Effects of Financial Development on Aggregated Foreign Investment Flows in Nigeria: ARDL Approach

Purpose: This study examines the effects of financial development on aggregated foreign investment flows in Nigeria over the period Q1 2012 to Q4 2024, with the aim of assessing both the long-run and short-run relationships between key dimensions of financial sector development and foreign investment inflows. Methodology: The study adopts a causal and descriptive research approach based on an ex-post facto design. Quarterly time-series data were employed, and the Autoregressive Distributed Lag (ARDL) model was used to analyse the long-run and short-run dynamics between financial development indicators—financial depth, financial inclusion, financial stability, and financial efficiency (independent variables)—and aggregate foreign investment flows (dependent variable). Findings: The results reveal that financial depth, financial efficiency, and financial inclusion exert a positive and statistically significant influence on foreign investment flows in Nigeria. Among these, financial efficiency demonstrates the strongest positive impact, largely attributed to Nigeria’s expanding fintech revolution. In contrast, financial stability exhibits a negative and significant long-run relationship with foreign investment, indicating that some foreign investors may prefer relatively volatile markets in pursuit of higher returns. Although financial inclusion positively affects foreign investment, its magnitude remains weak due to insufficient depth and limited active usage, especially in rural areas. Unique Contribution to Theory, Practice and Policy: The study contributes to theory by highlighting the differentiated effects of financial development components on foreign investment, particularly the counterintuitive role of financial stability in emerging markets. Practically, it underscores the importance of financial efficiency and fintech innovation in attracting foreign capital. From a policy perspective, the study recommends that Nigeria deepen financial markets, sustain and regulate the fintech ecosystem, and reassess financial stability frameworks to balance risk management with investment attractiveness. Additionally, policymakers should shift focus from merely expanding financial access to enhancing active and productive use of financial services, especially in underserved rural areas, to attract more substantial and sustainable foreign investment inflows.