MODERATING ROLE OF INSTITUTIONAL QUALITY IN THE RELATIONSHIP BETWEEN FOREIGN DIRECT INVESTMENT AND MANUFACTURING SECTOR PERFORMANCE IN NIGERIA

This study examines the moderating role of institutional quality in the relationship between foreign direct investment (FDI) and manufacturing sector performance in Nigeria using annual data from 1990 to 2024. A composite institutional quality index was constructed from the six World Governance Indicators using Principal Component Analysis, and the ARDL bounds testing approach was employed. The findings reveal that FDI exerts a negative and significant impact on manufacturing value added in both the short and long run. Although this result contrasts with the conventional expectation that FDI stimulates industrial growth, it reflects the Nigerian experience where foreign investment has been concentrated largely in extractive industries with limited linkages to domestic manufacturing. The interaction between FDI and institutional quality is also negative, though smaller in magnitude, indicating that weak institutions limit the developmental impact of foreign capital. However, institutional quality independently exerts a positive and significant effect on manufacturing value added. The study concludes that FDI alone is insufficient to drive manufacturing growth and that institutional quality plays a critical moderating role. Policy recommendations include strengthening regulatory quality, rule of law, and control of corruption; channeling FDI into manufacturing through targeted incentives; and maintaining macroeconomic stability.