Institutional Quality and Its Role in Foreign Direct Investment-Driven Economic Growth in Nigeria

Nigeria is one of the major recipients of foreign direct investment in Africa and indeed one of the top three leading African countries that consistently received FDI in the past decades due to its natural resource’s endowment. However, despite Nigeria’s significant inflow of FDI over the years, its impact on economic growth has remained inconsistent, raising concerns about underlying structural and governance factors. This study investigated both direct and indirect effect of foreign direct investment on economic growth, taking into consideration the role of institutional quality in Nigeria. Secondary data were sourced from world development world indicators from 1984- 2024. The study employed econometric techniques such as correlation matrix, autoregressive distributed lag model, bound test of co-integration and error correction mechanism to analyze the data. The results revealed that there is a long run relationship among economic growth, foreign direct investment, gross capital formation, trade openness and institutional quality in Nigeria. In the long run, institutional quality has a negative relationship with economic growth but not statistically significant at 5% level. Conversely, in the short run, institutional quality has a negative relationship with economic growth and it is statistically significant 5% level. The short run dynamic results above revealed that the estimated equation passed the diagnostic tests. The study therefore, recommended that government should strive to put under check corrupt and fraudulent practices, encourage self-employment, provide access to loans such as micro financing and above all eradicate poverty through investment in the agricultural sector.