Evaluating the causal link between FDI inflows and domestic interest rate in Nigeria

Investigating the relationship between domestic interest rate and inflows from foreign direct investment (FDI) in a country is paramount for policy formulation. While a preponderance of extant literature has evaluated the impact of interest rate on the penetration of FDI owing to existing theories that support such link, studies that focus on the role of FDI inflows in influencing domestic interest rate is scanty. Dearth of studies in this area limits an understanding of the actual link between the two variables. This study therefore adds to the existing literature by verifying both theoretical and conceptual views concerning how FDI inflows and domestic interest rate are related in Nigeria. In addressing the identified gap in knowledge, the study used the vector error correction model (VECM)Granger causality with annual series which covered the period from 1981 to 2022. Finding indicates a bi-directional causality existing between domestic interest rate and FDI inflows. The paper thus concludes that much as domestic interest rate influenced FDI inflows (supporting the theoretical postulations), a reverse causality running from FDI inflows to domestic interest rate was equally revealed to exist. The study thus recommends that instead of manipulating the monetary policy instruments to attract FDI and as well handle the consequences accompanying its massive penetration, efforts should be directed at providing institutional reforms and upgrading the infrastructure in the country.