IOSR Journal Of Humanities And Social Science (IOSR-JHSS) Volume 24, Issue 1, Ser. 6 (January. 2019) 49-60 e-ISSN: 2279-0837, p-ISSN: 2279-0845. www.iosrjournals.org DOI: 10.9790/0837-2401064960 www.iosrjournals.org 49 |Page Bounds Test Approach to Co-Integration and Causality between Foreign Investment Inflows and Exchange Rates Dynamics in Nigeria. BigBen Chukwuma Ogbonna Department of Economics, Ebonyi State University Abakaliki, Nigeria Corresponding Author: BigBen Chukwuma Ogbonna Abstract: This study was commissioned to investigate for long run and causal relationship between foreign investment inflows and exchange rate dynamics in Nigeria. Foreign capital is decomposed into foreign direct investment (FDI) and foreign portfolio investment (FPI) to enable us look at both the real and financial sectors of the economy. Results established that there exists a long run association between exchange rates dynamics and foreign capital inflows to Nigeria. This was evident by the values of bound test F-Statistic of 61.82058 and 33.18053 for foreign direct investment and foreign portfolio investment models respectively. The coefficients of error correction terms lagged one period in the short-run models of FDI and FPI are negative and statistically significant at 1% level, meaning that in the both models, the independent variables jointly and significantly cause FDI and FPI respectively at least in the short run. Furthermore, this study has established that, for Nigeria, exchange rate ranks as one of macroeconomic fundamental that exact significant influence in moderating foreign direct investment (FDI) flows, while its effect on foreign portfolio investment (FPI) movements appears to be inconsequential, meaning that exchange rate should not be contemplated as instrument for moderating foreign portfolio inflows in Nigeria. Key wards: Foreign investments, exchange rates, external debt sustainability, interest rates, Nigeria --------------------------------------------------------------------------------------------------------------------------------------- Date of Submission: 30-12-2018 Date of acceptance: 15-01-2019 --------------------------------------------------------------------------------------------------------------------------------------- I. INTRODUCTION As the world gets figuratively smaller (globalization concept), the transactions and corporations between and among nation have intensified and becoming increasingly indispensable. This has led to increasing rate of economic integration, financial markets liberalization and technological advancement and development of policies, tended towards increasing the rate of “Ease of Doing Global Businesses”. The areas of corporation include but not limited to trade and investment. The most critical indicator of a developing economy is shortage of capital which has been adjudged to be the life wire of production. This suggests that any nation that wallops in prolonged scarcity of capital will remain backward and poor. However, since the early 1990s, there has been an upsurge in foreign capital flows to developing economies, particularly into emerging markets, and one of the views argued that capital inflows do help to increase efficiency, a better allocation of capital and fill up the investment-saving gap (Rashid & Hussain, 2010). The scarcity of capital identified with developing economies presents the clear indication of income inequality between the developing/underdeveloped and developed economies. For instance as at the year 2000, the per capita GNP of Bangladesh was USD200 while that of Ethiopia stood at USD100, but on the other hands, the GNP per capita of Switzerland was USD44320 while in the case of Japan this stood at USD37850 for developing and developed countries respectively (World Development Report, 2000). This disparity was further elucidated by the same report which reveals that in the year 2000 the total world production was put at more than USD31 trillion and that out of this, a whopping sum of USD25 trillion came from the developed countries, while only USD6 trillion was attributed to the developing countries of the world, meaning that 80% of World's income had been produced by the rich countries of the World where just about 15 % of World's population resides. Whereas 85% of World's population is producing just 20% of World's output. Relying on the above scenarios, the importance of the need to provide solution to the problem of world imbalance cannot be overemphasis. This would involve movement of capital from the developed to the developing economies through foreign investment channel. With the collapse of the Bretton Woods system in the early 70’s resulting in the switch to floating exchange rates in 1973, great attention has been paid on how exchange rate affects the level of trade and