The Effect of Exchange Rate Volatility on FDI in Nigeria: Evidence from Lagos Free Trade Zone
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Background of the Study
Foreign direct investment (FDI) plays a critical role in economic development by providing capital, technology, and expertise to host countries. In Nigeria, the Lagos Free Trade Zone (LFTZ) has emerged as a key destination for FDI due to its strategic location, tax incentives, and infrastructure. However, exchange rate volatility poses a significant challenge to attracting and retaining FDI.
The Nigerian Naira has experienced frequent fluctuations against major currencies, driven by economic instability, crude oil price shocks, and policy uncertainties (Olawale & Ekeh, 2023). These fluctuations create risks for foreign investors, reducing the attractiveness of investments in the LFTZ. This study examines the impact of exchange rate volatility on FDI in Nigeria, using the Lagos Free Trade Zone as a case study.
Statement of the Problem
The volatility of Nigeria’s exchange rate is a major concern for foreign investors, leading to uncertainties in returns on investment. While the LFTZ was established to attract FDI through incentives and infrastructure, the persistent instability of the Naira undermines these efforts. Previous studies have focused broadly on FDI inflows into Nigeria, but there is limited research on how exchange rate volatility specifically affects investment decisions in free trade zones like the LFTZ. This study seeks to address this gap.
Objectives of the Study
1. To analyze the trends of exchange rate volatility in Nigeria from 2023 to 2025.
2. To assess the impact of exchange rate volatility on FDI inflows in the Lagos Free Trade Zone.
3. To propose policy recommendations for mitigating exchange rate risks to attract more FDI.
Research Questions
1. What are the trends of exchange rate volatility in Nigeria during the study period?
2. How does exchange rate volatility affect FDI inflows into the Lagos Free Trade Zone?
3. What policies can mitigate the effects of exchange rate volatility on FDI?
Research Hypotheses
1. Exchange rate volatility negatively affects FDI inflows into the Lagos Free Trade Zone.
2. Stable exchange rates are positively correlated with higher FDI inflows.
3. Policy measures to stabilize the Naira enhance FDI attraction in the LFTZ.
Scope and Limitations of the Study
The study focuses on the relationship between exchange rate volatility and FDI inflows in the Lagos Free Trade Zone. Limitations include challenges in obtaining accurate investment data and external factors influencing FDI beyond exchange rate fluctuations.
Definitions of Terms
• Exchange Rate Volatility: Fluctuations in the value of a country’s currency relative to foreign currencies.
• Foreign Direct Investment (FDI): Investments made by foreign entities in the business interests of another country.
• Lagos Free Trade Zone (LFTZ): A special economic zone in Lagos designed to attract foreign and domestic investment through incentives.
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