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Volume 62, Issue 342, September - December 2026

The Impact of Political Stability and Government Effectiveness on Foreign Direct Investment Inflows in Nigeria: Assessing the Mediating Role of Financial Development

Ubong Effiong

Department of Economics, University of Uyo, PMB 1017, Uyo, Akwa Ibom State, Nigeria

ABSTRACT

The concern of this paper was targeted at studying how Nigeria’s political stability, and government effectiveness influences foreign direct investment (FDI) inflows from 1996 to 2024 and overtly test the mediating effect of domestic financial development in such relationship. The analysis was based on the System Generalized Method of Moments estimation technique to deal with the potential endogeneity, dynamic persistence and unobserved heterogeneity associated with FDI determinants. The empirical results show that political stability and government effectiveness have a positive and statistically significant impact on FDI inflows in Nigeria in the full mediation model, with political stability having a relatively larger effect than government effectiveness. Furthermore, the results of the mediation analysis indicate that financial development has a significant mediation role between institutional governance quality and FDI inflows. This highlights the fact that while good political and administrative institutions are essential to building investor confidence, a welldeveloped domestic financial sector is an indispensable structural route to enhancing the country's capacity to absorb investment and returns. Based on the findings, it is recommended that policymakers in Nigeria should strive to mitigate political risks, electoral instability, and make the capital market more liquid.

Keywords: Foreign Direct Investment, Political Stability, Government Effectiveness, Financial Development