Can bond and equity markets attract more foreign direct investment?

Abstract

This study investigates the role of bond and equity market development in attracting Foreign Direct Investment (FDI) inflows in Nigeria over the period 1996–2024. Using an ex-post facto research design, secondary data were sourced from Central Bank of Nigeria Statistical Bulletin and World Bank Development Indicators. The analysis focuses on the contribution of bond and equity markets, alongside macroeconomic stability, to the attraction of foreign capital. The Autoregressive Distributed Lag (ARDL) model was employed to estimate both short-run and long-run relationships, while the ARDL bounds test confirmed the presence of cointegration among the variables. The results indicate that equity market development has a consistently positive and significant impact on FDI in both the short and long run, highlighting the importance of a well-functioning stock market in attracting foreign capital. Bond market development exhibits a mixed effect, with short-term expansions positively influencing FDI, while long-term high levels may discourage investment due to potential crowding-out effects. Inflation and exchange rate were found to be insignificant, suggesting that moderate macroeconomic fluctuations do not materially affect FDI inflows. The findings underscore the need for integrated policy measures that strengthen financial markets and ensure macroeconomic stability to sustain and enhance foreign investment in Nigeria.