Exchange Rate, Foreign Direct Investment and Economic Growth Nexus in Nigeria

— The relationship among exchange rate, foreign direct investment and economic growth is explored in this study by adopting the Autoregressive Distributive Lag (ARDL) technique to examine the long-run cointegrating relationship for the period 1981-2018. A long-run relationship was confirmed among exchange rate, foreign direct investment and economic growth. From the findings, foreign direct investment contributes positively to economic growth, while the speed of adjustment is 78.46% and significant . The study recommends, among others, that the Nigerian government must create an enabling atmosphere for private businesses to prosper. The study suggested that the government pursue policies that will boost investors' confidence and enable foreign companies to invest in the country's economy. Government and private-sector agencies are encouraged to invest more in the country's education and health care infrastructure.


INTRODUCTION
Economic growth is a major focus of most developing countries in the world, and Nigeria is not left out. However, despite the government's several attempts to promote growth, weak investment policy, weak exchange rate policy and over-reliant on revenue generated from the sales of crude oil export while completely ignoring the other sectors of the economy where huge income could be generated, has hindered this plan.
From literature, exchange rate and foreign direct investment (FDI) are vital variables that stimulate economic growth. The main contribution of FDI to economic growth is an increase in productivity due to improved technology. In 2001, Nigeria recorded domestic savings of 34.33% and 14.27% in 2015, but this figure increased slightly to 17.81% trillion in 2018. (World Bank, 2020). Nevertheless, the domestic savings ratio is still relatively low, so the need to close the fiscal deficit gapusing FDI.FDI has been on the increase in Nigeria since 1981 when it was $542 million to about $8.84 million in 2011. Following the rapid insecurity recorded across Nigeria since 2011 and the global financial crises since then, the foreign inflow has continued to experience a downward trend going as low as only $1.99 billion in 2018.The case is no different for the world's leading economic (The United States), foreign direct investment value has also been on a downward trajectory since 2015. In 2018 the United States recorded an FDI inflow of 1.19 trillion (World Bank, 2020).
Studies on FDI are focused on the flow within developed countries and pay less attention to the flow from developed to developing countries (Alabi, 2019). FDI is a significant capital inflow source and has reasonably been on the increase (Antwi et al., 2013).Some of the advantages of FDI include developing new technology leading to new production techniques that lead to improved productivity and revenue generation from taxes for the federal government. Therefore, it is not surprising that FDI is perceived to be an instrument to promote growth and development. Therefore, it is not surprising that FDI is seen as an instrument to promote growth and development. (Pegkas, 2015;Umeora, 2013

II. INSIGHTS FROM EMPIRICAL LITERATURE
There have consistent arguments regarding the impact of FDI on economic growth in an economy, which has resulted in mixed evidence. Some authors (Ehimare,

III. METHODOLOGY
The dependent variable is the real gross domestic product, a proxy for economic growth, while the explanatory variables are gross capital formation, labour, exchange rate, inflation and interest rate.
The model is specified in its implicit form as: Both sides of the model are logged to make it linear Where represents economic growth proxied by real gross domestic product, represents gross capital formation, represent labour, represent foreign direct investment, represent exchange rate, represent inflation, and represents interest rate.
The use of quality and reliable data is advised when conducting an econometric analysis. Annual data from 1981 to 2018, comprising 38 years are used for the analysis. The data are sourced from the World Banks, World Development Indicators, and the Central bank of Nigeria (CBN)statistical bulletin.
The error correction model is presented in equation 5 Where 0 is the constant; are the coefficient, ∆ is the difference operator, and are the optimal lag order, is the dependent variable lag while is the independent variable lag, represents the time, represent the error correction term, and represents the speed of adjustment of the model.

IV. RESULTS AND DISCUSSION
This section results from the econometric analysis such as unit root test, ARDL bounds test, stability and diagnostic test are reported.

Unit Root Test
This study uses the Augmented Dicky-Fuller unit root test to confirm the level stationarity of our variables. This is to avoid spurious result from the estimations process and  Table  2, it reveals that the dependent variable, labour and interest rate are not stationary at level, but they become stationary at the first difference.
All variables except foreign direct investment and inflation were stationary at order one I(1) while foreign direct investment and inflation were stationary at level I(0). Therefore, we can go ahead with the desired estimation process as none of the variables is I (2). Based on these results, we go-ahead to use the ARDL method of estimation.

ARDL Bound Test for cointegration
The ARDL bound test is conducted to verify if a cointegrating relationship exists among the variables, and the result is presented in

ARDL estimates and Error Correction Model
The result from the long run and short run ARDL estimate are presented in Tables 4 and 5. From the long run results, capital, labour and foreign direct investment positively affect economic growth. An increase in capital increases economic growth by 35.67%. Also, an increase in labour brings about a positive increase in economic growth by approximately 110%. Exchange rate and interest rate is inversely related to growth. A percentage increase in the exchange rate and interest rate brings about a respective 0.54% and 0.58% decrease in growth rate. These results are in line with a priori expectation. The contribution FDI is however, not significant in the long run.This is in line with the findings of Akinlo (2004).The effect of capital inflow may not be immediately felt due to the many current challenges faced by Nigerian but consistent increase will help to develop the production process leading to technological advancement which ultimately leads to economic growth in the long run. From the error correction model, the error correction term (ECT) is -0.784618 and significant. The negative and significant ECM implies the speed of adjustment of the model back to equilibrium is at approximately 78%.

Diagnostic and Stability test
Some diagnostic and stability tests are conducted and present in Table 6, Figures 1 and 2. From the results of the Breusch-Godfrey Serial correlation, there is no Auto Correlation problem since the P-value of 0.0721 is greater than 5%. Also, revealed from the result is that there is no problem with heteroskedastic since the P-value of 0.1967 is greater than 5%. The model is also normally distributed and possess no problem of misspecification. Figure 1 and Figure 2 are the cumulative sum of recursive residuals and the cumulative sum of squares recursive residuals. The cumulative sum of recursive residuals and the cumulative sum of squares recursive residuals plot is within the 5% significant level ads indicated by the blue line from Figure 1 and 2.

Implication of Findings
Based on the study's findings, depreciation in the Nigerian exchange rate is found to have a negative impact on the country's economic growth. In an economy with viable production capacity for manufacturing and exportation of goods and services, it is expected that a depleting foreign exchange would benefit more. However, the Nigerian economy's manufacturing sector has not been able to produce goods and services sufficiently enough to meet up with local demands, let alone exporting them. This has made the country a consuming economy. Larger proportions of Nigerian exports are primary produces which include crude oil and other raw agricultural produce. Because this category of products commands relatively low prices in the international market when compared with manufacture goods, it becomes difficult for the country to benefit from a lower exchange rate.
Furthermore, larger percentages of products used in Nigerian markets are imported. These items include automobiles, constructions equipment, computers, manufacturing and other service equipment are not produced locally. Hence, a fallen exchange rate makes their prices to skyrocket locally. There is no domestic producer to compete favourably with the imported product at a high price. The few manufacturing firms available in the country are sourcing major part of their inputs and workforce from overseas. A fallen exchange rate makes the cost of the input considerably high, hence their product prices as well. These two ways-imported manufactured product prices and imported manufacturing input price cause a fallen exchange rate to shrink the Nigerian economy's productive performance. This assertion corroborates the findings of Ehinomen and Oladipo (2012) and Mlambo (2020).
Moreover, an increase in FDI is empirically discovered to be an impetus for economic growth. With an increase in FDI inflow coupled with an expansion in the country's infrastructure base, the economy's production capacity will be enhanced, thereby causing a reduction in the unemployment rate. By implication, this will lead to increased output and hence promote economic growth. The submission is in line with the findings of Dinh et al. (2019) and Sasi and Mehmet (2015). Another exciting outcome is the positive contribution of labour to economic growth. This positive contribution may be attributed to the improved human capital index, especially the health and education component, which improves the productivity of labour. Furthermore, the Nigerian economy is labour intensive; most of the firms' production outlay in Nigeria are driven by manual labour.

V. CONCLUSION AND RECOMMENDATION
The study explores the relationship between economic growth, exchange rate and foreign direct investment in Nigeria. This objective is achieved using the ARDL test for cointegration technique for the period ranging from 1981 to 2018. In conclusion, a long-run relationship between economic growth, exchange and foreign direct investment in Nigeria was established. The model also found a convergence to the equilibrium at a speed of adjustment of 0.78 % in case of disequilibrium in the economy.
In line with the findings of this study, the following recommendations are made. Nigeria's government should create an enabling atmosphere for private businesses to prosper. Such a conducive business atmosphere that attracts FDI include improved infrastructure base such as good road and stable power supply; political stability; security of lives and properties and favourable tax policy. This enabling business environment to be created will encourage FDI inflow and spurs the production capacity of the local firms. The government should support this sector by giving tax relief, allowing for more production at a cheaper rate. Therefore, it is crucial to pursue policies that will enable foreign companies to invest in their economy by increasing FDI inflow.
Considering that the quality of labour force determines how effective and efficient the contribution of labour would be, it is important to improve Nigeria's labour productivity. It is recommended that the government and private sector agencies concerned should invest more in the country's education and healthcare infrastructure. This is because the country is labour intensive. By this, the Nigerian labour force would be productive locally, but they will be able to compete with their peers globally.
The data for this empirical study is limited between 1981 and 2018; which does not cover up to 2020 as this study was carried out; hence, it is not able to cover the COVID-19 era. Thus, future studies can use quarterly data to deal with small observations, especially when a large number of parameters are involved in having a greater degree of freedom.