Multivariate Analysis of Macroeconomic Determinants of Foreign Direct Investment in Nigeria

Foreign direct investment inflows to Nigeria have been characterised by high volatility and persistent underperformance relative to the country's economic size and resource endowment, creating a gap between potential and actual FDI attraction that demands rigorous empirical analysis. This study applies vector autoregression modelling, cointegration analysis using the Johansen procedure, and variance decomposition to examine the dynamic relationship between FDI inflows and seven macroeconomic determinants using quarterly data for the period 2005 to 2023. Explanatory variables include real GDP growth, inflation rate, exchange rate volatility, trade openness, infrastructure quality index, institutional quality score from the World Governance Indicators, and commodity price index. The Johansen cointegration test confirms two cointegrating relationships, justifying estimation of a vector error correction model that captures both short-run dynamics and long-run equilibrium adjustments. Generalised impulse response functions trace FDI responses to structural shocks in each macroeconomic variable over a 12-quarter horizon. Variance decomposition at the 8-quarter horizon attributes 31 percent of FDI forecast error variance to institutional quality shocks, 24 percent to infrastructure quality shocks, and 19 percent to exchange rate volatility shocks. Findings empirically validate the primacy of institutional reform and infrastructure investment as FDI attraction levers in Nigeria. Keywords: foreign direct investment, vector error correction model, cointegration, Nigeria, institutional quality.