ABSTRACT.
The
purpose of this study is to examine the determinants of investment in the Nigeria economy making use of time series data
for the period 1970-2003. The study employed the Ordinary Least Square (OLS)
and the Cochrane Orcutt technique of estimation. The main conclusion which
emerged from the analysis is that increase in investment will lead to an
increase economic growth. The policy implication of this finding calls for the
harmonization of interest rate policy, exchange rate, financial savings,
inflation rate, and maintaining a stable macroeconomic environment and
financial reforms to stimulate investment and capital accumulation. Also good
governance is also important for sustainable economic growth.
TABLE OF CONTENTS
TITLE
PAGE……………………………………………………………………………..i
CERTIFICATION………………………………………………………………………..ii
DEDICATION…………………………………………………………………………...iii
ACKNOWLEDGE……………………………………………...……………………….iv
TABLE OF CONTENTS…………………………………………………….…………...v
ABSTRACT……………………………………………………………………………..vi
CHAPTER ONE INTRODUCTION……………………………………………….1
1.1
Background of the study…………………………………………………1
1.2
Statement of the problem…………………………………………….......3
1.3
Objectives of the study…………………………………………………..5
1.4
Justification of the study…………………………………………………6
1.5
Research hypothesis…………………………………………………..…7
1.6
Scope of the study……………………………………………………….7
1.7
Definition of terms………………………...…………………………….8
1.8
Plan of the study………………………………………………………...9
CHAPTER TWO LITERATURE REVIEW AND THEORETICAL
FRAMEWORK.10
2.1
Introduction………...…………...……………………………………….10
2.2
Concept of Investment………………...………………………………...10
2.3
Theoretical Framework..……………………………..………………….11
2.3.1 Theories of
Investment………………………………………………….11
2.4
Literature review…………...……………………………………………13
2.4.1 Survey of Empirical
studies……………………………………………..13
2.4.2
Sectoral distribution of Investment by banks……. …………………….16
2.4.3
Geographical distribution of investment by banks….……………….….18
2.4.4 Impact of macroeconomic variables on
Investment.…………...……….19
2.5 Conclusion………………………………………………………………21
CHAPTER THREE RESEARCH
METHODOLOGY……………………………….22
3.1 Introduction…………………………………………………………….22
3.2 Model Specification….………………………………………...………..22
3.3 Technique of Data
Analysis...…………………………………………..25
3.4 Measurement of specific
variables….…………………………………...27
3.1
Sources of data…………………………………………………………...28
CHAPTER FOUR MODEL ESTIMATION AND EVALUATION………………..29
4.1
Model estimation………………………………………………………..29
4.2 Presentation of
Data………......…………………………...…………….29
4.3 Data Analysis and
Result………………………………………………..30
4.4 Discussion of
Result……...……………………………………………...31
CHAPTER FIVE SUMMARY, RECOMMENDATION AND CONCLUSION.....36
5.1
Summary of Findings.…………………………………..……………….36
5.2 Recommendations……………………………………………………….37
5.3 Conclusion………………………………………………………………39
5.4 Limitation of the study………………………………………………….39
5.5 Recommendations for further
Study……………………………………40
APPENDIX……………………………………………………………………………..41
BIBLIOGRAPHY………………………………………………………………………46
CHAPTER ONE
INTRODUCTION
1.1
Background of Study
Investment expenditure in economic analysis is both a
component of aggregate demand and an injection into the circular flow of
national income. It is a crucial variable
on the supply side of the economy as it is the means by which changes in the
real capital stock are brought about, thereby adding to country’s productive
capacity.
Investment is spending devoted to increasing or
maintaining the stock of capital. The stock of capital consists of the
factories, machines, offices, and other durable products used in the process of
production. The capital stock also includes residential housing as well as
inventories. Gross domestic investment, therefore, represents total additions
to a country’s capital stock. If the capital stock grows larger overtime, the
increase in capital stock per period of time is known as net investment. Gross
domestic investment, therefore, is made up replacement investment or
depreciation and net investment. Gross domestic investment can also be
classified into public and private. While private investment refers to
expenditure in acquisition of machinery and equipment to increase the firm’s
output, public investment comprises social and economic infrastructure.
The need to
investigate the determinants of gross domestic investment stems from two main
reasons. First, investment is more volatile than any other components of
aggregate demand. Such volatility therefore affects the level of output and
employment in the economy (P.A Olomola 2002). Second, investment has been
regarded as the key to economic growth. Recent empirical studies conducted in
Africa, Asia and Latin America have established beyond a doubt, the critical
linkage between investment and the rate of growth (M.I. Obadan 2001).
In the light of the
foregoing, this study investigates the main determinants of gross domestic
investment in Nigeria, and the determinants of investment to be looked at
include interest rate, inflation, exchange rate, financial savings, and
external debt. All this determinants have the impact on the Investment of the
nations and this research work is going to find the relationship between all
these determinants and investment.
These
determinant have their apriori specification (what it’s suppose to be) and they
are as follows: Inflation is supposed to have a negative relationship with
investment. Interest rate is supposed to have a negative relationship with
investment. External debt is supposed to have a negative relationship with
investment. Exchange rate and investment would have a positive relationship
between them, so also would be the relationship between savings and investment
It is believed that this study will provide necessary insights into the
behaviour of gross domestic investment and the necessary steps in rekindling it
in the Nigerian economy.
Some empirical work has been carried out on this
research and one says empirical determinants of
private investment in developing countries he identified macroeconomic and institutional
factors, such as financial repression, foreign exchange shortages, lack of
infrastructure, economic instability, aggregate demand, public investment,
relative factor prices and credit availability as important variables that
explains private investment (Rama 1980).
Khatkhate (1988) adopted
non-parametric methodology in his study on the relationship between interest
rates and other macroeconomic variables, including savings and investments. He
grouped 64 countries (including Nigeria) into three, based on the level of
their real interest rates. He then computed economic ratios, among which were
gross savings-income and investment-income, for the countries. Applying the
Mann-Whitney test, he found that the impact of real interest rate was not significant
for the three groups.
1.2
Statement of the Problem
Development economists have
identified a strong correlation between investment and economic growth
(Bamidele and Englama, 1998). Modern growth theory takes the view that economic
growth is particularly the result of capital accumulation, as it is generally
accepted that more capital goods will be required if there is to be growth.
In Nigeria, like most developing
countries, public investment was dominant from the 1960s to1980s, within this
period, particularly from the 1970s through the 1980s, the Nigerian economy
witnessed a tremendous growth as a result of the oil boom Ajakaiye and Odusola
(1997). Following the unprecedented oil earnings, there was an investment boom,
especially in the public sector. This is
because when windfall savings were relatively high, investment expanded
significantly. When domestic savings fall short of the desired level of
investment, government resorted to foreign savings as a means of complementing
domestic savings to finance investment. This consequently led, not only to debt
overhang but also to poor growth performance of the economy.
Despite the adoption of Structural Adjustment
Programme, Bamidele and Englama (1998) maintained that the rate of growth in
gross domestic investment has been rather low. Iyoha (1998) also stressed that
“the decline in investment in the late 1980s and the low investment-GDP ratio
which persisted into the 1990s, no doubt, partly explains the slow growth rate
of output during this period.”
In the light of the slow
growth in gross domestic investment since the 1980s, the basic research
questions which this study intends to address include: what are the key
determinants of gross domestic investment in the Nigerian economy? What policy
measures could be adopted to rekindle investment in Nigeria? This study sets
out to empirically investigate these questions.
1.3 Objectives of the Study
The broad objective of this study is to empirically
investigate the main determinants of gross domestic investment in the Nigerian
economy. The specific objectives of this
study according to the following Molho (1986), Uchendu (1993), Iyoha
(1998).include:
(i)
To examines the trend of gross domestic
investment in Nigeria.
(ii)
To find out the impact of interest rate (traditional
lending rate) on gross real domestic investment in Nigeria
(iii)
To investigate the impact of inflation on gross
real domestic investment in Nigeria.
(iv)
To find impact of exchange rate on gross real
investment in Nigeria.
(v)
To find the impact of external debt on gross
real investment in Nigeria
(vi)
To find the impact of savings on gross real
investment in Nigeria.
(vii)
To provide necessary insight into measures that
could be adopted to rekindle investment in Nigeria.
1.4 Justification of the Study
One belief that is fast becoming
a dogma is the development orthodoxy that economic development depends
critically on investment (see Kindleberger, 1965, pp. 83-102).
Despite the importance of
investment in the growth process, evidence from the Nigerian economy indicates
that the growth of this macroeconomic variable has not been impressive over the
years. Even the negative real GDP growth in the early and mid-1980s could be
attributed mainly to the collapse of investment (Iyoha, 1998) Recognizing the
role of gross domestic investment in the nation’s economic growth process,
several policies have been implemented over the years. Incidentally, these
policies have not been yielding the expected results.
In the past years Nigeria used
administrative control and before (SAP) in 1986 government used policy of low
interest rate where nominal interest rate was fixed irrespective of the
inflation rate, this caused saving deposit to be largely negative Ajakaiye and
Odusola (1997) and the automatically reduced the amount of investment funds.
The Structural Adjustment
Programme (SAP) was brought in 1986 and the programme relied on market forces
as well as the corresponding relaxation of the administrative controls. The
major distortion of this programme was the regulation of interest rate given
the above backdrops, it becomes crucial to investigate the main determinants of
gross domestic investment in Nigeria.
1.5 Research Hypotheses
The hypotheses to be
tested in this study include:
Ho: There is no
significant relationship between interest rate, and gross real investment in
Nigeria.
H0: There is no
significant relationship between savings, and gross investment in Nigeria.
H0: There
is no significant relationship between inflation and Investment in Nigeria.
H0: There is no
significant relationship between external debt and Investment in Nigeria
H0: There is no
significant relationship between exchange rate and investment in Nigeria.
1.6 Scope of the Study
This study sets out to investigate the main
determinants of gross domestic investment in the Nigerian economy. Gross
domestic investment is made up of private investment and public investment.
While private investment refers to expenditure in acquisition of machinery and
equipment to increase the firm’s output, public investment comprises social and
economic infrastructure.
In achieving the objective
of this study, attention will be focused on the period 1970-2003.
1.7
Definition of Terms
Gross Fixed Capital Formation
This is the expenditure on fixed
assets (such as building, machinery) either for replacing or adding to the
stock of existing fixed assets.
Gross Capital Formation
This is often referred to as
gross domestic investment. It is the total change in the value of fixed assets
plus change in stocks.
Government Capital expenditure
This is the expenditure of the
government on assets of permanent nature such as roads, building of dams,
electricity etc. Expenditure on infrastructural facilities is capital
expenditure.
Investment
This refers to the accumulation
of real capital goods (that is, those which will yield a future flow of goods
and services). We can distinguish between several kinds of investments,
depending on the economic agents involved and the type of investment.
1.8 Plan of the Study
To facilitate proper
analysis and adequate coverage, this study will be divided into five chapters,
each dealing with the different aspects of the study. Chapter one of this
study, focuses on the general introduction. It discusses the background of the
study, statement of the problem, justification for the study, research
objectives, research hypothesis, and scope of the study, plan of the study,
definition of terms and expected contribution to knowledge.
In
chapter two, the theoretical framework as well as literature review is
considered. In this chapter, previous empirical studies on the determinants and
trend of gross domestic investment in Nigeria will be reviewed. Chapter
three of this study deals with the research methodology. Chapter four
focuses on data analysis and interpretation of results. Chapter five, on the other
hand, deals with the summary, recommendations and conclusion drawn from this
study.
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