The interplay between foreign direct investment, interest rate and exchange rate in the Nigerian system (1970-2014) Barisua Fortune Nwinee; Ikechukwu S. Nnamdi & Omiete Victoria Olulu-Briggs* Department of Finance and Banking, University of Port Harcourt, Nigeria. Abstract The study aims to empirically investigate the interplay between Foreign Direct Investment, interest rate and exchange rate in the Nigerian system between 1970 and 2014. Annual time-series data on interest rates, exchange rates and foreign direct investment were sourced from the statistical database of the Central Bank of Nigeria and United Nations Conference on Trade and Development; and the e-views8 statistical software was employed to process the data using the VAR estimation technique. From the results, there is a statistically insignificant relationship between interest rate and foreign direct investment; while there is a statistically significant relationship between exchange rate and foreign direct investment as well as a uni-directional causal relationship. Based on the findings, it is recommended that first, though this study shows variations in exchange rate as strongly influencing the flow of foreign direct investment into the nation, there appears to be a negative effect of depreciation in the value of the Naira in the international financial market. As such, managers of the Nigerian economy should in an attempt to attract a flow of foreign direct investment, take measures to ensure an appreciation in the value of Naira; reduce the level of risk in the investment environment in Nigeria and; introduce export oriented policies through export promotion investments to boost exports. Further, they should formulate and implement appropriate interest rate policies that will enable Nigeria use a single digit interest rate policy option which is hoped to attract foreign investors and encourage domestic borrowings for further expansion in the Nigerian economy. Keywords: Foreign Direct Investment, Vector Autoregression, Nigerian economy, Causality. 1. Introduction: One of the macroeconomic goals of any country is the achievement of balance of payment (BOP) equilibrium. Amongst the components of balance of payment, is the issue of capital account. Capital account is comprised of foreign direct investment (FDI) and foreign portfolio investment (FPI) components. Foreign direct investment according to United Nations Conference on Trade and Development (2007) can be described as an investment concerning an extended business interest and controlled by a foreign investor in a different country distinct from that of the investor. Foreign direct investment has played a significant role in enhancing productivity of nations and promoting development in developing nations which has dissuaded many countries from placing restrictions on foreign investments in their economy (Antwi et al, 2013). Conversely, portfolio investment is a financial asset investment in another country’s securities (bonds and stocks). The World Bank (1996) conceptualized Foreign Direct Investment as a venture with the sole purpose of acquiring a permanent management concern (i.e. a voting share of minimum of10%) in a business which is operational in a country distinct from those of the investors. The investor’s aim is the ability to make routine decisions for optimal management of the business with the objective of receiving either short or long period capital revealed in the country’s balance of payment account statement (Macaulay, 2012). Jenkin and Thomas (2002) argue that foreign direct investment should contribute to economic development by providing foreign capital and improving other domestic investment. This is achieved through investment chains and diversification within the domestic economy. Hence, further employment opportunities are created due to increased productive activities. Adegbite and Ayadi (2010) observe that foreign direct investment assists a nation in filling her domestic revenue gap, especially emerging nations, given the challenges faced in generating adequate revenue for development purposes. Apart from bringing investible funds to emerging countries, it encourages technology transfer and spillover