The Impact of Economic Policies on Business in the Private Sector (A Study of Manufacturing Companies in Nigeria)
Chapter One
Objective of the Study
- To determine the impact of economic policies on manufacturing sector performance in Nigeria.
- To ascertain the direction of the causality relationship between macroeconomic variables and manufacturing sector performance in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
Preamble
This chapter provides literature from past researchers and scholars on the impact of economic policies on investment in the manufacturing sector of Nigerian economy.
The macroeconomic factors under this study are: interest rate (INTR), inflation rate
(INFR), exchange rate (EXR), Gross Domestic Product (GDP), Foreign Direct Investment (FDI). This chapter properly x-rays the concept and theories on the topic with major attention on macroeconomic factors on investment in the manufacturing sector; divided into conceptual framework, theoretical framework and empirical review.
Conceptual Framework
According to Madueme (2010), conceptual framework provides (2) two basic information namely: giving the exact meaning of the key concepts of the study in the context of the research and showing the expected linkages or relationship between the key concepts of the study. Hence, this work will not be complete without understanding the various concepts which are likely going to be used repeatedly on the course of the study as well as their linkages.
Macroeconomic Factor(s)
The word “macroeconomics” is derived from the Greek prefix makro meaning “large” and economics, and is a branch of economics which deals with the performance, structure, behavior and decision making of the economy as a whole (Sullivan & Sheffrin, 2003) as cited in (Adegbemi, 2018). The macro environment looks at forces surrounding a firm that have the potential to affect the way it operates (Davis & Powell, 2012). The Institute of Chartered Accountants (ICAN) opined that it can be viewed as a set of factors or conditions that are external to the firm but which can influence the operations of the firm.
The macro environment refers to those conditions and forces which are external to the firm and are beyond the individual business unit, but they all operate within it (Taher et al., 2010). Duncan (1972) opined that the external business environment refers to the totality of factors outside an organization that are taken into consideration by an organization in its decision making. These factors depend largely on the complexity and dynamism of the environment (Duncan, 1972; Dess & Beard, 1984). The external business environment is classified as being stable when it does not show any changes, unstable when it shows relative changes and dynamic when it shows changes continuously (Aguilar, 1967).
Studies have indicated changes in the value of financial assets to be responsive to macroeconomic factors such as inflation rate, exchange rate, interest rates, GDP, money supply, unemployment rate, dividends yields and so forth (Fosu et al., 2014). The study focused on the following selected macroeconomic variables: interest rate, inflation, exchange rate, money supply and GDP.
Interest Rate:
Crowley defined interest rate as the price a borrower pays for the use of money they borrow from a lender or fee paid on borrowed assets. Ngugi (2001) described interest rate as a price of money that reflects market information regarding expected change in the purchasing power of money or future inflation. Economists argue that interest rate is the price of capital allocation over time; monetarist use the interest rate as an important tool to attract more saving, as increases in the interest rates attract more savings and the decrease in interest rate will encourage investors to look for another investment that will generate more return accordingly (Murungi, 2014). Those interest rates are important because they control the flow of money in the economy. High interest rates curb inflation but also slow down the economy. Low interest rates stimulate the economy, but could lead to inflation.
CHAPTER THREE
RESEARCH METHODOLOGY
Theoretical Framework
The study adopted the Cobb-Douglas production function. As explained in the literature review, this theory is a functional form of production functions which is used to represent the relationship of an output to inputs. This function was proposed by Knut Wicksell
(1851-1926), and tested against statistical evidence by Charles Cobb and Paul Douglas in 1928. The Cobb-Douglas function mainly measures the physical capital and labour, as well as the amount of output that can be produced by these inputs. This model published in 1928, was used to model the growth of the American economy during the period 18991922. They viewed a simplified economy, where production output is determined by the amount of labour involved and the amount of capital invested. Their model proved to be remarkably accurate. Cobb-Douglas production function shows that one input can be substituted by other but to a limited extent. For example, capital and labour can be used as a substitute of each other, but to a limited extent only.
CHAPTER FOUR
PRESENTATION AND INTERPRETATION OF RESULTS
This chapter presents the estimate of the model specified in chapter three. This is necessary in order to test the hypotheses as stated in chapter one of this work. It looks at the economic, econometrics, statistical significance with the descriptive statistics of all the variables used in this work. The tests generally help to provide robust results, check if they are statistically significant and conform to a priori expectation. In view of this, two OLS model and one Granger Causality Test are used. The descriptive statistics and preestimation tests are first presented.
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND POLICY RECOMMENDATION
Summary of Research Findings
In this chapter the variables were first subjected to some preliminary tests of which the unit root test was the first. It was carried out in order to avoid getting spurious regression results. All the variables except inflation rate were found to be stationary at levels, while other variables are found stationary at their first and second differences. The results of the residual co-integration test, which was carried out to check if the variables have a long run relationship between the dependent and independent variables, showed that the variables were not co-integrated, that there is no long run relationship between the variables. The regression results of the models were presented and were economically interpreted, statistically analyzed and econometrically evaluated. The results of the tstudent tests show that Real GDP, Interest rate, and Exchange rate are statistically significant while Inflation rate and Foreign direct investment are statistically insignificant. The F-test reveals that the overall model is statistically significant. The coefficient of determination (R2) shows that the independent variables explain up to 98% of the variations in the dependent variable; however, by virtue of the adjusted R2 being slightly lower than the R2shows that the model is parsimonious. The causality test shows uni-directional causality relationship between the variables, moving from macroeconomic factor to manufacturing sector output. Macroeconomic factor granger cause manufacturing sector output.
Policy Recommendation
Based on the findings the following recommendations were suggested:
From the result of the findings, Real Gross Domestic Product (RGDP) shows positive relationship with manufacturing sector output performance in Nigeria. And it is statistically significant with manufacturing sector output, which means Real GDP contributing positively to manufacturing sector output productivity; as Real GDP is increasing, the manufacturing sector productivity is increasing. Therefore, for increasing output and productivity of the manufacturing sector; The government should allocates more funds and development of the manufacturing sector as manufacturing sector contributes to rapid industrialization and economic growth.
The exchange rate has a positive relationship with manufacturing sector output in Nigeria and increasing exchange rate is not good for an economy, therefore, government should reviewed it fiscal and monetary policy to favour manufacturing sector output; as higher exchange rate is not favourable to manufacturing sectors. Higher exchange rate makes domestic output expensive relative to foreign output. The resultant effect is increased import relative to export and reduced net export which also means low output. The Central Bank of Nigeria should come-up with policies that will help to stabilize the Naira exchange rate vis-à-vis the major currencies of the world, like the United States Dollar. This will boost the investors’ confidence in the economy.
The interest rate is negative with manufacturing sector output in Nigeria; which means lower interest rate encourages investor borrowing and investment on the manufacturing sector leading to increasingly manufacturing sector productivity. Therefore, the Central
Bank of Nigeria should come-up with policies that will help to stabilize the interest rate.
This will boost the investors’ confidence in the economy.
The result of the finding revealed that Foreign Direct Investment has not really promoted manufacturing sector productivity in Nigeria and is statistically insignificant with manufacturing sector productivity; because of poor utilization of the foreign direct investment into the economy. Therefore, government should provide conducive environment in other to encourage the kinds of foreign direct investment that will be beneficial to the manufacturing sector in Nigeria.
Conclusion
This work investigated the impact of economic policies on development in the manufacturing sector of Nigerian economy. The study established a long run relationship between the dependent variables – manufacturing sector proxied with manufacturing output for model one and the explanatory variables – Real GDP, Exchange rate, inflation rate, interest rate and foreign direct investment. Nigeria is known as a country with a weak capital base and high level of corruption with our public officials diverting public funds made for capital and infrastructural development. More emphasis should be geared towards encouraging domestic investment and development of the manufacturing sector for rapid industrialization as can be seen from the Asian Tigers rapid industrialization through manufacturing sector development.
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