A Critical Assessment Of The Determinants Of Investment In Nigeria

Project and Seminar Material for Economics

A Critical Assessment Of The Determinants Of Investment In Nigeria


In recent times there has been growing concern about the rising but volatile rate of investment in Nigeria. This concern stems from the fact that investment play a dominant role in stimulating growth. The study buttress on the overview and empirical analysis into the determinants of investment in Nigeria.

In order to achieve the objectives hypothesis was stated with the purpose of achieving current and future stable upswing of investment by re-addressing problem of investment as highlighted in the statement of the problem.

The study used investment as the dependent variable and government expenditure, tariff , real interest rate and capital stock as the independent variable. In analyzing the data, economic model of multiple regression using ordinary least square (OLS) technique was employed. That t-test conducted indicates that government expenditure, tariff and real interest rate. Not statistically significant at 5 percent level. Normality test and heteroscedaticity test were employed as the second order test.

Table of Contents

  • Title Page
  • Approval Page
  • Dedication
  • Acknowledgement
  • Abstract

Chapter One


  • 1.1 Background of the Study
  • 1.2 Statement of the Problems
  • 1.3 Research Questions
  • 1.4 Objective of the Study
  • 1.5 Statement of the Hypothesis
  • 1.6 Significance of the Study
  • 1.7 Scope/limitation of the Study

Chapter Two

Literature Review

  • 2.1 Literature Review
  • 2.2 Empirical Literature
  • 2.3 Limitation of Previous Studies

Chapter Three


  • 3.1 Model Specification
  • 3.2 Analytical Techniques
  • 3.3 Sources of Data and Software Packages

Chapter Four

Presentation and Analysis of Result

  • 4.1 Presentation of Regression Result
  • 4.2 Result Interpretation
  • 4.4 Evaluation Based on Economic Criteria

Chapter Five

Summary, Conclusion and Recommendations

  • 5.1 Summary of Findings
  • 5.2 Conclusion
  • 5.3 Policy Recommendation
  • Bibliography
  • Appendix

Chapter One


1.1 Background of the Study

The Nigerian economy has witnessed a slow pace of growth of less than 5 percent in the last two decades. Various reasons have been advanced to this development but the most apparent has been the poor investment climate in the economy and this has been attributed to the low available investable funds.

The stimulation of sustained economic growth requires a balance investment in physical and financial assets human and social capital as well as natural and environmental capital.

Nigeria has been classified as low savings and even lower investment economy (Ajakaiye 2002) one of the principal objective of the Nigerian government under the 1999 democratic dispensation is fostering of sustained economic growth. Over the years the government has been in the driver’s seat in growth the economy. But lessons of experience have show that government cannot regulate the economy effectively. A typical example has been the shift under the National Economic Empowerment and Development Strategy (NEEDS) which has recommended the need to restructure and deepen the financial system. Some economists like Mckinnon and Shaw (1973) said that rising investment alone is not sufficient enough to bring about growth and the role of financial institutions is very vital. In particular, the view expresses that the role of capital fund is very critical to the success of any endeavor (World Bank 1998). In this regard, it is therefore important to investigate the determinants of investment in economy in the past three decades.

Growth of economies is derived from investment is such economy. A key role is assigned to investment as a propellant of economic growth. Investment in various sectors of the economy stimulate aggregate employment, output, demand income which also increase the government revenue for further provision of basic industrial and agricultural further provision of basic industrial and agricultural inputs for the growth and development of an economy. This entails that the investment multiplier increase national income which increases savings for investment, consumption and aggregate demand level. The effect will be the rising standard of living of the masses which is the major determent of growth and development in an economy.

Banking sub sector in Nigeria has remained foreign in rural areas. But recently the establishment of community banks (now micro finance banks) has been to deepen their operation in rural areas. These banks with government assistance give loans and mobilize savings from rural areas for further investment in Nigeria. In addition government have tried to provide necessary infrastructures in rural areas to help reduce the rate of rural – urban migration for the purpose of compelling the rural population to take agriculture to greater height as it was in past 38 years. However the diversification of the various sectors of the economy has been the main objective of the government. This is to increase employment which will increase income and savings for investment. But the process so far have not been adequate because of political instability and policy inconsistency which range from corruption of political administrators and negative effect of transitional government.

Diversification of different key sectors of the economy like agriculture and industry increases employment, incomes, consumption, savings, demand and generally, aggregate investment level that will broaden and deepen the society’s standard of living. But the dismissal growth record in most African countries relative to other regions of the world has been of concern of economists (World Bank, 1998).

This is because the growth rate registered in most African countries including Nigeria is often not commensurate with the level of investment.

In Nigeria for instance, the economy witnessed tremendous growth in the early and late 1970s, as a result of the oil boom.

This increased investment especially in the public sector. But with the collapse of the oil market prices in the early and mid 1980s, investment fill, thereby causing a fall in economic growth. For example during the investment boom, gross investment as a parentage of GDP was 16.8% and 31.4% in 1974 and 1976 respectively, where as it declined to 9.5 and 8.7 percent in 1984 and 1985 due to the depression.

Although the rise in oil prices during the 1990 – 1991 period was supposed to spark off an investment but that was not the case in Nigeria. The Nigerian Military government for instance was inexperienced in formulating economic policy and thus left that task to bureaucracy (Babalola and Idoko 1996). The unit was that investment decision which were undertaken with great decline, the government in 1986 adopted the IMF World Bank Structural Adjustment Programme (SAP) with a view to providing stable macroeconomic and investment environment.

To this end interest rate that were previously fixed and negative in real terms were replaced by an interest rate regime which is driven by the market forces.

The policy shift de-emphasized direct investment stimulation through low interest rate and encouraged savings mobilization by decontrolling interest rate (World Bank 1996). Consequently, the objective of enhanced investment and output growth was not realized as the country’s investment failed to rise to anything near the level it had reached in the 1970s.

Although successive government has implemented policies and strategies raising the level of savings and investment but these policies so far have been erratic as a result of recent changes in government induced by political instability.

In addition the experience of the east Asian countries suggests that an investment rate of between 20 and 25 percent could engender growth rate of between 7 and 8 percent. Statistical evidence reveal that output represented by the real GDP in Nigeria showed a positive growth soon after the civil war, following the oil boom of the 1970s such that growth rate stood at 21.3 percent in 1971 (Bage 2003. P. 17)

Therefore, for Nigeria to register increase in growth and development there is need to increase the tempo of private investment that would lead to higher growth as was the case in Asian countries.

Finally, an analysis of domestic investment require a simultaneous link to GDP as aggregating factor interest rate and other unique variables that react to fluctuations in investment, like debt ratio, business environment real exchange rate government expenditure and provision of infrastructures etc.

1.2 Statement of the Problems

Domestic Investment in Nigeria has been constrained by numerous factors.

These factors range from the followings

Low capital stock: investment can never be successful if the capital stock is low.

The poor level of capital stock has been as a result of poverty which decreases domestic savings resulting from decline in real per capital inadequate infrastructures, investment entrepreneurial activities is discouraged more by the absence of basic infrastructure like electricity, good road and communication (Green J. and D. Villanura (1991)).

Economic and Social Infrastructures are poorly developed in Nigeria. Thus domestic and foreign investors are wary of investing in countries where basic requirement are inadequate. Political instability and policy inconsistency. Due to the transitional nature of the Nigerian government investment have been derailed.

Interest rate move inversely with investment, that is, as interest rate increase, investment fall conversely, when interest rate is falling investment raises. But Nigeria interest rate of about 17.6% year ended 2006 did not account for upswing in private investment because of inappropriate administration and poverty.

The growth of domestic and external debt over the years has negatively affected the level of investment in Nigeria. Nigeria debt burden between 1977 – 2007 has effect for the economy and the welfare of the people. For example Nigeria was owing the international community as at end of 2007 was up to billion while its total external debt stock stood at 25.77 billion dollars (US), which could have been used for more allocation of basic requirement that would aggravate investment (Babalola and Idoko 1996).

Exchange rate fluctuation have also contributed to low propensity to invest in Nigeria by the foreigners. This is because of low manufacturing of export good capital which would have ordinarily increased domestic exchange rate (Jhingan M. L. 2005).

Therefore instead of investing domestically, the greater percentage of Nigerian’s prefer investing abroad where their money would be managed effectively.

High cost of raw materials and inadequate developed nature of domestic raw materials for investment. Therefore government should give incentives to encourage the investors given tax holding and reduction in duties charged during import of raw materials.

1.3 Research Questions

The study revolves around answering the following questions:

  1. The relationship between national savings and investment.
  2. Relationship between household consumption and investment.
  3. The relationship between inflation rate and investment

1.4 Objectives of the Study

The objectives of the study will be to :

  1. To determine the trend, character and profile of investment.
  2. To determine the causal relationship between investment and real gross domestic production in Nigeria.
  3. Recommend policy measures that will stimulate investment in Nigeria.

1.5 Statement of the Hypothesis

The research study will be conducted under the hypothesis frame work below :

  • Ho: the macro economics variables do not influence investment in Nigeria.
  • Hi: the macro economics variables do influence investment in Nigeria.

1.6 Significance of the Study

The importance of the study lies in the fact it will provide an insight into the relationship between investment and other core policy variables.

It will also further identify the reason why Nigeria’s investment efforts have not provided the desired results.

It is anticipated that this research work should be a source of reference to economic and social planners interested in the study of investment in Nigeria.

1.7 Scope / Limitation of the Study

The major limitation is the quality of date while public sector investment are easily obtained from budget estimates, there is no reliable control in case of private investment as the date series are questionable as it is derived residually the analysis are questionable as it is derived residually.

The analysis relied on data series from 1977 to 2007 the choice of time was informed by the availability of data and the desire to capture the periods of structural break control regime.

Chapter Five

Summary, Conclusion and Recommendations

5.1 Summary of Findings

Following the findings in this study with the coefficient of various variables that was conducted employing econometric approach. The objective of the research was to determine the trending profile, the macroeconomic determinant of private investment, the causal relationship between investment, and GEXP, TARF, DISP, REIR, CSTK, was established as well which will help in making policies that will improve the investment environment and would be of immense help to policy analysts, business executives and policy makers to analyze current information and to forecast future trends. The 025 model was used which help to ascertain the result.

5.2 Conclusion

This study so far, econometrically analyzed the determinants of investment behaviour in Nigeria over the period of 1577-2007. The empirical findings have some serious policy implications relevant to the growth and development of the investment level in the nation for the Nigeria economy to break away from its current level of under development, policy makers must recognize the importance of these variables.

Government Expenditure Tarrif, Real Interest Rate are not significant except capital stock to the investment in Nigeria.

This is because of the crucial role adequate mobilization can play in generating or bringing about productive investment needed for the nations current economic development goals as enunciated in the National Economic Empowerment and Development Strategy (NEEDS).

Thus, the effective manipulation of these variables through consistent and effective target policies in important for facilitating adequate mobilization necessary for productive investment.

5.3 Policy Recommendation

Due to the existing gap in domestic resources for investment activities would elevate investment profile for sustainable growth the appropriate policy mix must be adopted (Nnanna 2004:119). Therefore, the behaviour of the macroeconomic determinants of the investment should be used to analyze current and expected economic condition in Nigeria in the following ways.

  1. From the result, it is observed that most of the variables are exhibiting improvement indicating that with approprsiate policy mix, the economy would be experiencing an increase in the level of investment.
  2. A fall interest rate accounted for a (0.006236) rise investment, this presupposes that the economy might not experience short-run fluctuation, and low investment activities.
  3. The “trending” profile of private investment has shown the tendency to move upwards but in an unstable manner. This is as a result of social forces, most predominantly unplanned change in government regime policies schemes and sudden shocks.

Generally, the government should pay greater attention to the macroeconomic variables as to make up for the loss brought about by the economic depression of the early 1980s and the SAP of 1986.

Policy options should be targeted towards achieving steady growth in those variables, taking into consideration the speed of adjustment, length of transmission and the magnitude of response. The debt management policy can be used to reduce the effect of interest on debt on government spending and investment, promote the regime of managed flexible exchange rate by ensuring that government does not influence rate of exchange exogenously.

The (0.0121818) increase in private domestic investment due to currency appreciation can be improved upon. Small and medium scale enterprises (SMES) and having scheme can also be used to increase the level of investment.

Finally, recent investment and pro-poor growth policies and programmes like the National Economic Empowerment and Development Strategy (NEEDS) and the bank recapitalization policy of 2006 and 2007 should be consistently reviewed and re-adjusted to account for future unexpected price fluctuations.

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