Table of Contents

DECLARATION……………………………………………………………………………………………………………… iii

CERTIFICATION……………………………………………………………………………………………………………. iv

DEDICATION…………………………………………………………………………………………………………………. v

ACKNOWLEDGMENT…………………………………………………………………………………………………… vi

Table of Contents…………………………………………………………………………………………………………… vii

LIST OF TABLES…………………………………………………………………………………………………………… ix

LIST OF FIGURES…………………………………………………………………………………………………………. x

ABSTRACT…………………………………………………………………………………………………………………… xi

CHAPTER ONE……………………………………………………………………………………………………………… 1

INTRODUCTION……………………………………………………………………………………………………………. 1

• Background to Study………………………………………………………………………………………….. 1
  • Statement of the Problem……………………………………………………………………………………. 3
  • Objectives of the Study………………………………………………………………………………………. 4
  • Justification for the Study……………………………………………………………………………………. 4
  • Research Hypotheses………………………………………………………………………………………… 5
  • Scope of the Study…………………………………………………………………………………………….. 6
  • Plan of the Study……………………………………………………………………………………………….. 6

CHAPTER TWO…………………………………………………………………………………………………………….. 8

LITERATURE REVIEW AND CONCEPTUAL FRAMEWORK……………………………………………. 8

• Concept of Investment……………………………………………………………………………………….. 8
  • Literature review………………………………………………………………………………………………… 9
    • Survey of Empirical Studies……………………………………………………………………………….. 9
    • Sectoral distribution of Investment by Banks………………………………………………………. 12
    • Geographical distribution of Investment by Banks……………………………………………….. 13
    • Impact of Macroeconomic Variables on Investment…………………………………………….. 14
  • Conclusion……………………………………………………………………………………………………. 15

CHAPTER THREE……………………………………………………………………………………………………….. 17

THEORETICAL FRAMEWORK AND METHODOLOGY………………………………………………….. 17

• Theorical Framework………………………………………………………………………………………… 17
  • Model Specification………………………………………………………………………………………….. 21
    • A priori Expectation………………………………………………………………………………………….. 22
  • Techniques of Analysis……………………………………………………………………………………… 23
  • Measurement of Specific Data…………………………………………………………………………… 24
  • Sources of Data……………………………………………………………………………………………….. 24

CHAPTER FOUR…………………………………………………………………………………………………………. 25

MODEL ESTIMATION AND EVALUATION…………………………………………………………………….. 25

• Model Estimation……………………………………………………………………………………………… 25
  • Data Analysis and Result…………………………………………………………………………………… 25
    • Pre-Estimation Analysis……………………………………………………………………………………. 25
    • Graphical Analysis…………………………………………………………………………………………… 31
    • Post- Estimation Analysis………………………………………………………………………………….. 34

CHAPTER FIVE……………………………………………………………………………………………………………. 35

SUMMARY, RECOMMENDATION, AND CONCLUSION……………………………………………….. 35

• Summary of findings………………………………………………………………………………………… 35
  • RECOMMENDATIONS……………………………………………………………………………………. 36
    • Fiscal Policy……………………………………………………………………………………………………. 36
    • Monetary and Credit Policy………………………………………………………………………….. 36
    • Timely Development of Basic and Heavy Industries………………………………………… 36
    • Investment in Human Capital…………………………………………………………………………….. 37
    • Diversified Export Strategy……………………………………………………………………………. 37
  • CONCLUSION………………………………………………………………………………………………….. 37
  • LIMITATIONS OF THE STUDY………………………………………………………………………….. 38

REFERENCE……………………………………………………………………………………………………………….. 39

APPENDIX…………………………………………………………………………………………………………………… 47

LIST OF TABLES

Table 2.2.2 Sectoral distribution of Investment by Banks…………………………………….. 12

Table 2.2.3 Geographical distribution of Investment by Banks………………………………. 13

Table 4.2.1.1 Descriptive Statistics Result……………………………………………………………. 25

Table 4.2.1.2 Unit Root Test…………………………………………………………………………….. 26

Table 4.2.1.2a Summary of Unit Root Test………………………………………………………….. 27

Table 4.2.1.2bSummary of Unit Root Test………………………………………………………….. 27

Table 4.2.1.3Bounds test…………………………………………………………………………………… 28

Table 4.2.1.4 ARDL model result……………………………………………………………………….. 29

Table 4.2.1.5Co-integration test……………………………………………………………………….. 30

Table 4.2.3.1Correlation test…………………………………………………………………………….. 34

Table 4.2.3.2Heteroskedasticity test…………………………………………………………………. 34

LIST OF FIGURES

Graph 1  Stability Test…………………………………………………………………………………………… 31

Graph 2   CUSUM of squares Test………………………………………………………………………….. 32

Graph 3  Normality Test………………………………………………………………………………………… 33

ABSTRACT

The purpose of this study is to examine the determinants of investment in the Nigerian economy by making use of time series data for the period, 1970-2015. The study employed the auto- regressive distributed lag (ARDL) for the analysis. From the result, it is shown that exchange rate, interest rate, inflation rate, and total financial saving, all have a positive effect on investment whereas external debt has a negative effect on investment. Therefore, the Government should improve these determining factors of investment in order to increase gross domestic investment in Nigeria. The policy implications of this findings call for the harmonization of interest rate policy, exchange rate, financial savings, and inflation rate. This will help in maintaining a stable macroeconomic environment, the development of financial reforms to stimulate investment and capital accumulation.

                        Background to Study

CHAPTER ONE INTRODUCTION

Investment is defined by Fischer (2008) as “a commitment of funds made in the expectation of some favorable rate of returns.” Kothari (2013) avows that investors have series of investment avenues which differ in terms of risk; the investor must choose the proper investment avenue patterned after his/her specific need, risk preference, and expected returns. Investment expenditure in economic analysis is both a component of aggregate demand and an injection into the circular flow of national income. It is a crucial variable on the supply side of the economy as it is how changes in the real capital stock are brought about, thereby adding to the country’s productive capacity (Fischer, 2008).

Investment is spending devoted to increasing or maintaining the stock of capital. The stock of capital consists of the factories, machines, offices, and other durable products used in the process of production. The capital stock also includes residential housing as well as inventories. Gross domestic investment, therefore, represents total additions to a country’s capital stock (Ayeni, 2014). If the capital stock grows larger over time, the increase in capital stock per period is known as net investment. Gross domestic investment, therefore, is made up of replacement investment or depreciation and net investment. Gross domestic investment can also be classified into public and private. While private investment refers to expenditure in the acquisition of machinery and equipment to increase the firm’s output, public investment comprises social and economic infrastructure (Kothari, 2013).

The need to investigate the determinants of gross domestic investment stems from two main reasons. First, investment is more volatile than any other components of aggregate demand. Such

volatility, therefore, affects the level of output and employment in the economy (Olomola, 2015). Second, investment has been regarded as the key to economic growth. Recent empirical studies conducted in Africa, Asia, and Latin America have established beyond a doubt the critical linkage between investment and the rate of economic growth of these countries (Obadan, 2001).

In the light of the foregoing, this study investigates the main determinants of gross domestic investment in Nigeria, and the determinants of investment to be looked at include interest rate, inflation, exchange rate, financial savings, and external debt. All these determinants have an impact on the Investment of the nations and this research work is going to find the relationship between all these determinants and investment. (Obadan, 2001).

These determinants have their a priori expectation (what it’s supposed to be) and they are as follows: Inflation is supposed to have a negative relationship with investment. Interest rate is supposed to have a negative relationship with investment. External debt is supposed to have a negative relationship with investment. Exchange rate and investment would have a positive relationship between them, so also would be the relationship between savings and investment (Osmond, 2015). It is believed that this study will provide necessary insights into the behavior of gross domestic investment and the necessary steps in rekindling it in the Nigerian economy (McKinnon and Shaw, 1973).

Various empirical works have been carried out on this research, (Rama, 1980) identified that determinants of private investment in developing countries include important macroeconomic and institutional factors/ variables, such as foreign exchange shortages, lack of infrastructure, economic instability and relative factor prices. Khatkhate (1988) adopted a non-parametric methodology in his study on the relationship between interest rates and other macroeconomic

variables, including savings and investments. He grouped 64 countries (including Nigeria) into three, based on the level of their real interest rates. He then computed economic ratios, among which were gross savings-income and investment-income, for the countries. Applying the Mann- Whitney test, he found that the impact of real interest rate was not significant for the three groups.

                        Statement of the Problem

Development economists have identified a strong correlation between investment and economic growth (Bamidele and Englama, 1998). Modern growth theory takes the view that economic growth is particularly the result of capital accumulation, as it is generally accepted that more capital goods will be required if there is to be growth (Bamidele and Englama, 1998).In Nigeria, like most developing countries, public investment was dominant from the 1960s to1980s, within this period, particularly from the 1970s through the 1980s, the Nigerian economy witnessed tremendous growth as a result of the oil boom (Ajakaiye and Odusola, 1997). Following the unprecedented oil earnings, there was an investment boom, especially in the public sector. This is because when windfall savings were relatively high, investment expanded significantly (Ajakaiye and Odusola, 1997). When domestic savings fall short of the desired level of investment, the government resorted to foreign savings as a means of complementing domestic savings to finance investment. This consequently led, not only to debt overhang but also to the poor growth performance of the economy.

Despite the adoption of Structural Adjustment Programme, Bamidele and Englama (1998) maintained that the rate of growth in gross domestic investment has been rather low. Iyoha (1998,

p. 24) also stressed that “the decline in investment in the late 1980s and the low investment-GDP ratio which persisted into the 1990s, no doubt, partly explains the slow growth rate of output during this period”. In the light of the slow growth in gross domestic investment since the 1980s, the basic

research questions which this study addressed include: (i) what are the key determinants of gross domestic investment in the Nigerian economy? (ii) What policy measures could be adopted to rekindle investment in Nigeria? This study sets out to empirically investigate these questions.

                          Objectives of the Study

The broad objective of this study is to empirically investigate the main determinants of gross domestic investment in the Nigerian economy. The specific objectives of this study include to:

• Characterize the relationship among the determinants of investment

• Examine the impact of the determinant of investment.

• Providing necessary insight into measures that could be adopted to rekindle investment in Nigeria.

                            Justification for the Study

One belief that is fast becoming a dogma is the development orthodoxy that economic development depends critically on investment (Kindleberger, 1965). Despite the importance of investment in the growth process, evidence from the Nigerian economy indicates that the growth of this macroeconomic variable has not been impressive over the years. Even the negative real GDP growth in the early and mid-1980s could be attributed mainly to the collapse of investment (Iyoha, 1998). Recognizing the essential role of gross domestic investment in the nation’s economic growth process, which has not been favourable, and several policies have been implemented over the years. Incidentally, these policies have not been yielding the expected results. Importance of the work is that there has not been any work that has analyzed their data till 2015

In the past years, Nigeria used administrative control and before Structural Adjustment Programme in 1986, the government used policy of low-interest rate where the nominal interest rate was fixed irrespective of the inflation rate, this caused saving deposit to be largely negative (Ajakaiye and Odusola, 1997) and automatically reduced the amount of investment funds. The (SAP) Structural Adjustment Programme was brought in 1986 and the program relied on market forces as well as the corresponding relaxation of the administrative controls. The major distortion of this program was the regulation of interest rate given the above backdrops. It then becomes crucial to investigate the main determinants of gross domestic investment in Nigeria, which is what this research study is geared towards.

                        Research Hypotheses

The hypotheses to be tested in this study include:

H10: There is no significant relationship between interest rate and gross domestic investment in Nigeria.

H11:    There is a significant relationship between interest rate and gross domestic investment in Nigeria.

H20: There is no significant relationship between savings and gross domestic investment in Nigeria.

H21: There is a significant relationship between savings and gross domestic investment in Nigeria.

H30: There is no significant relationship between inflation and gross domestic investment in Nigeria.

H31: There is a significant relationship between inflation and gross domestic investment in Nigeria.

H40:     There is no significant relationship between external debt and gross domestic investment in Nigeria

H41:     There is a significant relationship between external debt and gross domestic investment in Nigeria

H50:     There is no significant relationship between exchange rate and gross domestic investment in Nigeria.

H51:     There is a significant relationship between exchange rate and gross domestic investment in Nigeria.

                        Scope of the Study

This study investigates the main determinants of gross domestic investment in the Nigerian economy. Gross domestic investment is made up of private investment and public investment. While private investment refers to expenditure in the acquisition of machinery and equipment to increase the firm’s output, public investment comprises investment in social and economic infrastructure. In achieving the objective of this study, attention is focused on the period 1970- 2015, due to the availability of accurate data.

                        Plan of the Study

To facilitate proper analysis and adequate coverage, this study will be divided into five chapters, each dealing with the different aspects of the study. Chapter one of this study focuses on the general introduction. It discusses the background of the study, statement of the problem, the justification for the study, objectives of the study, scope of the study, plan of the study, and expected contribution to knowledge.

In chapter two, the theoretical framework, as well as the literature review, is considered. In this chapter, previous empirical studies on the determinants and trend of gross domestic investment in Nigeria will be reviewed. Chapter three of this study deals with the research methodology. Chapter four focuses on data analysis and interpretation of results. Chapter five, on the other hand, deals with the summary, recommendations, and conclusion drawn from this study.

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