Sensitivity of Foreign Direct Investment to Monetary Policy Dynamics in Nigeria

Abstract

Due to the recent slowdown in foreign direct investment in Nigeria, this study considered it necessary to look at the monetary policy dynamics of Nigeria to ascertain if there are gaps in transmission processes.  The study made use of annual data from 1988 to 2019 on Foreign Direct Investment (FDI) and four other monetary policy variables; Liquidity Ratio, Monetary Policy Rate, Prime Lending Rate and Degree of trade Openness collected from the globaleconomy.com and Central Bank of Nigeria Statistical Bulletin to examine the relationship between Foreign Direct Investment (FDI) and monetary policy dynamics using Autoregressive Distributive Lags. The major findings are; that monetary policy rate and degree of trade openness have negative and significant relationship with foreign direct investment, while liquidity ratio and prime lending rate insignificantly relate to the foreign direct investment. However, since monetary policy rates is disclosed to significantly but negatively relate to foreign direct investment, the central bank of Nigeria should reduce further the rate in order to woo foreign investors to do more business in Nigeria. Again, since globalization and trade liberalization have totally removed the issue of countries being in the state of autarky (closed economy), most of the beggars thy neighbours policies should be discarded at least to enhance the degree of trade openness. The Central Bank of Nigeria should also conduct the monetary policy with the aim of encouraging foreign investment in Nigeria.

Keywords: FDI, Monetary Policy, ARDL, Nigeria

DOI: 10.7176/RJFA/11-16-06

Publication date:August 31^st 2020