option theoretical framework. The study further adopted an Error Correction Model (ECM) after confirmation of the long-run relationship between macroeconomic uncertainty variables and foreign investment indicators in Nigeria. The major findings from the study is that macroeconomic uncertainty variables included in the model, such as variability in consumer price index (INF), the ratio of total external debt to GDP (RDT), cost of capital, Political uncertainty/government commitment variable (POL) and the variability in the real effective exchange rate (RER) have significant and negative long-run effects on foreign investment inflows into Nigeria, especially the foreign portfolio investment. Also our findings revealed that domestic market size and the ratio of value of total export of goods and services to GDP (TXP) have positive and significant long-run effects on foreign investment inflows into Nigeria. The study further found that a unit increase in cost of capital will force FDI inflows to reduce by 80% and FPI to reduce by approximately 35% in Nigeria, when other factors were fixed. The study therefore recommended that to boost the confidence of foreign investors, the government must show increased commitment in creating favourable  investment climate, by reducing the increasing macroeconomic uncertainty and policy inconsistencies in the system, in order  to alleviate possible fear of expropriation.