Empirical Study of the Relationship Between Governance Quality and Foreign Direct Investment Inflows in Nigeria

Institutional quality and governance are theorised to be critical determinants of FDI location decisions, but the specific governance dimensions most influential for Nigerian FDI attraction have not been comprehensively established empirically. This study empirically examined the relationship between governance quality dimensions and foreign direct investment inflows in Nigeria using annual data from 1996 to 2022. Governance quality was measured using six World Governance Indicators: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption. FDI inflows data were from UNCTAD. A Dynamic OLS and Fully Modified OLS approach was applied to address non-stationarity. Results showed that government effectiveness was the governance dimension with the strongest significant positive relationship with FDI inflows (long-run coefficient = 0.78, p < 0.001). Rule of law showed the second strongest positive association. Political stability showed a significant positive association specifically for manufacturing-sector FDI. Control of corruption showed a weaker but significant positive effect. Voice and accountability showed a non-significant relationship with total FDI but significant effects on services sector FDI. GDP growth, infrastructure quality, and market size were significant control variables. The study fills an empirical gap in Nigeria-specific governance-FDI literature and recommends prioritising government effectiveness and rule of law reforms in Nigeria's investment promotion strategy, and incorporating governance quality targets into investment promotion legislation. Keywords: governance quality, FDI, Nigeria, World Governance Indicators, investment climate