An Appraisal of FDI’s Influence on Nigeria’s Balance of Payments
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Background of the Study
The balance of payments (BOP) is a comprehensive record of a country’s economic transactions with the rest of the world. In Nigeria, Foreign Direct Investment (FDI) plays a crucial role in shaping the BOP by affecting the capital and financial accounts. FDI inflows can improve the BOP by providing a stable source of external financing, reducing reliance on volatile portfolio investments, and fostering long-term economic relationships (Ibrahim, 2023). At the same time, the repatriation of profits by foreign investors can exert downward pressure on the current account, potentially offsetting some of the positive impacts of FDI.
Recent trends in Nigeria show an increase in FDI inflows, driven by reforms aimed at improving the investment climate and diversifying the economy. However, the net effect of FDI on the BOP is ambiguous. While increased FDI can strengthen the capital account, its influence on the current account depends on the behavior of multinational enterprises and the extent to which investment translates into domestic production and exports (Chukwu, 2024). This study seeks to appraise FDI’s overall influence on Nigeria’s BOP by analyzing the interplay between FDI inflows, profit repatriation, export performance, and other balance of payments components over the period 2020 to 2024 (Afolabi, 2025).
Statement of the Problem
Despite the potential benefits of FDI in strengthening Nigeria’s capital account, the overall effect on the balance of payments remains uncertain. While FDI inflows can provide a stable source of external financing, they may also lead to increased profit repatriation and a widening current account deficit. This paradox poses a significant problem for policymakers aiming to achieve a balanced and sustainable external position (Ibrahim, 2023). Moreover, variations in the sectoral composition of FDI and the efficiency of domestic production systems may further complicate the relationship, resulting in inconsistent impacts on export performance and, ultimately, the current account (Chukwu, 2024).
The problem is to determine whether FDI contributes to an improved overall balance of payments or if its benefits are neutralized by adverse effects on the current account. Addressing this issue is critical for designing policies that maximize the positive aspects of FDI while mitigating its potential drawbacks. This study will examine the mechanisms through which FDI affects both the capital and current accounts, identify the key factors that influence profit repatriation, and propose policy interventions to enhance the net positive impact of FDI on Nigeria’s external balance (Afolabi, 2025).
Objectives of the Study
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To evaluate the influence of FDI on Nigeria’s balance of payments.
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To identify the channels through which FDI affects both the capital and current accounts.
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To propose policy measures that enhance the net positive impact of FDI on the BOP.
Research Questions
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How does FDI impact the different components of Nigeria’s balance of payments?
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What are the key channels through which FDI influences profit repatriation and export performance?
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What policies can optimize the net contribution of FDI to the BOP?
Research Hypotheses
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FDI inflows improve the capital account, leading to a net positive effect on the BOP when profit repatriation is minimized.
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The sectoral allocation of FDI moderates its impact on the current account.
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Policy measures that encourage domestic value addition will enhance the positive effects of FDI on the BOP.
Scope and Limitations of the Study
The study focuses on Nigeria’s balance of payments and FDI data from 2020 to 2024. Limitations include the difficulty in accurately measuring profit repatriation and external shocks affecting trade balances.
Definitions of Terms
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Balance of Payments (BOP): A record of all economic transactions between residents of a country and the rest of the world.
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FDI: Investments by foreign entities in domestic economic activities.
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Profit Repatriation: The process by which foreign investors transfer profits back to their home countries.
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