Determinants of Investment in Nigeria
Chapter One
Objective of the study
The objectives of the study of the study are;
- Evaluate if inflation significantly predicts investment in Nigeria
- Determine if exchange rate impact on investment in Nigeria.
- Examine to what extent interest rate have explained investment in Nigeria
- Investigate if government expenditure significantly impact on investment in Nigeria
- Establish the existence or not if any significant long run relationship exist between the identified independent variables and investment in Nigeria.
CHAPTER TWO
REVIEW OF RELATED LITERATURE
Introduction
Investment is one of the components of aggregate demand and therefore it plays a crucial role in the determination of equilibrium, national income. It means the accumulation of real capital goods that is those stocks and means of production like plants machinery, new building, will and land to future flow of services. In other words, investment consists only of new physical goods to be used to increase productive capacity and leave future output. Although, investment is a smaller component of aggregate demand than consumption. It is more volatile as a source of short run; it is a more important determinant such that variation in it can produce magnified changes in aggregate demand and level of output on employment. In many modern economic investment account on the average of 15 to 20% of GNP. However, because of its vitality and variability the important is out of proportion of its size. Investment expands productive capacity. It is a major explanatory and contributory factor to long run growth in the economy, it is largely unpredictable. Investment is financial from both domestic and foreign saving in advanced countries of the 20 world, domestic savings are mainly used and always enough to financial investment. In developing economies, foreign savings are used to supplement domestic savings to finance investment the first component is new construction. The new construction include residential and commercial construction while the residential may be new house built rents, commercial construction are those by firms to enhance their business. Producer durable equipment like machine is consisting of second component of investment, while the third component is net change in business investment. However, commercial construction and producer durable equipment are called plant and equipment (Ihesiulo 2005). Investment can be of this kinds, these two classifications are based on the source of investment which are based on foreign or domestic public investment are those investment abroad by the state, while it can be domestic if it is always dependent of the level of income. Private investment are those investment by the profit oriented individuals or firms. It can be foreign when they invest abroad and domestic when they invest within the economy. But for 21 the sake of this research, private domestic investment are investment that is, individual in a country (both citizen and foreigners) for example, Dangote groups is a private domestic investment in Nigeria. Furthermore, public’s investment which is carried on by a state of government is always autonomous. This entails that most often the government in other for the growth and development of such economy which may not necessarily be profit minded, while the aim of profit investment is always to make profit and it is dependent of income levels. The levels of investment are determined by various factors. The major determinant of investments is:
Interest Rate: This is more inversely with investment rate that is to say the higher the interest rate, the less investment is induced. On the other hand if interest is low, the inducement to invest is always high. This is because if the cost of obtaining capital is high, potential investment will back investment because it will reduce the return on investment (Ayanwu 1997).
Cost of capital: The cost of procuring capital needed in an industry is compared by investor, these cost may be cost binding and machineries etc. if these costs are low, private domestic investment will rise consistently and vise-versa. The expected rate of return during the time of a project in other words, it may be regarded as the case inflow that is the ability of the project to give an efficient and sufficient returns on investment. If the expected rate of return is high investors will always increase their level of investment. However, Keynes’s sum up these factors in this concept of marginal efficiency of capital (MEC) and marginal efficiency of investment (MEI). The MEC is the highest rate of returns expected from an additional unit of capital assets over its cost. It is the ratio between the prospective yield of addition capacity good and their supply from an asset during its life time while the supply price of capital assets is the cost of producing this asset (Jhingan 2005). The MEI is the rate of return. Expected from a given investment on a capital asset after covering all its cost except the rate interest like MEI, it is the rate which acquires the supply price of capital assets to its prospective yield. The investment on an asset will be made depending upon the interest rate involving in getting funds from the banks the MEI relates the investment to the rate of interest. Its schedule shows the amount of investment demanded at various rate of interest that is why it is called the investment demand schedule curve the MEI (stock) is based on a given supply praise for capital and MEI (flow) on induced charges in the price. The MEI shows the rate of return on all successive unit of capital without regards to the existing stock of capital. On the other hand the MEI shows the rate of return on only unit of capital over the above the existing stock of capital Jhingan (2006).
CHAPTER THREE
RESEARCH METHODOLOGY
INTRODUCTION
In this chapter, we described the research procedure for this study. A research methodology is a research process adopted or employed to systematically and scientifically present the results of a study to the research audience viz. a vis, the study beneficiaries.
RESEARCH DESIGN
Research designs are perceived to be an overall strategy adopted by the researcher whereby different components of the study are integrated in a logical manner to effectively address a research problem. In this study, the researcher employed the survey research design. This is due to the nature of the study whereby the opinion and views of people are sampled. According to Singleton & Straits, (2009), Survey research can use quantitative research strategies (e.g., using questionnaires with numerically rated items), qualitative research strategies (e.g., using open-ended questions), or both strategies (i.e., mixed methods). As it is often used to describe and explore human behaviour, surveys are therefore frequently used in social and psychological research.
POPULATION OF THE STUDY
According to Udoyen (2019), a study population is a group of elements or individuals as the case may be, who share similar characteristics. These similar features can include location, gender, age, sex or specific interest. The emphasis on study population is that it constitutes of individuals or elements that are homogeneous in description.
This study was carried to examine determinants of investment in Nigeria. CBN form the population of the study.
SAMPLE SIZE DETERMINATION
A study sample is simply a systematic selected part of a population that infers its result on the population. In essence, it is that part of a whole that represents the whole and its members share characteristics in like similitude (Udoyen, 2019). In this study, the researcher adopted the convenient sampling method to determine the sample size.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
INTRODUCTION
This chapter presents the analysis of data derived through the questionnaire and key informant interview administered on the respondents in the study area. The analysis and interpretation were derived from the findings of the study. The data analysis depicts the simple frequency and percentage of the respondents as well as interpretation of the information gathered. A total of eighty (80) questionnaires were administered to respondents of which only seventy-seven (77) were returned and validated. This was due to irregular, incomplete and inappropriate responses to some questionnaire. For this study a total of 77 was validated for the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain determinants of investment in Nigeria. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of determinants of investment in Nigeria
Summary
This study was on determinants of investment in Nigeria. four objectives were raised which included: Evaluate if inflation significantly predicts investment in Nigeria, determine if exchange rate impact on investment in Nigeria, examine to what extent interest rate have explained investment in Nigeria, investigate if government expenditure significantly impact on investment in Nigeria and establish the existence or not if any significant long run relationship exist between the identified independent variables and investment in Nigeria. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from CBN, Abuja. Hypothesis was tested using Chi-Square statistical tool (SPSS).
Conclusion
The empirical analysis was based on the time series data for Nigeria over the period 1980-2018. The data was collected from Central Bank of Nigeria Annual Abstracts and various issues of Economic survey. All the regression equations are estimated by the ordinary least square technique. The results for this study provide some support for the hypothesis that the rates of private investment are affected by important macro-economic variables. The econometric tests undertaken support he view that inflation rate, exchange rate, government expenditure and interest rate have all been significant determinants of private investment. The empirical evidence suggests that interest rate is inversely related to private investment but it is significant. This is consistence with the empirical evidence that when interest rate rises, cost of borrowing increases so, there will be a decline in future profits. As a result, the stimulus to invest is discouraged. The result provide evidence that a higher level of exchange rate reduces productive capacity, increases the real cost of purchasing imported capital goods, which will eventually lead to a decline in the level of investment. The model equation is in line with the above assertion. The result also provide empirical evidence that inflation is negatively related to investment. This is due to the fact that as inflation rate increase, the value of economic activity reduces, performance drops and ultimately reduces investment. Again the result also suggests that government expenditure is positively related to private investment. This is because government expenditure create aggregate demand and it is an essential ingredient in boosting investment in Nigeria. It is very important for Nigerian Government to review its policies on Private Investment and pay more attention to its determinants i.e Interest Rate (INT), Exchange Rate (EXR), Inflation Rate (INF) and Government expenditure (GEX) as they are the essential ingredients for boosting Private Investment in Nigeria. Government need to focus on the overall institutional framework of private investment in Nigeria in order to facilitate growth and development in the country.
Recommendation
Interest rate should not be left in the hands of the forces of demand and supply but should be fixed at a very reasonable rate in order to encourage private investment in Nigeria. More so, government should direct its effort in assisting private sector on increasing spending on basic infrastructure which will go a long way in boosting private investment in Nigeria. Bottom line is that, it is strongly recommended that government should make Nigerian economy a conducive environment for private investment as a matter of high national priority by putting in place policies through practical strategies that will ensure consistent, moderate and acceptable levels of inflation rate, interest rate, exchange rate and increase in government expenditure on basic infrastructure in the Nigeria economy
References
- Agwu, Charles (2015). Determinant of investment in Nigeria: An econometric analysis. Journal for Studies in Management and Planning Vol1 Issue 3
- Ayeni, R. K. (2004). Macroeconomic determinants of private sector investment – An Ardl approach: evidence from Nigeria. Global Advanced Research Journals, 3
- Acha I. A. &Acha C. K. (2011). Interest Rates in Nigeria: An Analytical Perspective. Research Journal of Finance and Accounting, IISTE, Vol 2, No 3 ISSN (Paper) 2222-1697, ISSN (Online) 2222-2847
- Adebiyi, M.A. (2001). “Can High Real Interest Rate Promote Economic Growth Without Fuelling Inflation in Nigeria?”Journal of Economics and Social Studies, Maiden Edition, Pp. 86- 100.
- Ahuja, H.L. (2013); “Modern Economics”, S. Chand Higher Academic, 17th Revised Edition.
- Anyanwu, A. (1995). Macroeconomics, policy modeling of Africa Economic.Lagos: Acera Publisher.
- Central Bank of Nigeria (2012).Statistical Bulletin Chris O. U. &Anyingang R. A, The Effect of Interest Rate Fluctuation on the Economic Growth of Nigeria, 1970-2010 International Journal of Business and Social Science Vol. 3 No. 20 [Special Issue – October 2012
- Eregha, P.B. (2010). Interest Rate Variation And Investment Determination In Nigeria, International Business Management, 4 (2), Pp. 41-46
- Gujarati, N. G., & Porter, D. C. (2009). “Basic Econometrics”( Fifth ED.) McGraw Hill International Edition
- Jhingan M. L. (1997). Macro-Economic Theory, 10threvised enlarged edition. Vrinda Publications (P) Ltd India
- Mckinnon, R. and Shaw, (1973).Money and Capital in International Development.The Brookings Institution, Washington D.C.