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Determinants
Of Investment In Nigeria
ABSTRACT
In recent
times, there has been growing concern about the rising but volatile rate of
investments in Nigeria. Thus concern stem from the fact that investment plays a
dominant role in stimulating growth. The study buttress on the overview and
empirical analyses into the determinant of investment in Nigeria in other to
achieve the objective hypotheses which was stated with the purpose of achieving
current and future stable and upswing of investment by readdressing problems of
investment, as highlighted in the statement of problem. The study used
investment as dependent variable and interest rate, inflation, foreign direct
investment, degree of trade openness, gross domestic product, and money supply
as independent variable. In analyzing the data, economic model of multiple
regression using ordinary least square (OLS) techniques was employed. t- test
was conducted to evaluate the significant of independent variables in the model
not statistically significant at 5 percent level. Auto correlation and
heteroscedaticity test were employed as the second order test.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The Nigeria
economy has witness a slow pace growth of less
5 percent in
the decades. Various reasons have been advanced to this development but the
most apparent have been poor investment climate in the economy and this has
been attributed to the low available investable funds.
The
stimulation of sustained economy growth requires a balance investment in
physical and financial assets human and social capital as well as natural and
environmental capitals.
Nigeria has
been classified as low saving and even lower investment economy (Ajakaiye 2002)
one of the principal objectives 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’sseatingrowth the government
economy. But lessons of experience have shown 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
11
restructure
and deepen the financial system. Some economist like Mc Kinnon 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
new express of that the role of capacity fund is very critical to the success
of any endeavor (World Bank 1998). In this regards, it is therefore important
to investment the determinants to investment in economy in the past three
decades.
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 infrastructure in rural areas reduce
the rate of rural- urban migration for the purpose of compelling the rural
population to take agriculture to grater height as it was in past 38 years,
however, the diversification of the various sectors of the economy has been the
12
main
objective of the government. This is to increase employment which will increase
income and saving for investment.
But the
process so far have not been adequate because of political instability and
police inconsistence which range from corruption of political administrators
and negative effects of transitional government.
Diversification
of different key sectors of the economy like agriculture and industry increase
employment, incomes, consumptions, savings demand and generally, aggregate
investment level that will broaden and Deeping the society standard of living.
But dismissal growth record in most African countries relatives to other region
of the world has been of concern to economist. (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
1970(World Bank) 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
13
investment
fill, thereby causing a fall in economic growth. For example, during the
investment boom, gross investment as a percentage of GDP was 16.8% and 31.4% in
1974 and 1976 respectively ,where as it decline to 9.5 and 8.7 percent in 1984
and 1985 due to the depression (world bank).
Although the
rise in oil prices during the 1990-1991 periods was supposed to spark off an
investment but that was not the case in Nigeria. The Nigeria military
government for instance was inexperience in formulating economy policies and
thus,left that task to bureaucracy (Idoko 1996). The unit was that investment
decisions which were undertaken with great decline, the government in 1986
adopted IMF World Bank structural adjustment programmer (SAP) with a view in
providing stable macro-economic 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 market force. The policy
shift de-emphasized direct investment stimulation through low interest rate and
encourages savings mobilization by decontrolling interest rate (World Bank
1996). Consequently, the objective of enhanced investment and
14
output
growth was not realized as the countries investment failed to erase to anything
near the level it has reached in the 1970s.
Although
successive government has implemented policies and strategies raising the level
of savings and investments, this policy so far has been erratic as a result of
the recent change in government as a result of political instability.
In addition,
the experience of East Asia countries suggested that an investment rate of
between 20 and 25 percent could endanger growth rate of between 7 and 8
percent. Strategically evidence reveals that output represented as the GDP in
Nigeria shows a picture growth after the civil war, following the oil boom of
the 1970 such that growth rate stood at 21.3% in 1971(Bage 2003).
Therefore,
for Nigeria to register increase in growth and development there is need to
increase the private investment that will lead to higher growth, as was the
case of Asian countries.
Finally an
analysis of domestic investment require a simultaneous link to GDP as aggregate
factor interest rate and other unique variables that reacts to fluctuations in
investment like debt ratio, business environment real exchange rate government
expenditure and provision of infrastructure etc.
15
1.1 Statement of the Problems
Domestic investment
in Nigeria has
been constrained by
numerous
factors.
These
factors range from the following:
Low capital
stock: investment can never be successful if the capitalis low
The poor
level of capital stock has been as a result of poverty which decreases domestic
saving resulting from decline in real pre-capital inadequate infrastructure
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