Global Journal of Economic and Finance Research

This study investigates the relative impacts of external and domestic public debt components on foreign direct investment (FDI) inflows in Nigeria. The focus is on establishing a nonlinear (inverted U-shaped) relationship between public debt accumulation and FDI in the country. Drawing on the debt overhang hypothesis, the paper posits that while moderate debt may stimulate investment by financing growth-enhancing activities, excessive debt can create fiscal and macroeconomic risks that deter foreign investors. Annual time-series data for the period of 1981 to 2023 is used for the empirical analysis while a dynamic econometric model was evaluated using the autoregressive distributed lags (ARDL) approach.  The study finds that rising and unsustainable public debt in Nigeria signals economic risk with attendant capacity to reduce FDI inflows in the long run. This negative long run effect exists for both domestic and external debt. In particular, there is evidence that low levels of debt may improve FDI inflows. However, at very high levels, public debt generates disincentives for foreign investors in the long run. Thus, the study provides evidence that a threshold of debt accumulation exists beyond which debt becomes detrimental to attracting foreign investment. The results underscore the need for prudent debt management and policy frameworks that balance borrowing for development with maintaining an enabling environment for sustained FDI inflows. 

domestic debt, external debt, FDI, fiscal risk, non-linear effects

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