Global Journal of Economic and Finance Research Vol. 02(07): 482-491, July 2025 Home Page: https://gjefr.com e-ISSN: 3050-5348 p-ISSN: 3050-533X DOI URL:https://doi.org/10.55677/GJEFR/02-2025-Vol02E7 pg. 482 Public Debt and Foreign Direct Investment Inflow in Nigeria Roland I. Irughe 1 , Monday I. Egharevba 2 , Rufus T. Oziegbe 3 , Joel Edafe 4 1,2,3,4 Department of Economics, Adeyemi Federal University of Education, Ondo, Nigeria. KEYWORDS: domestic debt, external debt, FDI, fiscal risk, non-linear effects JEL Classification: F21, F34, H32, H63 Corresponding Author: Roland I. Irughe Publication Date: 03 July-2025 DOI: 10.55677/GJEFR/02-2025-Vol02E7 License: This is an open access article under the CC BY 4.0 license: https://creativecommons.org/licenses/by/4.0/ ABSTRACT This study investigates the relative impacts of external and domestic public debt components on foreign direct investment (FDI) inflows in Nigeria. The focus is on establishing a nonlinear (inverted U-shaped) relationship between public debt accumulation and FDI in the country. Drawing on the debt overhang hypothesis, the paper posits that while moderate debt may stimulate investment by financing growth-enhancing activities, excessive debt can create fiscal and macroeconomic risks that deter foreign investors. Annual time-series data for the period of 1981 to 2023 is used for the empirical analysis while a dynamic econometric model was evaluated using the autoregressive distributed lags (ARDL) approach. The study finds that rising and unsustainable public debt in Nigeria signals economic risk with attendant capacity to reduce FDI inflows in the long run. This negative long run effect exists for both domestic and external debt. In particular, there is evidence that low levels of debt may improve FDI inflows. However, at very high levels, public debt generates disincentives for foreign investors in the long run. Thus, the study provides evidence that a threshold of debt accumulation exists beyond which debt becomes detrimental to attracting foreign investment. The results underscore the need for prudent debt management and policy frameworks that balance borrowing for development with maintaining an enabling environment for sustained FDI inflows. 1. INTRODUCTION The relationship between public debt and economic outcomes continues to attract considerable interest from research and policy makers. The general position is that public debt accumulation can constitute a long-run burden on the economy, especially in developing countries. In particular, there is concern that large debt service payments made by indebted low-income countries retard their growth and fiscal adjustment efforts (Bi et al, 2014; Salmon & Rugy, 2020; Miningou, 2023). In the same vein, large external debt accumulation has resulted in “debt overhang” in these countries with negative implications for investment and domestic stability (Krugman, 1988; Borensztein, 1990; Otieno, 2024). In the same vein, the complex crowding-out effect that domestic debt could generate for investment also poses challenge in an economy. These issues have intensified the debate over the impact of a high debt burden on an economy and the channels through which these effects may occur. In Nigeria, the public debt problems (particularly external debt) that started in the early 1980s emanated from deep-rooted macroeconomic difficulties related to worsening fiscal revenue. Although there was respite in external debt condition after the debt forgiveness in 2005, overall public debt challenge in Nigeria has remained severe, especially in recent years. For instance, while external debt to GDP ratio was 1.48 percent in 2006 (a year after the debt relief), the ratio had grown to 16.3 percent in 2023. Domestic debt to GDP ratio also rose from 8.21 percent in 2010 to 22.72 percent in 2023. These sharp increases in public borrowing are consistently pushing the economy into the pre-2005 era. Moreover, the share of external debt in total debt, which had fallen to 6.83 percent in 2006 has risen to 41.78 percent in 2023. This shifts in the public debt structure in Nigeria further complicates the possible effects of debt on the economy. FDI flows in Nigeria have been marked by inconsistency. FDI to GD ratio which had reason to 2.9 percent in 2009 was only 0.85 percent in 2016 and 0.52 percent in 2023. These vagaries are not unrelated to the distorted market environment arising from high