Determinants of Foreign Direct Investment in Nigeria: A Hierarchical Bayesian Modelling Approach.

Abstract

The aim of this study is to examine the relationship between Foreign Direct Investment (FDI) and some macroeconomic indicators such as; Gross Domestic Product (GDP), inflation and exchange rate fluctuations in Nigeria. The data used were extracted from the website of the Central Bank of Nigeria (CBN) and World Bank spanning from 1990 to 2023 to capture long-term economic trends.
The study employed a Bayesian regression approach within a hierarchical framework to analyze the impact of these macroeconomic variables on FDI inflows. The results indicate that GDP has a positive and significant effect on FDI, suggesting that economic growth enhances the attractiveness of Nigeria to foreign investors. In contrast, inflation exhibits a negative relationship with FDI, reflecting the adverse effect of macroeconomic instability on investment decisions. Exchange rate fluctuations also show a negative, though relatively weaker, influence on FDI inflows. Model diagnostics confirm that the estimates are stable and reliable, with satisfactory convergence and predictive performance. Overall, the findings highlight the importance of maintaining macroeconomic stability and promoting sustained economic growth to attract foreign investment.
The study recommends that policymaker’s priorities growth enhancing policies, inflation control, and exchange rate stability to improve Nigeria’s investment climate. Furthermore, the adoption of Bayesian techniques is encouraged for future econometric analysis due to their ability to incorporate uncertainty and provide robust parameter estimates