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. Â Â Â Â Â
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 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
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
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
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
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
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
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
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
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:
The relationship between national savings and investment.
Relationship between household consumption and investment.
The relationship between inflation rate and investment
1.4 Objectives of the Study
The objectives of the study will be to :
To determine the trend, character and profile of investment.
To determine the causal relationship between investment and real gross domestic production in Nigeria.
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
Hi: the macro economics variables do influence investment in
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
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.