EFFECT OF FINANCIAL EFFICIENCY ON FOREIGN INVESTMENT FLOWS IN NIGERIA

Abstract

This study empirically investigated the effect of financial efficiency on foreign investment flows in Nigeria from the first quarter of 2012 to the fourth quarter of 2023. Employing an ex post facto research design and the Auto-regressive Distributed Lag (ARDL) model, the analysis utilized quarterly data obtained from the Central Bank of Nigeria and the World Bank to assess both short-run and long-run relationships between financial efficiency and foreign investment flows comprising foreign direct investment (FDI), foreign portfolio investment (FPI), and total foreign investment (TFI). The findings revealed that financial efficiency had a significant and positive impact on FDI and total foreign investment inflows, indicating that a more efficient financial system attracts long-term and stable capital. However, financial efficiency exhibited no significant effect on portfolio inflows, underscoring the sensitivity of speculative capital to short-term macroeconomic fluctuations. Furthermore, the results indicated that exchange rate depreciation attracted portfolio and total inflows, while inflation consistently discouraged all categories of foreign investment. The study concluded that enhancing financial efficiency is vital for bolstering investor confidence and sustaining long-term foreign investment. Consequently, it recommends that policymakers strengthen financial intermediation efficiency through reduced interest rate spreads, increased banking sector competition, and FinTech integration, while maintaining macroeconomic stability by curbing inflation and exchange rate volatility to foster a resilient and investment-friendly environment in Nigeria.

Keywords: financial efficiency, foreign investment, ARDL, macroeconomic stability