Foreign direct investment: an empirical investigation of economic and climate variables in Somalia

Foreign Direct Investment (FDI) plays a crucial role in economic growth, particularly in fragile states like Somalia. Despite its strategic location and resource potential, Somalia faces challenges such as political instability, weak infrastructure, and climate vulnerabilities that deter investors. This study explores the economic and environmental determinants of FDI in Somalia, focusing on GDP growth, inflation, population growth, urbanization, rainfall, and temperature. Using time-series data and the ARDL model, it examines both the direct effects of these variables and the moderating role of GDP growth. Findings confirm a long-term relationship where GDP and population growth enhance FDI, while inflation and rising temperatures hinder investment. Rainfall positively influences FDI, reflecting its importance in Somalia's agriculture-dependent economy. Urbanization remains insignificant in the long run due to unplanned growth. In the short term, population growth, urbanization, and temperature significantly affect FDI, while GDP, inflation, and rainfall show weaker immediate effects. The moderation analysis suggests that GDP growth mitigates climate-related investment risks. This study underscores the need for economic stability, infrastructure development, and climate adaptation strategies to attract sustainable FDI and promote long-term growth in Somalia.This study provides a comprehensive analysis of the determinants of Foreign Direct Investment (FDI) in Somalia, focusing on the interplay between economic and climate variables. Using an Autoregressive Distributed Lag (ARDL) model and a unique moderation analysis, it reveals that GDP growth, inflation, population growth, and climate variability play crucial roles in shaping FDI inflows. The findings indicate that while GDP growth and rainfall positively influence FDI, inflation and rising temperatures deter investment. Moreover, the study highlights the moderating role of GDP, demonstrating that a strong economy can offset some of the risks posed by climate variability. The insights from this research have significant policy implications for fragile and developing economies. The study underscores the importance of economic stabilization, infrastructure development, and climate adaptation strategies to create a more attractive investment environment. By addressing both economic and environmental risks, Somalia can foster sustainable foreign investment and drive long-term economic growth. This research contributes to the broader FDI literature by integrating economic and climate dimensions, offering a novel perspective on investment dynamics in fragile states.