How Monetary Policy and Macroeconomic Instability Influence Foreign Direct Investment?

Abstract

Purpose: The study aimed to examine how Foreign Direct Investment (FDI) is responsive to monetary policy and macroeconomic instability. The study considers how interest rate, exchange rate, inflation rate, money supply, and unemployment rate impact FDI inflows. Design/Methodology/Approach: The data were obtained through the Central Bank of Nigeria (CBN) Statistical Bulletin and the World Bank indicators for thirty-five years (1991-2024). The Autoregressive Distributed Lag (ARDL) model is utilized in order to take into consideration both short-run and long-run dynamics, and the diagnostic tests prove the model's reliability and stability. Findings: Thel findings reveal that previous FDI inflows play a major role in the present investment. In the short run, an appreciation of the exchange rate and a rise in the interest rates have a negative impact on FDI, whereas inflation and unemployment create a sense of uncertainty. The supply of money usually promotes investment by increasing liquidity. The results obtained in the long run show that inflation is a major contributor to diminishing FDI, but money supply has a positive contribution to investment. Implications/Originality/Value: The implication of this discovery is that these macroeconomic variables all move together with foreign direct investment in the long-run. Policy makers should have moderate and predictable interest rates, stable exchange rates, tame inflation, and employ employment-creation policies in order to maintain a stable, investor-friendly environment that will increase its capacity to attract and retain foreign investment.