The standard neoclassical theory of growth predicts that capital should move from developed countries to developing countries (Lucas, 1990). In recent years, there has been increase in the flow of international capital, due to a constellation of factors like economic integration, financial markets liberalization and technological advancement. It is now obvious that given the vicious cycle of poverty, emerging economics like Nigeria can progress to steady state economic growth by relying significantly on inflow of foreign capital. Basically, foreign capital flows refer to movement of financial resources from one country to another, thereby enhancing the economic growth and development of the host country.
The host country is typically constrained by low domestic savings and investment (Obiechina, 2010). Foreign capital flows can be decomposed into official development assistant, export credits and foreign private flows. This last group is the focus of this study. Foreign private investment is the stock of physical assets and financial securities held in one country by investors of another country. While the former is called Foreign Direct Investment (FDI), the latter is called Foreign Portfolio Investment (FPI). Suffice to say that FDI is usually seen as the international investment of multinational companies. Foreign capital flows are influenced by an array of factors which include the stability or otherwise of macroeconomic variables, insecurity, corruption and other socio-political factors (Edo, 2011), but our focus is on exchange rate volatility.
