Revisiting the Inflation–FDI Nexus in Nigeria: Long-Run and Short-Run Evidence from Multiple Price Indicators

Abstract

This study examines the relationship between inflation and foreign direct investment (FDI) inflows in Nigeria over the period 1990–2024, employing the autoregressive distributed lag (ARDL) modelling framework. The analysis establishes a stable long-run relationship between inflation dynamics and FDI, confirming that macroeconomic conditions exert a persistent influence on foreign investors’ decisions. The empirical results reveal that inflation has a negative and statistically significant effect on FDI in the long run, indicating that sustained price instability undermines investor confidence by eroding real returns and increasing uncertainty. In contrast, price indicators associated with productive economic activity, including production-side price movements and broader output expansion, exhibit positive relationships with FDI, suggesting that inflation driven by real-sector growth may signal profitable investment opportunities. Exchange rate behaviour contributes positively, though modestly, highlighting the importance of relative currency stability in enhancing Nigeria’s investment attractiveness. The error-correction mechanism indicates a meaningful speed of adjustment toward long-run equilibrium, underscoring the model's dynamic consistency. Short-run results show that inflation exerts a limited immediate influence on FDI, implying that foreign investors respond more strongly to persistent inflationary trends than to transitory shocks. The findings emphasise that credible inflation control, stable exchange rate management, and disciplined macroeconomic policies are central to sustaining long-term foreign capital inflows. The study concludes that improving Nigeria’s FDI performance requires prioritising price stability, strengthening monetary policy credibility, and ensuring that economic growth is driven by productivity-enhancing structural reforms rather than inflationary pressures.