Nexus between Market Size and Governance Quality: Analysis of FDI Determinants in a Resource-Based Economy.

Abstract

This paper investigates the determinants of FDI in Nigeria’s oil and gas industry from 1973 to 2024, analyzing the interplay between market size and governance quality. It adopts the ARDL bound testing and a threshold ARDL framework to evaluate how macroeconomic fundamentals and governance indices shape investment trajectories in a resource-based economy. Findings reveal a complex "resource-seeking" dynamic: while sectoral output (oil and gas market size) serves as a significant short-run driver of FDI, institutional quality exerts a statistically significant negative effect in the long run. This empirical paradox shows that formal regulatory reforms may initially disincentivize FDI due to perceived rigidities or the gap between de jure rules and de facto implementation. Furthermore, the results of the analysis identify regime-dependent behavior, with FDI responses varying significantly between periods of high and low oil reserves. The paper concludes that discrete policy shifts, such as the PIA (2021) and industry-based fiscal reforms, have not significantly changed the sector’s long-term equilibrium. Consequently, the evidence underscores the need for institutional credibility and streamlined regulatory frameworks to harmonize market incentives with sustainable sectoral growth.