Effect of Insecurity on Foreign Direct Investment in Nigeria, 2002-2023

Effect of Insecurity on Foreign Direct Investment in Nigeria, 2002-2023

Ajibua Gbenga (PhD)

Charisma University, Department of Business Administration, Grace Bay, Turks & Caicos Island

DOI: https://dx.doi.org/10.47772/IJRISS.2025.915EC0025

Received: 11 March 2025; Accepted: 13 March 2025; Published: 23 April 2025

ABSTRACT

The devastating effect of insecurity on economy performance particularly foreign direct investment have tended to undermine key indicators of macroeconomic variables such as unemployment, poverty and government revenue. The study assessed the impact of insecurity on the level of foreign direct investment in Nigeria covering the data period 2002-2023. Besides the two underlying variables, gross domestic product was included in the model as a control variable. Employing the ARDL model, the study found that insecurity negatively affected FDI growth in Nigeria. Also, the study further found that gross domestic product, a proxy for economic growth, exerted positive impact on foreign direct investment. The study recommended that government may be proactive in dealing with security threats, through training, modern methods of intelligence gathering, and sharing, logistics and the deployment of advanced technology in managing security challenges. Finally, government may formulate policies and programmes capable of addressing the current level of low productivity in the country thereby repositioning the economy for growth and development.

Key Word: Insecurity, Foreign Direct Investment, ARDL model, Nigeria.

INTRODUCTION

It is natural to express fear and anxiety that insecurity would have a negative impact on FDI inflows in economy of any nations. Empirical studies dictate that the loss of foreign investors’ confidence occasioned by security challenges have prompted large outflows of capital in affected countries (Abubakar, et al., 2017; Nusrat, 2022). This is why Nwankwor and Nkechukwu (2023) submitted that insecurity posed significant challenges to investment in Nigeria as economic growth is impacted while investor confidence and social stability have been chartered. It has been further argued in the extant literature that the reputational risks associated with insecurity deter potential investors thereby hindering the needed development (Madume  & Owulo, 2024). In recent time, there have been increasing security challenges to safety of lives and properties as available statistics show that Boko Haram and government forces in the Northeast alone have led to over 4000 being feared killed in several fatal incidents between 2020 and 2023 insurgency without counting the losses on kidnapping, banditry and Fulani herdsmen violent acts (Ayobami, et al., 2022). The led to a situation where several domestic and foreign businesses experienced stagnation leading to closure of many business premises resulting in increasing unemployment.

In Nigeria, the pace of security challenges in recent time with its concomitant effect on the level of economic activities call for pragmatic approach from government and stakeholders of the Nigeria’s project in addressing the problems. The current wave of kidnapping, armed robbery, corruption, assassination is worrisome. The disturbing accounts of mayhem unleashed on innocent citizens by unidentified gunmen, the Boko Haram Islamist Sect and other agents of darkness have become a dominant issue in the media. Owolabi and Ayenakin (2015) averred that the current state of insecurity poses serious threats to the stability of the economy thereby leading to colossal loss of lives, properties, and infrastructures which affected the level of foreign direct investment. It is a fact that no business or enterprise can thrive in an insecure environment. For instance, the killings of over 40 students at Mubi in Adamawa State in 2016 and 4 students of the University of Port Harcourt in Rivers State in 2017, the killing of over 30 students in Yobe State in 2016, the attacks at the United Nation Building and Police Headquarters in Abuja in 2010 were enough to scare away foreign investors. In recent time, frequent cases of kidnappings have been reported in Katsina. For instance, in the evening of 11/12/2020, over 300 pupils were kidnapped from a boys’ secondary boarding school on the outskirt of Kankara Katsina State North West Nigeria. A gang of gunmen on motorcycles attacked the Government Science Secondary School, where more than 800 pupils reside. Similarly, government statistics for Abuja show 40 kidnapping cases involving 236 victims between January 2021 and June 2023. There is hardly any passing month where kidnapping cases are not reported in most part of Nigeria.

At the moment, Kaduna, Jos, Maduguri, Benue and other states in the North are now dreaded places for both domestic and foreign investors as well as tourists. The Boko Haram war has claimed over 40,000 lives since it began over a decade ago. According to anecdotal evidence, over 8500 Nigerians have reportedly lost their lives in political, religious, and ethnic conflicts amid post-election violence between 1999 and 2023. The unprecedented level of insecurity in Nigeria prompted huge allocation of the national budget to security vote (Achumba, et al., 2013). The 1999 Constitution of the Federal Republic of Nigeria specifically states that “The security and welfare of the people shall be the primary purpose of government”. Unfortunately, government has failed to provide a secured and safe environment for lives, properties and the conduct of business and economic activities. The alarming level of insecurity in Nigeria has increased the crime rate and terrorists attacks in different parts of the country, leaving unpalatable consequences for the nation’s economy and business growth. In order to ameliorate the incidence of crime, the federal government has embarked on criminalization of terrorism by passing the Anti-Terrorism Act in 2011. Despite the government efforts, the level of insecurity in the country has remained unabated and a confirmation of this is the low ranking of Nigeria in the Global Peace Index where the country ranked 144th out of the 163 countries surveyed in 2023.

Essentially, the inability of government to provide a secure and safe environment for lives, properties and the conduct of business activities led to resentment and disaffection among business investors. This resulted in communal clashes, religious violence and crimes in different parts of the country that have destroyed lives and properties, disrupted businesses and economic activities, and retarded economic growth and development in Nigeria (Okonkwo, et al., 2015). No business investors whether local or foreign will be motivated to invest in an unsafe and insecure environment. In a globalized world investors are not only looking for high returns on their investments but also safe environment to make investments. Thus, the alarming level of insecurity in Nigeria made the economy unattractive to foreign investors and slowed down the level of business activities thereby impacting negatively on economic growth and development.  Therefore, this study is posed to examine the implications of insecurity on foreign direct investment in Nigeria. Conclusively, the sequence of the paper is clear. Following the introduction, section two contains brief review of related literature and the methods of study were outlined in section three. In section four, the empirical findings were presented and the paper is concluded in section five with policy recommendations based on findings.

REVIEW OF RELATED LITERATURE

Concept of Insecurity

The concept of insecurity connotes different meanings such as absence of safety, danger, hazard, and uncertainty, lack of protection and lack of safety. Beland (2005) views insecurity as the state of fear or anxiety stemming from a concrete or alleged lack of protection. This means lack of inadequate freedom from danger. Achumba, et al., (2013) defines insecurity from two perspectives. Firstly, insecurity is the state of being open or subject to danger or threat of danger, where danger is the condition of being susceptible to harm or injury. Secondly insecurity is the state of being exposed to risk or anxiety, where anxiety is a vague unpleasant emotion that is experienced in anticipation of some misfortune. These definitions of insecurity underscore a major point that those affected by insecurity are not only uncertain or unaware of what would happen but they are also vulnerable to the threats and dangers when they occur. This applies to people engaged in business activity, either directly or indirectly, to satisfy unlimited human wants. Therefore, business has become part and parcel of human existence in particular and global world in general.

Concept of Foreign Direct Investment

Foreign direct investment means the direct investment of a foreign company or country on the productive asset of the domestic economy. According to Graham and Spaulding (1995), it is defined as a company from one country making physical investment into building a factory in another country. Given the rapid growth and changes in global investment patterns, the definition has been broadened to include the acquisition of lasting management interest in a company or enterprise outside the investing firm’s home country. As such, it may take many forms, such as direct acquisition of a foreign firm, construction of facilities, or investment in a joint venture or strategic alliance with a local firm with attendance input of technology and licensing of intellectual property. To Odozi (1995), foreign direct investment is a form of lending or finance in the area of equity participation. It involves the transfer of resources, including capital, technology, and management and marketing expertise. Such resources usually extend to the production capabilities of the recipient country. Direct investment whether portfolio or not, involves the movement of resources from a surplus region probably to deficit region with a view to making profit. The flow of resources can however be hampered if the political and socio-economic environment of the host country are hostile.

FDI may likewise be viewed as an investment that acquires the enthusiasm for big business which works outside the residential region of the speculator (Kamaraj, 2008). It requires a business connection between a parent organization and its foreign auxiliary. This foreign direct business relationship offers to ascend to multinational enterprises, and for an investment to be viewed as an FDI, the parent firm needs no less than 10% of the normal offers of its foreign members. The contributing firm may likewise meet all requirements for an FDI on the off chance that it claims of voting power in business ventures working in a foreign nation. The Nigerian government in perceiving the benefits of FDI embraced a few arrangements to draw in FDI into the Nigerian economy. Especially, the legislature actualized the IMF customized progression of its economy, got foreign financial investors in the assembling sub-area and give motivating forces for value possession taking all things together, enterprises with the exception of key industry like military hardware (Udoh & Egwaikhide, 2008).

Empirical Issue

The literature is saddled with copious empirical studies on the effect of insecurity on foreign direct investment and mixed findings have been uncovered. Thus, Sandler and Enders (2008) conduct a study on 177 nations covering a period, 1968-2000. Utilizing pooled cross segment information, the study finds a negative and insignificant terrorism effects on per capita income growth and investment. Oriakhi and Osemwengie (2012) examine the relationship between FDI and national security in Nigeria using data covering the period, 1980 – 2009. The study used defence and security vote as a proxy for national security. Employing the OLS technique, the study finds a negative nexus between FDI and national security.

Achumba, et al., (2013) examine the effect of insecurity on investment in Nigeria and find that insecurity challenges in Nigeria were colossal and complex thereby affecting investment growth in Nigeria. Ikpe and Nteegah (2014) aver that social insecurity has become a major hurdle to the Nigeria States as it is believed to have a strong negative link with foreign direct investment and the level of economic growth. Employing the Cob-Douglas production function on data covering 1981-2010, the study finds that social insecurity stimulates the inflow of foreign technology rather than inhibit it. A development attributed to the merging of distinct social insecurity data.

Essien, et al., (2015) assess the effect of national security on foreign direct investment in Nigeria covering a data period, 1999-2013. Utilizing descriptive statistics, the study finds that national security remains a major factor hindering the growth of FDI in Nigeria. Owolabi and Ayenakin (2015) investigate the impact of insecurity on foreign direct investment covering the period, 2003-2012. Employing the OLS methods, the study finds negative relationship between foreign direct investment and insecurity. The paper suggests strong policy stance which must be taken to address the state of insecurity in Nigeria in order to attract more foreign direct investment into the economy.

Jelilov, et al., (2018) examine the extent at which insecurity affected investment and socio-economic development in Nigeria from 2007 to 2017. Using three variables model, terrorism index (a proxy for insecurity), foreign direct investment and oil prices, the study finds that foreign direct investment had significant negative response to changes in terrorism index (47.5%) contrarily to its 2.7% response in oil price variation.  Abubakar, et al., (2017) investigate the effect of insecurity on foreign direct investment outflow in Nigeria spanning 2005-2015. The study employs defense and security vote (a proxy for insecurity) as independent variable while gross domestic product, exchange rate and trade openness were the control variables. Accordingly, the study finds evidence of long-run relationship between foreign direct investment and insecurity. Likewise, the study further revealed that causality runs from insecurity to foreign direct investment.

Ayoola (2022) assesses the effect of insecurity on foreign direct investment in Nigeria with data covering 1999-2014. The study utilizes both primary and secondary data. Whilst the primary data consist of purposively selected respondents from Ministry, Departments and Agencies of government, the secondary data were mainly from official publications on foreign direct investment and insecurity. The study employed qualitative and descriptive methods of analysis and findings indicated evidence of deleterious effect of insecurity on foreign direct investment in Nigeria.

In Afghanistan, Nusrat (2022) appraises the effect of insecurity and instability in the inflow of foreign direct investment on economic performance on the country’s economic performance. The study employed primary data using sample of 130 respondents out 250 target population from the Afghan business community who have been affected by the consequences of insecurity. Using a non-probabilistic technique, the study finds negative effect of insecurity on foreign direct investment and economic performance in Afghan.

Ayobami, et al., (2022) examine the impact of terrorism on Nigeria’s economy with a focus on foreign direct investment for the period 2010-2020. Employing the OLS estimation technique, the study finds that the second-order polynomial regression model is statistically significant. This led the study to conclude that the highest significant negative impact of terrorism on the economy was produced by the current state of transnational terrorism mostly by terrorist organizations such as Boko Haram and ISWAP. The study recommends elimination to the dearest minimum of all forms of transnational terrorism which will alley the fear of foreigners in their choice of investment in Nigeria.

Madume and Owulo (2024) examined the effct of insecurity on foreign direct investment in Nigeria. The relevant proxies for insecurity used for the model consisted of political stability, insecurity and terrorism as well as kidnapping while the dependent variable is FDI. Using inferential statistics, the study found that has deleterious effect on foreign direct investment in Nigeria. The study recommended transparent and credible governance as a strategy to mitigate political instability thereby attracting foreign direct investment in Nigeria.

Stylist Facts on Terrorism index and FDI in Nigeria

The spate of terror attacks in Nigeria over the last few years has affected the level of economic performance. We employed the Global Terrorism Index (GTI) to determine the level of terrorism in Nigeria. The GTI measures the direct and indirect impact of terrorism, including its effects on lives lost, injuries, property damaged and the psychological after effects. It is a composite score that ranks countries according to the impact of terrorism from 0 (no impact) to 10 (highest impact).

Table 1: Terrorism Index and FDI in Nigeria (%)

Source: CBN &tradingeconomics.com/Institute for economics and peace

Table 1 indicates that terrorism index in Nigeria decreased to 7.8 in 2023 from 8.1 in 2022. The index averaged 7.1 from 2002 and 2023, reaching an all-time high of 9.3 in 2015 and a record low of 3.9 in 2002. In the case of FDI, it recorded positive performance in few years. This positive trend was predicated on the Nigerian army’s intelligence gathering abilities, operational scope, and overall impetus which became more active. Furthermore, Nigeria also entered into pacts with foreign nations in the fight against terrorism.

Fig 4.1: Trend of FDI and NTI

This meant military aid from allies especially with regards to training of personnel, provision of ammunition and intelligence sharing improved the morale and made better the abilities of local and regional troops. This gave rise to a steady recapture of a sizeable portion of territories initially controlled by Boko Haram. This tends to boost investors’ confidence and accounts for the few positive trends. In late 2014, it was reported that these territories during the peak of the violence covered an expanse of land up to the size of Belgium.  In 2015, Boko Haram overtook ISIL to become the deadliest terrorist group in the world. This made Nigeria to move up to 3rd country on the list of GTI having the highest impact of terrorism with an index score of 9.2, surpassed only by Iraq and Afghanistan. This affects the pace of FDI in Nigeria. The several clashes between farmers and Fulani headsmen resulting in several killings in Jos and Benue further exacerbated the problems of insecurity that scared away foreign investors. Fig 1 shows the trend of FDI and Nigerian terrorism index between 2002 and 2023.

METHODOLOGY

The study develops a linear model similar Ayoola (2022) and Ayobami, et al., (2022) to investigate the effect of insecurity on foreign direct investment. Accordingly, the autoregressive distributed lag (ARDL) model was employed for the long run while the unrestricted error correction model was utilized for the contemporaneous short run analysis. For the purpose of data refinement, a test of unit root is performed to ensure that I(2) variables are not included in the models. Additionally, a battery of diagnostic test is carried out to avoid misleading findings. They include normality test, serial correlation test, ARCH test, Ramsey reset test as well as cusum and cusumsq tests for model stability. The study which spanned the period, 2002-2023 is specified as follows:

FDI = f(NTI, GDP) ……………………………………………. (1)

In log stochastic term, equation 1 becomes:

lnFDI = β₀ + β₁lnNTI + β₂lnGDP + μ ……………………………………………. (2)

Where:

FDI = Foreign Direct Investment, NTI refers to Nigerian Terrorism Index and GDP is Gross Domestic Product. A negative correlation is expected between FDI and terrorism index while FDI is expected to respond positively to variations in GDP. Accordingly, the ARDL model developed by Pesaran, et al., (2001) is presented as follows:

The outcome of the long run estimation is the bound test cointegration in which Pesaran, et al., (2001) calculated the F-statistic for bounds of critical values. If the F-statistic exceeds the upper bound the series are cointegrated and evidence of long run relationship exists. If F-statistic falls below the lower bound, no cointegrationn is possible by definition. However, the test will be inconclusive if the F-statistic lies between the two bounds. Meanwhile, if cointegration is established the unrestricted error correction model may be estimated as follows:

In equation 4, λ measures the speed of adjustment to the equilibrium level after a shock while ECT_t−1 is the error correction term obtained from the estimated long-run equilibrium relationship. The coefficient of λ must be negative and significant to ensure that long run equilibrium relationship exists between the dependent and the independent variables.

RESULTS AND DISCUSSION

Table 1, the unit root tests were conducted at 5% level of significance using the ADF and PP tests and results revealed that foreign direct investment  and gross domestic product were stationary at first differencing while terrorism index was stationary at level.

Table 1: Result of Unit Root Test

Source: Author’s computation using Eview 12.0

Accordingly, the ARDL model (3, 2, 2), not shown, was estimated to achieve the bound cointegration tests to determine if long run relationship exists. This was preceded with battery of diagnostic tests conducted on the data to prevent misleading findings. Table 2 therefore contains the diagnostic tests with the p-value in parenthesis.

Table 2: Diagnostic Tests

Source: Extracted from Eview 12

Observably, the results indicate that the model passes the diagnostic tests and is satisfactory in that it is normally distributed, serially uncorrelated, no heteroscedasticity and has no misspecification bias. Likewise, the model is stable as revealed by the tests of stability in Fig 1 and Fig 2 where the blue line lies between the two critical bounds of +5 level of significance.

Fig 1: Stability Test (CUSUM)

Fig 2: Stability Test (CUSUMSQ)

In Table 3 therefore, the bound co-integration test is presented where the F-Stat of 9.31 exceeds the upper bound value of 3.49 thereby suggesting evidence of long run equilibrium relationship between foreign direct investment and terrorism index and gross domestic product.

Table 3: ARDL Bound test for co-integration

Source: Extracted from Eview 12

Accordingly, Table 3 presents both the long run and short run estimations of the effect of terrorism index and gross domestic product on foreign direct investment in Nigeria. It can be seen from the results that the fit of the model is relatively robust as the R²  of 0.87 reveals that the explanatory variables accounts for 87% variation in foreign direct investment in Nigeria. Also, the DW statistic of 1.98 reveals absence of serial correlation thereby corroborating the battery of diagnostic tests.

Table 3: Estimation Model

Method: ARDL

Dependent Variable: LFDI

Source: Extracted from Eview 12

Therefore, the long run results show that in the long run terrorism index has significant negative effect on foreign direct investment while the impact of gross domestic product and the past level of FDI is positive and statistically significant. For instance a 1% increase in terrorism index leads to 0.45% decrease in foreign direct investment in the long run. Meanwhile, the results of the short run mimic the long run findings. In the short run therefore, terrorism index exerted significant negative effect on foreign direct investment while effect of GDP is positive and statistically significant. Like the short run a unit increase in terrorism index led to 0.32% decline in foreign direct investment during the period under consideration. The findings give credence to other prior studies in the extant literature such as Jelilov, et al., (2018), Ayobami, et al., (2022), Nusrat (2022) and Ayoola (2022). In the meantime, the ECT which is negative and correctly signed is statistically significant which is what is expected if there is cointegration between terrorism index and foreign direct investment as well as gross domestic product used as control variable. The ECT carries a high speed of adjustment of 76% to correct any disequilibrium between the short and the long runs in the course of the year.

CONCLUSION AND RECOMMENDATIONS

The study examined the impact of insecurity on the level of foreign direct investment in Nigeria and stressed that the rising wave of insecurity in the country tended to undermine the economy performance through its foreign direct investment channel. The study uses econometric approaches for the analysis and found that insecurity negatively affected FDI growth in Nigeria. The study also found that gross domestic product used as control variable exerted significant positive impact on foreign direct investment both in the short run and long run. The findings indicated that terrorism in Nigeria is a serious problem and has affected the economy negatively by scaring away investors particularly foreigners and their businesses closed down. This is why many foreign investors have fled Nigeria especially the north east which is the hotbed of insurgency where the fear of Boko Haram and banditry is the beginning of wisdom. Similarly, the activities of the Niger Delta militants have also made a number of multinational oil companies to flee the region.

In the 2024 Global ranking of terrorism index, the Institute for Economics and Peace (IEP) headquartered in Sydney put Nigeria as the 8^th most terrorized country in the world out of the 161 countries surveyed. The country was ranked 7.5% with 10% being the highest score for heavily terrorized countries and 0% for least terrorized ones. The IEP attributed the country’s position on the list to the increase in violence involving banditry and kidnapping for ransom, herder-farmers clashes and thousands of deaths committed by the deadly terrorist Boko Haram. It described Boko Haram activities as crimes against humanity which involves attacks against women and girls, against schools, teachers and school children such as the abductions of over 300 school girls in Chibok in 2014, 113 girls from the Government Girls’ Science Technical College in Dapchi, Yobe State, in 2018, and more recently the adoption of over 300 students from Government Boy Secondary School in Kankara, Katsina in 2020. A report by the IEP noted that Boko Haram was once the world’s deadliest terror group, but that its power had been weakened significantly since the peak of its powers in 2014. However, it remains the most active terrorist organization in Nigeria and, until 2017, was the deadliest terror group in sub-Saharan Africa. The main conclusion that can be drawn from this study is that insecurity crowd out foreign direct investment in Nigeria. Evidently the the empirical findings revealed that insecurity is capable of scaring away investors, thereby leading to unemployment, reducing export receipts and government revenue and the performance of the economy will be affected.

On the basis of the findings therefore, government should be proactive in dealing with security issues and threats, through training, modern methods of intelligence gathering, and intelligence sharing, logistics and the deployment of advanced technology in managing security challenges. This will add more values in checking incessant bombings, robbery, kidnapping and violent crimes by hoodlums in the country. Likewise, government may formulate and effectively implement policies and programmes capable of addressing the low productivity in the country thereby repositioning the economy for growth and development where unemployment and poverty which are root causes of insecurity in Nigeria are mitigated. Finally, governments may include security management in school curriculum at all levels of education in Nigeria. This will enable the youths to appreciate the importance of security in a secular state like Nigeria.

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