Foreign Direct Investment and Youth Unemployment in Nigeria: Reassessing the Employment Transmission Mechanism

Abstract

Nigeria continues to have chronically high youth unemployment despite continued foreign direct investment (FDI) inflows, contradicting traditional development theory's assertion that FDI inflows boost employment through investment expansion and knowledge transfer. This study uses annual time-series data spanning 25 years (2000–2024) to reexamine the relationship between youth unemployment in Nigeria and foreign direct investment (FDI). The Autoregressive Distributed Lag (ARDL) method was used for analysis in this study. Results indicated that all the explanatory factors (exchange rate, government spending, inflation rate, minimum wage rate, population growth rate, and foreign direct investment) in Nigeria have a long-run relationship with the dependent variable (youth unemployment rate). In the short run, the a priori assumption is met by government spending, FDI, and the minimum wage rate, but not by the rate of inflation, population growth, or currency rate. The findings suggest that the weak employment response to FDI reflects structural and absorptive capacity constraints rather than the ineffectiveness of foreign investment per se. The study recommends that policymakers should formulate and implement programs to boost foreign direct investment within the domestic economy. Additionally, the government should implement labor-absorbing FDI policies and make sure that FDI is directed toward labor-intensive industries like manufacturing, agriculture, and information, communication, and technology (ICT) that have a high ability to absorb labor.