IIARD International Institute of Academic Research and Development

IIARD INTERNATIONAL JOURNAL OF BANKING AND FINANCE RESEARCH (IJBFR )

E-ISSN 2695-1886
P-ISSN 2672-4979
VOL. 9 NO. 3 2023
DOI: https://doi.org/10.56201/ijbfr.v9.no3.2023.pg1.12

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Does Foreign Direct Investment Affect Financial Stability in Developing Countries: The Nigerian Experience

Kolawole Ebire, Lucky O. Onmonya, Christopher Enny Ofikwu, Maurie Nneka Nwala

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Abstract

The relationship between Foreign Direct Investment (FDI) and financial stability is of increasing concern among economies. The volume and structure of FDI can affect the financial system's stability. This study examines the effect of FDI on financial stability in Nigeria between 2003:1 and 2019:4. The data were subjected to a stationarity test using the Augmented Dickey-Fuller test, and the test result shows that all variables were integrated in the order of 1. The Johansen cointegration test result showed a long-run relationship between all the dependent and independent variables. The hypotheses were tested using Error Correction Mechanism (ECM). It was found that the short runs deviations will adjust to their long-run equilibrium by 17.3% quarterly. The findings show that FDI as a percentage of GDP positively affects Nigeria's financial stability. In contrast, FDI as a percentage of fixed investment and net FDI have a significant negative effect on Nigeria's financial stability. The study, therefore, concluded that inflows of FDI play a significant role in the Nigeria’s financial stability. Based on the findings, the study recommends that authorities such as Ministry responsible for trade, commerce, and investment create an enabling investment environment such as regulations for protecting investors interests to attract FDI into the system.

keywords:

Net FDI, FDI as a percentage of GDP, FDI as a percentage of fixed investment, Financial stability

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References:

Adekunle, W. & Sulaimon, M. (2018). A re-examination of the relationship between foreign
capital flows and economic growth in Nigeria, Munich Personal RePEc Archive,
https://mpra.ub.uni-muenchen.de/87754/

Adeola, O. O. (2017). Foreign Capital Flows and Economic Growth in Selected Sub-Saharan,
A Ph.D Thesis submitted to Stellenbosch University https://scholar.sun.ac.za

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