DETERMINANTS OF INVESTMENT IN NIGERIAN MANUFACTURING 1981-1997

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DETERMINANTS OF INVESTMENT IN NIGERIAN MANUFACTURING 1981-1997

Abstract:

Many economists agree that the expansion of private investment especially in manufacturing should be the main impetus for economic growth in developing countries. But after’ a decade of economic adjustment, the recovery of this sector in Nigeria has remained very weak and slow; and as usual, inappropriate macroeconomic policies, macroeconomic instability and structural factors are blamed for this. This issue has received only limited attention in empirical studies on the experience of Nigeria. This study uses data from Nigeria during 1981-1997 to perform the empirical analysis. In exploring the association between manufacturing investment and macroeconomic policies (including fiscal policy, exchange rate and monetary policy) with particular reference to Nigeria, the study finds that macroeconomic policy variables do actually affect manufacturing investment in Nigeria. Furthermore, the study confirms the negative impact of foreign exchange rates, unguarded deregulation of interest rate and high domestic inflation rates on manufacturing investment in Nigeria and highlights the adverse impact of large budget deficits on private capital accumulation. The study sharply brings to focus the macroeconomic uncertainty associated with high external debt ratio. On the other hand, private manufacturing investment is determined by the rate of capacity utilization, credit to the sector and the growth rate of real GDP, which suggest that developments within these three variables have significant positive effects on manufacturing investment in Nigeria. Supplementing regression analysis with historical and qualitative insights, the study establishes that other structural factors like low managerial skill and technological capability explain low investment in manufacturing. Policy wise, these results suggest that strategies to boost’ manufacturing investment must take into account both macroeconomic stability and structural incentives. Also, the removal of structural constraints should be stressed. Manufacturing investment being mostly long-term by nature requires a predictable and stable business environment, reliable and efficient infrastructure, high level managerial skill and technological capability, diversified export base, political and social stability and transparency. These are some of the factors required for the growth of manufacturing investment and development in Nigeria.

DETERMINANTS OF INVESTMENT IN NIGERIAN MANUFACTURING 1981-1997

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