This study empirically examined the determinants of manufacturing firms’ financial performance in Nigeria using a panel data for 12 years across 10 manufacturing firms listed on the Nigerian Stock Exchange for the period 2004 to 2015. The effect of revenue reserves, interest paid on borrowings and tax paid were examined on net worth, profit after tax and return on asset.

The data was analyzed using descriptive and inferential analysis. The study was based on the microeconomic theory of production. The hausman test was used to determine the appropriateness of the fixed effect and random effect estimators that were employed. A robust check was carried out on the effect of borrowings.

The results revealed that the mean profit after tax, net worth and return on asset was N11,800,000,000, N67,200,000,000 and 10.441% respectively. From the panel regression estimates, revenue reserve had insignificant effect on net worth, profit after tax and return on asset. Tax paid had a negative significant effect on the net worth and profit after tax of manufacturing firms. However it had no significant effect on return on asset. The amount of borrowings had a positive significant effect on profit after tax and net worth of manufacturing firms. However, its effect on return on asset was insignificant. Interest paid on borrowings was not a significant determinant. 

The study concluded that the high tax paid by the manufacturing firms significantly explain declines intheir financial performance. The amount of borrowings available to manufacturing firms determines improvements in their financial performance. Tax reductions and subsidies as well as greater access to borrowings are important for improving the financial performance of manufacturing firms.

Keywords: Financial performance, Manufacturing firms, Tax and Borrowings.



  1. Background to the Study

The manufacturing sector plays a catalytic role in a modern economy and has many dynamic benefits that are crucial for economic transformation. In a typical advanced country, the manufacturing sector is a leading sector in many respects. It is an avenue for increasing productivity related to import replacement and export expansion, creating foreign exchange earning capacity; and raising employment and per capita income which causes consumption patterns to increase (Ogar & Charles 2014). Furthermore, it creates investment capital at a faster rate than any other sector of the economy while promoting wider and more effective linkages among different sectors. In terms of contribution to the Gross Domestic Product (GDP), the manufacturing sector is dominant and it has been overtaken by the services sector in a number of organizations for Economic Co-operation and Development (OECD) countries (Anyanwu, 2003).

Before independence, agricultural products dominated Nigeria’s economy and accounted for the major share of its foreign exchange earnings. Initially, inadequate capital investment permitted only modest expansion of manufacturing activities (Ariyo, 2005). Early efforts in manufacturing sector were oriented towards the adoption of an import substitution strategy in which Light Industry and assembly related manufacturing ventures were embarked upon by the formal trading companies up to about 1970, the prime mover in manufacturing activities was the private sector which established some agro-based Light manufacturing units such as vegetable oil extraction plants, turneries tobacco processing, textiles, beverages and petroleum products (Ariyo, 2005). The strategy of light and assemblage manufacturing shifted somewhat to heavy industries from the period of the Third National Development Plan (1975-1980) when government intervened to establish Core Industrial Plants to provide basic imports for the downstream industries. The import dependent industrialization strategy virtually came to a halt in the late 1970s and early 1980s when the Liberal Import Policy expanded the imports of finished goods to the detriment of domestic production (Ariyo, 2005).

Using data from the CBN Statistical Bulletin 2015, an analysis of the contribution of manufacturing sector to the growth of the economy is thus presented.The contribution of manufacturing sector to total output (GDP) was 13% in 1982. A slight decline of 12% was recorded in 1984 and further declined by 3% in 1986.  An increase to 15% was recorded in 1988 and huge increase of 33% was obtained in 1990.  From 1991, it decreased by 3% in 1992 and by 1994 a further decrease of 2% was recorded. A huge increase of 46% was obtained in 1996. However, it declined by 12% in 1998. From 2000, the contributions of this manufacturing sector only increased by 3% and further increased to 8% in 2002. Further fluctuations have therefore been recorded as seen from an increase to 11% in 2004 and also increased by 9% in 2006. By 2010 an increase of 7% was recorded and further increased to 14% in 2015.