An Evaluation of FDI’s Role in Diversifying Nigeria’s Economy
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Background of the Study
Economic diversification is crucial for reducing Nigeria’s over-reliance on oil revenues and fostering sustainable growth. Foreign Direct Investment (FDI) is widely regarded as a key mechanism for promoting diversification by channeling funds into non-oil sectors such as manufacturing, agriculture, and services (Ibrahim, 2023). Diversification through FDI can stimulate technological transfer, enhance productivity, and generate employment in sectors that are critical for long-term development (Afolabi, 2024). However, the success of FDI in diversifying the economy depends on factors such as the absorptive capacity of local industries, government policies, and infrastructural support.
Recent reforms aimed at attracting FDI into non-oil sectors have produced mixed results in Nigeria. While some sectors have witnessed significant growth due to foreign investment, others continue to be dominated by domestic players with limited technological advancement (Chukwu, 2025). This study seeks to evaluate the role of FDI in diversifying Nigeria’s economy by analyzing sectoral FDI trends, their contribution to GDP, and the resulting shifts in employment and industrial output. The research will use both quantitative sectoral data and qualitative insights from industry stakeholders to assess whether FDI is effectively broadening the economic base.
Statement of the Problem
Despite government initiatives to attract FDI into non-oil sectors, Nigeria’s economy remains heavily dependent on oil revenues. The central problem is that FDI has not uniformly contributed to economic diversification. In many cases, foreign investments are concentrated in a few sectors, limiting their potential to drive broad-based industrial development (Ibrahim, 2023). This concentration exacerbates economic vulnerability to oil price fluctuations and impedes sustainable growth. Factors such as weak infrastructure, limited local capabilities, and restrictive regulatory frameworks further hinder the capacity of FDI to spur diversification (Afolabi, 2024).
The inconsistency in FDI’s contribution to diversification poses a challenge for policymakers who aim to build a resilient and inclusive economy. This study aims to examine the barriers that prevent FDI from effectively diversifying Nigeria’s economic structure and to identify strategies to enhance its impact on non-oil sectors. Addressing these issues is vital for achieving a more balanced and sustainable growth model that reduces economic risks associated with overdependence on a single sector (Chukwu, 2025).
Objectives of the Study
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To evaluate the role of FDI in diversifying Nigeria’s economy.
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To identify the barriers that limit FDI’s effectiveness in promoting non-oil sectors.
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To recommend policy measures that enhance FDI-driven diversification.
Research Questions
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How does FDI contribute to economic diversification in Nigeria?
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What are the main barriers hindering the diversification impact of FDI?
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What policy interventions can improve the role of FDI in diversifying the economy?
Research Hypotheses
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FDI inflows positively impact the growth of non-oil sectors when accompanied by supportive policies.
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Structural barriers, including inadequate infrastructure and regulatory constraints, moderate the diversification benefits of FDI.
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Reforms aimed at enhancing local industrial capacity will strengthen FDI’s role in economic diversification.
Scope and Limitations of the Study
This study examines sectoral FDI data and economic diversification indicators in Nigeria from 2020 to 2024. Limitations include data availability and the difficulty of isolating FDI effects from other reform measures.
Definitions of Terms
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Economic Diversification: The process of expanding the range of economic activities beyond a single dominant sector.
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FDI: Investment made by foreign entities in domestic non-oil sectors.
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Absorptive Capacity: The ability of local industries to effectively utilize and benefit from foreign investments.
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