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EMPIRICAL ANALYSIS OF SELECTED DETERMINANTS OF 

CAPITAL FLOW IN NIGERIA 

 

1Dr. Saviour Sebastian Udo and 1Dr. Endurance G. Udo 

1Department of Economics, Akwa Ibom State College of Education, Afaha Nsit, Akwa Ibom State, 

Nigeria. 

sasedo2016@gmail.com  

DOI: https://doi.org/10.5281/zenodo.14871051 

 

ABSTRACT: This study evaluates how selected factors have influenced capital inflow in Nigeria. 

This study observes the fact that Capital inflow may be unstable and threatening to the Nigerian 

economy if an in-depth study of selected determinants of the flow in Nigeria is not investigated. By 

this observation, the study uses annual time series data collected from the Central Bank of Nigeria to 

cover 1986 to 2025. This study uses a multiple regression to analysis the variables in the model and 

such includes cointegration and error correction method of analysis. The study in the cause of the 

investigation finds out that external factors like external debt, foreign exchange 

reserve, and foreign interest rate are the major factors influencing capital flows in Nigeria and this 

flow is grouped into foreign direct investments and foreign portfolio Investments. The results further 

reveal that, domestic macro-economic variables such as inflation rate, real gross 

domestic products and external debts, are the major factors influencing capital flows on the long run 

in Nigeria. Based on the results of the findings, the study makes the following recommendations and 

these include: policy measures designed to direct long run capital inflows and changing the short run 

patterns of the capital flow into the Nigerian economy. The study also recommends that clumsy inflow 

of portfolio investment should be lessened by using appropriate policies. It further recommends that 

agents of government and its authorities should put in place machineries that will make the domestic 

mailto:sasedo2016@gmail.com
https://doi.org/10.5281/zenodo.14870639


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capital market more attractive to foreign investors to invest in Nigeria.  The study also recommends 

that appropriate portfolio management policies which will influence currency composition and choice 

of investment instruments that will reflect a country's precise policy settings and conditions should 

be put in place by the government. Further, it is equally recommended that sound reserve 

management policies and practices to improve the flow should be used by the government. Above all, 

the study recommends a healthy macroeconomic and financial system that will attract quality foreign 

investors into Nigeria for profitable investment. 

 

Keywords: Exchange Rate, Foreign Direct Investment, Inflation, Foreign Portfolio Investment,  and 

Capital Flow. 

 

 

INTRODUCTION 

1.0 Background to the Study 

 Capital flow refers to the movement of capital, such as money, investments, or assets, from one country, 

region, or economic entity to another. This movement can occur through various channels, including, 

foreign Direct Investment (FDI): Direct investment in a foreign country, such as building a factory or 

acquiring a company, portfolio Investment etc. This Investment can be in foreign financial assets, such 

as stocks, bonds, or mutual funds. The FDI can be in form of bank loans which include: Cross-border 

lending between banks or financial institutions. The movement can also be in form of remittances: 

transfers of money by individuals working abroad to their home countries. Capital flows can be 

classified into several types, including: Inward capital flow: Capital entering a country, such as foreign 

investment or loans and outward capital flow: Capital leaving a country, such as domestic investment 

abroad or repayment of foreign loan (net capital flow which means the difference between inward and 

outward capital flows). Capital flows play a crucial role in the global economy such as: facilitating 

economic growth and providing access to foreign capital. Countries can finance development projects, 



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improve infrastructure, and increase economic growth with the help of foreign aid. Nations can also 

promote economic integration which include capital flows that help integrate economies globally, 

fostering trade, helping in investment, and economic cooperation. Overall, capital flows are essential 

aspect of the global economy, and understanding their dynamics is crucial for policy makers, investors, 

and businesses.  

We can see Foreign direct investment (FDI) as an investment which is fix near directing possession in 

a business enterprise in local country by an entity based in external country. It is one of the key sources 

of capital inflows to less developed economies. This is from the technological advanced economies to 

developing countries themselves. This has been broadly taken to be significant in leading to growth in 

productivity from advanced nations of the world. Foreign Direct Investment is important to any nation. 

Sub-Saharan African (SSA) nations in general, and particularly Nigeria has been the main beneficiary 

of high-tech spill overs, job creation, improved managerial skills, high educational advancement, 

competitive markets and other benefits from these inflows to the nation. According to literatures, the 

flow of goods, services, and capital in and out of the nation are influenced by political and legal 

atmosphere of the host nation. Physical and social infrastructure, indigenous technology, inflationary 

pressure, domestic savings, fiscal and monetary policy, among other macroeconomic factors influence 

the variables. Worthy of addition to the above assertions are, two very vital factors that foreign investors 

consider before letting their goods move to any nation and these are risks related to exchange rate and 

its volatility in any of the countries. 

Exchange rate in this study is seen as the price of one country’s currency in terms of another. Exchange 

rate and is a vital macroeconomic variable viewed as a pointer to competitiveness of the currency of any 

country. Exchange rate, as one of the most vital prices in an open economy, is influenced by foreign 

flow of goods, services, and capital among nations of the world. This flow therefore leads to a strong 

pressure on balance of payments, inflation and other macroeconomic variables. It should be noted that, 

instability in exchange rate is likely going to lead to currency devaluation or evaluation in the country. 

This means as exchange rate appreciates, cost of production will rise in an economy. This rise will lead 



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to low and unstable FDI and vice versa. This means poverty will lead to high inequality and 

underdevelopment also and this will result in vast deficit domestic balance of trade and of payment in 

a domestic economy. Again, depreciation in exchange rate will lead to competitive advantages in foreign 

trade. This will make domestic goods cheaper and will lead to increase in the demand for export goods 

and this will cause an increase in international demand for domestic goods and decrease in import 

within the nation. All these trends will impact positively on FDI inflow into the domestic economy. 

Studies also revealed that, equilibrium foreign exchange will help decision makers to cut the uncertainty 

caused by volatility in exchange rate and hence growth and development in the country. The instability 

in exchange rate as noticed in past studies will lead to indecision, which has a negative effect on flow of 

trade in the country. Consequently, this study needs to stabilize the factor needed to influence the 

factors affecting the flow of foreign capital and review the variables use in this study in a bid to reduce 

risk from redirecting market activity to other lower risk market that occupies a critical aspect of 

economic management of any country. A closer observation of the economy in terms of capital 

movements globally also reveals in most cases a capital flow from resource-rich economies to resource-

scarce economies as opined by Smadi, 2018. However, in another study by Lucas (1990), it was 

observed that the direction of capital flows is hampered by macroeconomic instability induced by 

insufficient human capital, imperfection in the capital market, and political risk in developing 

countries. Other study again showed that capital flows to developing nations could be mired owing to 

distortions in major macroeconomic variables among global economic imbalances and divergences in 

monetary policy across nations of the world, (Lucas 1990). Capital flows are in some countries assisting 

in the proper allocation of global resources which will increase the availability of capital and thus higher 

investment and growth in an economy. 

The aim of any investor to invest in any country is a function, to a large extent, of the stability of 

exchange rate of the country. Therefore, a closer look at Nigeria shows that, the Nigerian economy is in 

serious need of adequate and effective management of foreign exchange rate that will boost the inflow 

of FDI and diversification of the Nigerian economy. Literatures show that Nigeria’s abolition of certain 



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laws and successive entrenchment of laws that encouraged investment and introduction of structural 

reforms to enable a considerable flow of capital was affected by external advice and policies by 

international financial institutions in 1982. The trend continued until 1986, where Nigeria did not 

record any figure on portfolio investment in her balance of payment (BOP) accounts as a result of non-

internationalization of the nation’s money and capital markets and also the non-disclosure of 

information on the portfolio investments of Nigerian investors in foreign capital and money markets 

which has affected the Nigerian economy negatively in terms of capital flo, (CBN 2009). 

However, past administrations in Nigeria have adopted several policies to boost FDI but despite these 

efforts by the government to stabilize the exchange rate in the country, much successes have not been 

achieved in terms of FDI inflow in the country. Based on the above, this study is carried out to examine 

selected determinants of capital flow in Nigeria and how this has affected the Nigerian economy as a 

whole.  

2.1 Theoretical Literature 

Factors affecting capital flows in any economy have been broadly evaluated by many studies like: Ekpo 

(1997) when he verified the determinants of Foreign Direct Investment in Nigeria and found out that 

inflation rate, government policies and market players have actually affected foreign direct investment. 

In another literature by Hau, and Rey, (2006) when they reviewed how exchange rates and equity prices 

have affected capital flows. They found out that exchange rate and equity price have significant effect 

on foreign direct investment. Calvo, Leiderman and Reinhart (1993) in their study examined the 

determinants of capital flows from developed countries to developing and emerging market economies 

in the context of push and pull factors found out both positive and negative contributions to FDI. Again, 

according to theories of imperfect competition and market failure by Dunning's (1979) using "eclectic 

approach". The approach aimed at explaining the reasons for transnational production, and thus capital 

flows as it related to the ownership merits of multinational firms. The devise to "internalize" merits, 

and the locational merits of the recipient countries mostly the LDCs from international flow of capital 

was assessed and found out to favour mostly the developed nations of the world, (Saviour, 2022). The 



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Standard portfolio theory by Bleaney, Mizen and Senatla, 1999; and Devereux, 2006 suggested that 

agents should allot their asset holdings according to their preferred trade-off between risk and expected 

return in any investment. There are several economic theories concerning foreign direct investment. 

Among them are: Two Gap Model, Overshooting Exchange Rate Theory, Production Flexibility and 

Risk  version Hypothesis, and the Neo-Classical Theory to mention but a few.  

2.1.1 Two Gaps Model  

The Two Gaps Model also known as investment theory, argued that there are two gaps that must be 

closed for developing countries to develop and this according to the theory are the disparity between 

domestic savings and the capital outlay required for take-off, and the difference between export 

earnings and the imports requisite for growth. The theory sued that developing countries should search 

for foreign investment that will boost growth since they have inadequate saving capacities. 

2.1.2 Overshooting of Exchange Rates Theory 

The Overshooting of Exchange Rates Theory also known as the sticky-price monetary model, was put 

forward by Dornbush in 1976. The theory provided an animated retort to the exchange rate instability 

observed among less developed countries. This trend according to the theory proved that such 

instability appears to be uniform with the evolution of rational expectation 

hypothesis. The theory also assumes that price levels would react to these instabilities over time rather 

than immediately adjusting to short-term changes in equilibrium level. In addition, the theory also 

assumed that price stickiness is compensated for by lags in economic time-series data, including rates 

of interest and exchange rates of nations. Considering this, the sticky-price economic model permits 

the short-run fluctuation of nominal currency rates over their long-term equilibrium point in the 

domestic economy. 

2.1.3 Production Flexibility and Risk Aversion Hypothesis 

This hypothesis had argued, that for the reason that businesses can adjust the use of one of numerous 

variable factors in response to nominal or real disturbances, advocates of production flexibility 

maintain that exchange rate instability excites foreign investment in the domestic economy. The 



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assumption about this argument is that, it may not hold if variables were static since it is grounded on 

the idea that businesses may adjust elements of the variables. This is for the reason that companies are 

unlikely to be able to adjust parameters in the near term. The hypothesis further argued that, FDI 

declines when exchange rate instability rises. This is because more instability reduces the predicted 

exchange rate's inevitability equivalent. The theory pointed out that, certainty equivalent levels are used 

in the anticipated profit functions of firms that make decisions about investments so as to generate 

future returns. 

2.1.4 The Neoclassical Investment Theory 

The Neoclassical Investment Theory had in their argument opined that one of the ultimate features of 

poorer countries, is fact that their labour and land resources are generally underused This situation, 

according to the theory is the cause of low savings rates among the poor countries of the world. Thus, 

their capital's productive efficiency been lower than that of manufacturing nations. This school of 

thought contends that interdependence among nations of the world benefits less developed countries 

more than the developed nations. This argument according to the theory is built on the vital evidence 

that, in a steady state, fund will flow from industrialized, established 

countries, to less developed nations, where according to the theory, investment returns will be high in 

the long run, which will transform the less developed nations into developed nations 

2.2 Empirical Review 

Saviour, Ekpe & Salamat (2023) examined the impact of monetary policy on real exchange rate volatility 

in Nigeria which influenced FDI in the long run. The study used time series data obtained from CBN 

and World bank 2021 and Ordinary Least Square (OLS) statistical technique was used to assess the 

degree of influence which the variables have on each other. Augmented Dickey-Fuller (ADF) test was 

adopted to test for unit root and Johansen’s co-integration test was also conducted to establish long run 

association. The study also incorporated one co-integrating equation, Vector error correction model 

(VECM), Granger causality test and CUSUM test for further analysis. The study reveals that real 

exchange rate volatility has a negative and insignificant effect on FDI and hence on real GDP in Nigeria. 



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It also shows that monetary policy has a positive and insignificant influence in the Nigeria Economy. 

The study shows (among others) that there is no long run or short run relationship from real effective 

exchange rate volatility, Domestic interest rate, Government Spending and Net export running to FDI 

and then real GDP. This study therefore suggests that the Government should implement an 

expansionary monetary policy, through increase in money supply by reducing the domestic interest 

rate. The Government should implement an exchange rate system that is Market-determined and 

should step in only at crucial times to ensure stability in the exchange rate that will also at the end 

attract foreign investors in the country. 

Saviour, Ferdinand and Jacob (2022) investigated the effects of selected macroeconomic variables on 

stock market performance in Nigeria. The study employed time-series data obtained from the Central 

Bank of Nigeria's statistical bulletin and World Development Indicators. Stock market performance 

was measured using the all-shares index while the identified macroeconomic variables included GDP 

growth, broad money supply, exchange rate, savings interest rate, and inflation rate. An Autoregressive 

Distributive Lag (ARDL) estimation technique was used to establish the long run relationship among 

the variables, and it was revealed that a long run relationship existed among the variables in the 

estimated model. The result shows that macroeconomic variables such as gross domestic product, 

broad money supply, exchange rate, and savings interest rate have a positive effect on stock market 

performance and hence in the FDI in Nigeria. On the other hand, the results showed that the inflation 

rate has a negative effect on stock market performance thus FDI in Nigeria. Predicated on the result, 

the study recommended that policies to increase gross domestic product, exchange rate, interest rate, 

and money supply should be implemented because they can lead to an improvement in the performance 

of the stock market and hence FDI, while the inflation rate should be maintained at a single digit to 

prevent its negative effect on the performance of the stock market and FDI in Nigeria. 

Ekine, Dennis, and Charity (2019) studied the impact of foreign investment somewhat on performance 

of the Nigerian economic growth. The result of the study showed a strong association between the 

performance of the Nigerian economy and the inflow of foreign direct investment, which was 



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statistically significant at the 5% level. The study further revealed that in one way or another a strong 

economy is deeply dependent on the inflow of these vital determinants. They had found out that FDI is 

attracted or improved by economic factors like GDP market size, interest rates, inflation, currency rates 

and their volatility, and market size. 

Mokuolu's (2018) investigated the relationship between FDI and economic growth in the Nigerian 

economy. The study used the yearly time series data for a period of 48 years. The study used 

Autoregressive Distributed Lag model (ARDL) method. The result of the study showed a strong positive 

correlation between FDI inflows and the GDP-based economic growth indicator in Nigeria. The 

macroeconomic variables that were used in the study was according to the apriori expectation of the 

study. The apriori expected had indicated that, if the rate of interest moves in the opposite direction, 

FDI will shrink in Nigeria. This is shown by the negative interest rate seen during the period. The 

outcome of the country's a priori postulated positive exchange rate condition in the country. The study 

then concluded that irrespective of how we observed FDI to be negatively related with variables, it is 

still vital for the economic growth of less developed countries of the world, and as such the study then 

recommended that government should ensure machineries are put in place to encourage foreign 

investors coming into the country for investment. 

Arawomo and Apanisile (2018) examined the strategic drivers of FDI in the Nigerian 

communications industry while examining determinants of FDI in Nigeria. The study collected data 

from Central Bank of Nigeria's Statistical Report. The variables used in the study include: the number 

of telecom users, interest rate, foreign currency rate, and inflation. Graphs, the t-test, and the 

Autoregressive Distributed Lag were used to analyse the data (ARDL). The study comes to the 

conclusion that market size, trade openness, government spending, inflation, and interest rate are the 

major factors influencing Flow of FDI into the Nigerian telecom sector. The study also found out that 

found that the historical Foreign investment, market size, exchange rate, and GDP growth have become 

the main drivers of Foreign investment inflows to Nigeria and that these macroeconomic factors have 

a positive and significant impact on FDI inflows in Nigeria 



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Odili (2015) examined the impact of stock market performance and exchange rate volatility on the 

inflow of foreign direct investment into Nigeria. The study used time series data sourced from 

secondary source and covered the years 1980 to 2013. The study used the ordinary least square method 

in its estimation. The study's findings verified that exchange rate volatility has both a long-term and 

short-term negative and considerable impact on the flow of foreign direct investment into Nigeria. 

According to reports, Nigeria would undoubtedly draw direct foreign investment if its capital market is 

strong and stable. In order to improve domestic production of export goods, the research recommends 

the implementation of appropriate exchange rate management systems and regulations. 

Amassoma (2014) in another study had investigated the influence of exchange rate on capital inflows 

(foreign direct investment and foreign portfolio investment) in Nigeria between 1986 and 2011. The 

study used time series secondary data collected from Central Bank of Nigeria of various years. The study 

used Granger causality and the Error Correction Modeling (ECM) techniques in the investigation. The 

result of the causality estimations revealed that there was no significant correlation between the 

exchange rate and capital inflows that is, foreign direct investment and foreign portfolio investment 

during the period of investigation. The result of the long-term regression also showed that, foreign 

direct investment had a negative influence on exchange rates, but portfolio investments had a positive 

effect. The fact that the short-term result was the same as the causation finding shows that neither 

foreign direct investment nor foreign portfolio investment had a significant impact on the exchange 

rate. The study came to the conclusion that there is a long-term link between FDI and the currency level 

in Nigeria and therefore recommended that government should ensure a functional and regulated 

capital market that will lead to a stable economy. 

Omorokunwa and Ikponmwosa (2014) had investigated the dynamic relationship between currency 

rate volatility and foreign private investment in Nigeria. The study covered the period 1980 to 2011. The 

study used the Augmented Dickey Fuller (ADF) test to find out the stationarity of the data used in the 

study. Error Correction Model (ECM) was also used to analyze the data and the Engle and Granger two-

step method was used to do the co-integration method. The result of the study that, exchange rate 



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volatility has moderate and little impact on the flow of foreign direct investment (FDI) into Nigerian 

economy, and this happened both in the short run and in the long run. The result of the study revealed 

that, in the short run, currency rate volatility has a trifling effect on foreign portfolio investments, but 

also that, in the long run, it has a substantial beneficial impact on the economy. Based on the results of 

the study, the following recommendations were made: Government should put policies in place to 

encourage private investors to produce quality goods that will complement foreign investors. The study 

also recommended that policymakers should create a reliable mechanism for managing the country's 

currency rates to boost investment and thus development. 

Soumyananda (2014) examined the factors that affected foreign direct investment in Nigeria between 

1970 and 2006. The result of the study showed that, market size was not a vital factor in attracting long-

term foreign investment to Nigeria. The study then found out that, the majority of FDI to Nigeria is 

resource-seeking meaning they come take what they want and give Nigeria very small gain. The study 

also found out that there is a considerable stimulus on Nigeria's natural resource where the trading 

partners like UK and China come to drain Nigeria 

Ntim and Emilia (2014) investigated the connection between various macroeconomic factors 

influencing foreign direct investment. They used the Vector Error Correcting Model (VECM) in analysis 

and obtained data from the Central Bank of Nigeria statistical bulletin 2013. 

The results of the study revealed that, political stability and corruption have a significant role in 

determining FDI inflows to Nigeria. The study also found out that, human capital and economic 

openness are equally major determinants of FDI. From the findings in the study, they recommended 

upgrading of Nigeria’s political and economic institutions for Nigeria to gain in any international 

investment. 

Rasaq (2013) had examined the impact of exchange rate volatility on important macroeconomic 

indicators. The study had collected secondary data from CBN statistical bulletin of 2011. The study used 

Granger Causality test, the Ordinary Least Square (OLS), and the Correlation Matrix in the analysis. 

The result of the study showed that, though exchange rate volatility was observed to have a negative 



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impact on the nation's inflation rate, it was equally observed that exchange rate volatility had a 

beneficial impact on the gross domestic product, foreign direct investment, and trade openness. The 

study therefore recommended that, in order to encourage a favourable terms of trade in the country, 

the country needed to develop its exports and reduce its over-dependence on the oil industry in order 

to increase its revenue. The study also recommended an increase in local manufacturing which 

according to the study will reduce the problem brought on by exchange rate volatility.  

Edo (2011) in a study to investigate factors affecting FDI had collected secondary data from CBN 

statistical bulletin for the analysis. The study analyzes how institutional quality affected FDI flows into 

Nigeria from 1980 to 2011. The study found out that institutional instability, extreme levels of 

corruption, insecurity, and macroeconomic instability hamper FDI from entering a nation. 

Osinubi and Amaghionyeodiwe (2009) in their study examining influence of exchange rate volatility on 

Foreign Direct Investment (FDI) in Nigeria adopted a standard deviation model to analyze how 

exchange rate volatility has influenced FDI in Nigeria. The study tried to determine how exchange rate 

volatility had affected the entrance of FDI to the Nigerian economy within the period under study. The 

study adopted both the OLS method of estimate and the error correction model. The results of the study 

found out that, foreign investors should not fear extremely about exchange rate volatility trend. The 

results further showed that actual inward FDI and exchange rate have a substantial positive 

relationship. By this result it showed that devaluation of the Naira 

boost actual inbound FDI in the study. Again, the results showed that the world bank suggested policy 

of structural adjustment program which was implemented in Nigeria in 1986, had a damaging effect on 

real inward Foreign Direct Investment in Nigeria, which may have been triggered by the deregulation 

of naira that was followed by exchange rate volatility in the country. 

3.0 METHODOLOGY  

The design adopted in this study was an ex post facto (after the fact) design. This is because the events 

had already taken place before the investigation was carried out. The choice of this design was made 

because the researchers had no control of the independent variables and inferences about the 



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relationship among the variables are made without the current interaction between the regress and 

regressors. The design is predicated on various econometric techniques such as the Augmented Dickey-

Fuller (ADF) unit root test and the autoregressive distributive lag model, as well as the trend analysis 

of stylized facts on some of the indicators of variables of concern. The dependent variable for this study 

is the Capital Flows define in this study as foreign direct investment (FDI) and foreign portfolio 

investment (FPI), while the independent variables are LIB London Inter-bank Offered Rate use as to 

measure the foreign interest rate, Rate of Inflation, Total External Debt, Market Size of the economy 

measured by real Gross Domestic Product in this study, Gross Foreign Exchange Reserves, Openness 

calculated as Exports + Imports divided by GDP at current market prices, human capital proxied by 

secondary school enrolment in the country. 

3.1 Model Specification 

According to the theoretical underpinning in this study, the factors influencing capital flows in the 

world depend on if the researcher is investigating aggregates and disaggregate flows and if the latter 

are investigated what type of disaggregate flows is investigated. In this study, the disaggregate flow is a 

function of both short- and long-term flows. Looking at equation (1) below, foreign capital flows is 

projected to hinge on the factors selected in this study in the model.  Therefore, considering the 

theoretical framework as the theories opined above, the model is then presented as: 

CAP = f (LIB, OPN, EXDT, INF, HC, FXR, RGDP)…………………………….…………..(1) 

CAP: Capital Flows divided into foreign direct investment (FDI) and foreign portfolio     investment 

(FPI). 

LIB = London Inter-bank Offered Rate use as a measure of foreign interest rate 

OPN = Level of openness  

EXDT = Total External Debt 

INF = Rate of Inflation 

HC = human capital (measured as secondary school enrolment) 

FXR = Gross Foreign Exchange Reserves 



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RGDP = real Gross Domestic Product use as a measure of Nigerian Market Size 

CAP= β0 +β1LIB +β2OPN +β3EXDT +β4 INF +β5HCt +β6FXR+β7 RGDP +u…………..... (2) 

A priori signs are: β1, β3, β4, < 0; β2, β5, β6, β7 > 0 

This study uses London interbank offered rate as one of the independent variables and this is 

anticipated to negatively impact on FDI and FPI in the country. This means that an increase in 

international interest rates will likely lead to low capital flow to Nigeria. According to the a priori 

expectation, rate of inflation is expected to have negative influence on international capital flows. This 

is because inflation leads to uncertainty in the domestic market and thus the Nigerian economy. It was 

equally expected that external debt has a tendency to inhibit the level of investment and this will have 

a negative influence on capital flows in the economy. The a priori expectation of real GDP is expected 

to be positively related with capital flows. The study expectation of foreign reserves and openness are 

to have positive impacts on international capital flows in the country. 

3.2 Method of Estimation and Data 

The design adopted in this study was an ex post facto (after the fact) design. This is because the events 

had already taken place before the investigation was carried out. The choice of this design was made 

because the researchers had no control of the independent variables and inferences about the 

relationship among the variables are made without the current interaction between the regress and 

regressors. The design is predicated on various econometric techniques such as the Cointegration and 

Error Correction Mechanism (ECM) which provides a dynamic structure for the analysis. The study 

also uses the Augmented Dickey-Fuller (ADF) unit root test. The study also investigates the time series 

and long run characteristics of the data collected and used in the analysis.  

To enables us carry out the investigation, equation two is again specified thus: 

FPIt=β0 +β1LIB +β2OPN +β3EXDT +β4 INF +β5HCt +β6FXR+β7 RGDP+ϒECMt-1 + ε1t...(3) 

and 

FDIt=β0 +β1LIB +β2OPN +β3EXDT +β4 INF +β5HCt +β6FXR+β7 RGDP+ϒECMt-1 + ε2t..(4) 



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Where ϒ is the error correction term in this study. The study collected 1986 to 2024 annual data from 

the Central Bank of Nigeria Statistical Bulletin various years and World Bank Development Indicators.  

4.0 EMPIRICAL ANALYSIS 

4.1 Unit Root Analysis 

Table 4.1 Unit Root Test  

Variable ADF Test 

at Levels 

ADF Test at 

First 

Difference 

95% Critical 

ADF Value   

Remark 

 

FDI 0.419  -8.287 -2.960 Stationary at First 

Difference 

FPI   -6.635  -2.960 Stationary at Levels 

FXR 2.422 -4.561 -2.960 Stationary at First 

Difference 

INFL -2.802 -5.586 -2.960 Stationary at First 

Difference 

HC -1.684 -3.131 -2.960 Stationary at First 

Difference 

EXDT -1.892 -4.129 -2.960 Stationary at First 

Difference 

RGDP 3.715  -2.960 Stationary at Levels 

LIBOR -2.573 -3.648 -2.960 Stationary at First 

Difference 

OPN -1.521 -3.089 -2.960 Stationary at First 

Difference 

Source: Result extracted by Authors from the E-views 9 



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The study uses Augmented Dickey Fuller (ADF) unit root test to test for stationarity of the data and the 

result from the table above shows that apart from FPI and RGDP all the other variables possess ADF 

values that are less than the 95 percent critical ADF value. This means that the time series are non-

stationary at levels. However, the variables FPI and RGDP are stationary at levels, indicating that these 

variables are not time-dependent as seen in the table. 

4.2 Co-integration Test 

Table 4.2: Engle and Granger Residual Cointegration Tests Results 

Model ADF 

Lag 

Calculated ADF  Critical ADF Value 

(95%) 

Remark 

1 1 -7.249 -2.957 Stationary 

2 1 -5.817 -2.986 Stationary 

Source: Result extracted by Authors from the E-views 9 

Looking at Table 4.2 above, it reveals that by using the Engle and Granger co-integration procedure, 

two of the models have ADF test statistic values that are more than the 95 percent critical ADF value as 

seen in the table. Therefore, it shows that the null hypothesis of no co-integration among the variables 

at 5 percent level of significant is rejected. This means that the variables are stationary and this shows 

that the time series data use in this study is cointegrated at the 5% level of significant. This then means 

that, there is a long run relationship existing between the dependent variable and selected independent 

variables in this study.  From the results above which shows that some variables are not stationary at 

levels gives us the impetus investigate further 

 if the variables are co-integrated in the study. For us to carry out this test we have to rely on the Engle 

and Granger hypothesis of 1987 which opined that, when  time series data pt and qt use in analysis are 

not stationary at levels I(0) but otherwise at first-difference, I(1), they opined then that there could be 

a linear combination of pt and qt, which is stationary at first difference. This means that, the two time 

series variables that placate this condition are considered to be cointegrated. The fact that there is an 

existence of cointegration among the variables shows that the two cointegrated variables must be 



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moving together at the same degree. According to the theory by Engle and Granger, a necessary 

condition for cointegration is that the data should be co-integrated at the same order. To further 

ascertain the state of cointegration in this study we employ the Engle and Granger two-step method. By 

this method we regress the dependent variable on all the independent variables. The value of the 

residuals confirms the results, that is, if the variables are cointegrated, the residual from the 

cointegrating equation must be integrated to order zero in the study. Considering the analysis in this 

study, the cointegration tests are done on the foundation of the specific models that were shown in the 

table above. 

4.3 The Long Run Results 

Table 4.3: The Long Run Relationship 

Variables FPI FDI 

C 9479.7 35926.5 

FXR -0.154*** -0.005 

INFL -7.401 16.17* 

HC 69.80 80.52 

EXDT -0.109** -0.074* 

RGDP 0.037* 0.053*** 

LIBOR 150.4 92.05 

OPN -176.3 -693.2 

R2 = 0.369           F = 1.59              R2 = 0.931                     F = 47.9 

Source: Result extracted by Authors from the E-views 9 

* shows significance at 10 percent level; ** shows significance at 5 percent 

level; *** shows significance at 1 percent level. 

Considering table 4.3 above, the result of the long run determinants of capital flows in Nigeria is shown. 

The result of the study shows that the Foreign Portfolio Investment model has a poor relationship with 

RGDP. This is as seen by the small R2 value of 0.369 in the table. This means that the long run Foreign 



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Portfolio Investment in Nigeria is externally influenced by variables not included in the models use in 

the study in the short run. This result agrees with the theoretical underpinning of this study which 

opines that Foreign Portfolio Investment is a short run capital rather than a long-term factor. The 

results further show that, the Foreign Direct Investment with the R2 value of 0.931 is high and this 

reveals that the flow of capital into the Nigerian economy is explain by variables captured in the models. 

Again, the F statistics value of 

47.9 indicates a strong relationship existing between Foreign Direct Investment inflows and all the 

determinant variables put together in the study. Despite the weak performance of the Foreign Portfolio 

Investment model, it is equally still seen that RGDP, FXR, and EXDT are significant in the result, and 

this means that foreign reserves and external debt have a continuous impact on Foreign Portfolio 

Investment flows on Nigerian economy. The result further shows that, in the long run, the growth of 

the economy becomes a robust influence for portfolio investment to consider in its flows in the study. 

Considering the Foreign Direct Investment result, it shows that inflation, external debts and real Gross 

Domestic Product are the significant variables in the study. This means that, domestic influences are 

very vital in the determination of Foreign Direct Investment on Nigerian economy in the long run. This 

means, inflation and level of economic performance exercise strong influences on the performance of 

Foreign Direct Investment inflows in the long run in the country. Consequently, for Nigeria to enhance 

workable and continuous inflow of Foreign Direct Investment, emphasis must be on the economic 

environments of Nigeria. 

4.4 Dynamic Analysis 

Table 4.4: Short run Model for Determinants International Capital Market 

Variables FPI FDI 

C -51.16 111.2 

FDI(-1)  0.282* 

ΔFXR -0.138*** -0.075** 

ΔINFL 4.497 6.703 



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ΔHC -94.31 174.6** 

ΔEXDT -0.111** -0.022 

ΔRGDP 0.051 0.026 

ΔLIB 117.7 116.6* 

ΔOPN 298.9 -204.0 

ECMt-1 -1.198*** -1.869*** 

R2 = 0.756           F = 6.58           R2 = 0.827           F = 31.14 

Source: Result extracted by Authors from the E-views 9 

* indicates significance at 10 percent level; ** indicates significance at 5 percent 

level; *** indicates significance at 1 percent level. 

The values from Table 4.4 discusses the short term changes in the determinants of flow of capital in 

Nigeria. This study uses an autoregressive distributed lags (ARDL) Method and focusses on the ECM. 

The use of error correction mechanism for the selected ARDL model is as seen in Table 4.4 above. This 

study use the R2 criterion to select the parsimonious equation as seen in the study. The study shows the 

FPI results of the error correction mechanism on the second column of table 4.4 above and this shows 

the presence of very high diagnostic statistics in the model. The R2 value of 0.756 shows the goodness 

of fit of the model and this means that over 75 percent of the systematic changes in FPI inflows in 

Nigeria is explained by the variable’s presence in the explanatory variables and the ECM. Looking at 

the R2 value for the Foreign Direct Investment in the model, it is also notice that the R2  of 0.827 is high 

and this means that 82 percent of the systematic changes in FDI flows in Nigeria is explained by the 

variables in the model. The overall performance of the models is also high. The table further shows that 

the F-statistic values of 6.35 for the FPI model and 31.1 for the FDI model have passed 1% level of 

significance test. This is because the calculated values of the F statistics are greater than the 1 % critical 

F-value of 5.01 in this study. Arising from the above, we cannot reject the hypothesis of a significant 

linear relationship between foreign capital and all the independent variables combined in the short run 

in Nigeria. 



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Considering the above results, it is observed that, the contribution of each of the variables to foreign 

capital flow in Nigeria is influenced the coefficients of the explanatory variables in terms of sign and 

significance in this study. The results also show that the coefficients of the variables in the FPI model 

that is the foreign reserves and human capital do not agree with the a priori expectation. The notice of 

high value foreign reserves variable shows that reserves position of the country has a very strong 

negative impact on FPI flows in the country. Looking also at the results of this study, it is seen that, 

external debt in Nigeria limit the amount of FPI inflows to country mostly in the short run. Hence the 

failure of all the other variables at the 10 percent level means that external factors have affected FPI 

flows in Nigeria in the short run than domestic factors. The results further show that the coefficient of 

Foreign exchange does not agree with the a priori expectation of positive sign in the FDI model. This 

means external reserves accumulation in Nigeria has significantly affected foreign capital flow in the 

country. The results also reveal a positive significant relationship between human capital (HC) and 

capital flow at 5 percent level of significant in Nigeria. This means that strong human capital base is a 

one of the main factors influencing FDI flows in Nigeria. Again, it is obvious that Foreign direct 

investment according to the result, appears to be vital in the growth of an economy and thus human 

capital development is the panacea for this flow in the country. The result also reveals that interest rate 

has positively influenced FDI flows in the country and this means that changes in the rate of interest 

has an effect on the inflow of FDI in Nigerian economy. Looking at the results of this study closely, it is 

seen that other variables in the model have not positively influenced capital flow except Inflation and 

human capital. Above all, the failure of the real GDP and openness coefficients in both the FPI and FDI 

results is a thing of worry as the refuse to agree with the a priori expectations. Therefore, it can be 

deduced that the market size or the rate of openness does not have much impact on the FDI inflows in 

the short run in Nigeria. This means, the adjusting macroeconomic factors in this study does not have 

serious impacts in the short term on foreign capital inflows into the country. The scenario sorts for the 

error correction terms in the both equations and this then have the correct negative sign as seen on the 

table above. This trend therefore reveals that any short run change in foreign capital in Nigeria will be 



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restored in the long run. This is because, the high values of the error correction term that is more than 

one means that adjustment to equilibrium in the long run will move backward. This means the 

adjustments appear to move from negative to positive over time as seen in this study and this may be 

as result of the compositions of the market in Nigeria. The implications of the results show that, 

international market factors have a tendency to have continuous impacts on capital flows in the 

Nigerian economy. This means the impacts of external reserves and external debt on foreign direct and 

portfolio investments are weighty in Nigerian economy. The non-significant relationship of the 

macroeconomic variables in the short run but being significant in the long run as observed in the ECM 

and long run estimates tables in this study means that the management of local macroeconomic factors 

have not attracted foreign investment, particularly the portfolio investment that will lead to growth and 

development of the Nigerian economy. Again, as seen in the result, the Human capital development is 

one of the key domestic factors that stimulate capital flows in Nigeria in the short and long run.  

5.0 SUMMARY, RECOMMENDATIONS AND CONCLUSION 

5.1 Summary of Findings 

The main aim of this study is to examine the factors influencing the inflows of foreign capital into 

Nigeria. The study further examines how the external capital flow has influenced the development of 

Nigeria. The results of this study reveal that the expected benefits to factors influencing foreign capital 

flow into Nigeria are mostly gotten from external than internal sectors. The study specifically found out 

that: Domestic factors wield more impact on the factors influencing long run capital flow. It is also 

found out that portfolio investment has significant influence in the short run than in the long run in 

Nigeria. A closer look at the result shows external factors are likely to influence the flow of FPI in the 

long term. This can be affirmed considering R2 values of 76% and 37% as seen in the table above. Again, 

it is revealing in the study that in the short run outside factors play more roles in encouraging capital 

inflows to the Nigerian economy. 

5.2 Recommendations 

In view of the above findings, the following policy recommendations are proffered: 



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i. Government authorities should put machineries in place to expand and promote domestic capital 

market that will attract more foreign investors to increase productivity and development. 

ii. The authorities should create a healthy macroeconomic environment and affordable and accessible 

financial system that will encourage and attract foreign investors into the country. 

iii. Government should put policies and machineries in place to reduce uncontrolled inflow of portfolio 

investment in Nigeria as this will reduce the level of equity bubbles in the capital market. 

iv. We also recommend that government authorities should pay attention to appropriate management 

of the vast external reserves of Nigeria so as to obtain short term stability of foreign capital flows that 

will aid economic growth and development. This can be done by putting correct policy in place that will 

focus on stringent management of the external sector through appropriate reserves policy and debt 

management that will likely improve the Nigerian economy. 

v. This study also recommends that, proper portfolio management policies relating to the 

currency structure, selection of the type of investment instruments, and satisfactory period of the 

reserves portfolio to ensure that assets are protected and made available to enable the market expansion 

in Nigeria. 

vi. The result reveals a veritable difference between short run and long run factors influencing foreign 

capital inflows to Nigeria. Hence, we recommend that policy measures designed to direct long term 

capital inflows should not be the same as those designed to control the short-term capital flows. This 

can be done by enhancing a policy is fashioned to consider the time horizon of capital flows. 

vii. No country of the world can strive in an unregulated capital market and unreserve management 

structure and as such we recommend the government to provide a sound reserve management policies 

and practices that will promote sound and regulated macroeconomic management system.  

5.3 Conclusion 

This study concludes that, managing capital flows the world over and Nigeria in particular is a difficult 

development that requires suitable choice of policies that will aid a country to grow and some of the 

policies include yet not limited to: enhancing a good financial market conditions that will aid financial 



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stability of a country, suitable level of capital reserves locally and internationally, and adequate 

monetary policy objectives that will aid liquidity management. We therefore conclude that, huge capital 

inflows frequently are connected with inflationary pressures that retard growth and development. 

Literatures opined that huge capital inflows may also lead to stock market bubbles and this in turn leads 

to an extreme expansion in internal credit which will again jeopardize the stability of the financial 

system. The capital inflows in Nigeria in the short term intensify the problems of the financial market. 

Therefore, for the capital flows to be effectively strengthened and enhanced key and sound 

macroeconomic policies as stated in the models should be promoted. Nations with sound 

macroeconomic policies and quality institutions are the countries benefiting from this capital flow. 

The reason for this study is to investigate the factors that influence capital flows in Nigeria and the study 

reveals that foreign capital inflow in Nigeria is distinguished between short run and long run bases. The 

result further reveals that Portfolio capital flow in Nigeria is more of short term than direct investment 

capital as seen in the result where Foreign Portfolio Investment have a tendency to produce volatile 

effects on short term financial market development in the Nigerian economy. We therefore can 

conclude that, the combination of Foreign Portfolio Investment and that of direct investment shows a 

means of guaranteeing more valuable operation of foreign capital inflows into the Nigerian economy 

that will enhance a desirable economy. 

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