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.