Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(6): 991-996

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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(6):991-996 (ISSN:2141-7024)

The Determinants of Output Expansion in the Nigerian

Manufacturing Industries

M.A Loto

Department of Economics,
University of Lagos, Lagos, Nigeria.
___________________________________________________________________________
Abstract
The study investigates the determinants of output expansion in the Nigerian manufacturing industries between
1980-2010. OLS method was adopted and important determinants were detected. One of the important findings
of the preceding analysis is that inflation rate plays the highest significant role in explaining manufacturing
output expansion between 1980 -2010. Any policy measure that can curb inflation will surely increase output.
Real GDP and per capita real GDP have positive and significant roles to play in the manufacturing output
expansion. The inverse relationship between output expansion and capacity utilization in manufacturing is not
surprising. Low demand due to ineffective purchasing power caused by inflation will result into excess capacity.
A negative relationship between this variable and manufacturing output expansion is not surprising, simply
because, if inflation is growing there will be higher prices which could increase the value of output at the
expense of lower capacity and lower demand. The significance of the study lies on the fact that if the
determinants of output expansion in the manufacturing industries are known, then, policies could be introduced
to take care of them and thereby strengthened the position of the manufacturing sector. This could lead to output
expansion and employment generation
_________________________________________________________________________________________
Keywords: manufacturing, capacity utilization, labour supply, export, competitiveness
__________________________________________________________________________________________
INTRODUCTION The structural Adjustment Programme (SAP) which
Manufacturing plays a dominant role among other was introduced in 1986 by the Nigerian government
sectors of the economy. It signifies modernization in was partly designed to address some of the problems
terms of production and distribution. This singular of the manufacturing sector. The aim was to
sector has many dynamic benefits that are crucial for revitalize the manufacturing sector by shifting
economic transformation. It is one of the sectors emphasis on the domestic sourcing of inputs by this
where forward and backward linkages can effectively sector. A way of motivating the sector to adopt this
take place. According to Ogwuma (1995), the strategy, incentives were given to firms that comply.
manufacturing sector has a wider and more effective These incentives included monetary and fiscal
linkage among different sectors. This sector also incentives. Looking at the manufacturing sector over
create investment capital at a faster rate than any the years, it could be seen that the contribution of the
other sector of the economy. In terms of its sector in terms of its shares in GDP has been
contribution to GDP, the manufacturing sector is very relatively low recording in 1970 (9%) in 1980 (10%)
important. in 1990 (8%) in 1998 (6%) in 2004 (3.7), in 2008
(4.9).The capacity utilization fell below54% in 2008
Early effort in the manufacturing sector were actually and 2010 respectively. (CBN documents).
oriented towards the adoption of an import
substitution strategy in which light industries and OBJECTIVE OF THE STUDY
assembly related manufacturing ventures were The main objective of this study is to establish those
embarked upon by the former colonial masters determinants of manufacturing output expansion and
companies. Being a leading sector in any economy, also to determine the extent of the impact of each of
this position must be maintained. To maintain it will the determinants of manufacturing output
depend on the productivity of this sector, the level of performance.
output and its competitive position. The focus of this
study is on the determinants of output expansion in LITERATURE REVIEW
the Nigerian manufacturing sector. The objective is to The importance of manufacturing can be examined
determine those factors that the determine output from various angles. The Government of Nigeria has
expansion, whereby improvement could be in recent years been pursing several policy initiatives
recommended for greater output in this sector. The to facilitate the process of industrialization in the
whole essence is to promote economic development country. It is of considerable importance both for the
at national level. policy makers as well as researchers to take stock of
the impact of these policy measures on the
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(6):991-996 (ISSN:2141-7024)

performance of the industrial sector. The dynamics the share of manufacturing in total GDP of an
of manufacturing sector can be assessed in terms of economy is low, the value added will surely
its size, composition, contribution and growth. Zaid correspondingly be very low. Low share according to
Bakitt and Debaukiya Bhaltacharga (1991) stressed them is associated with low value added.
that investment; employment and value added are the Industrialization is essential if it is to achieve rapid
three critical performance indicators of economic and social development.
manufacturing sector.
Manufacturing in Nigeria, however is still at an
Papanek (1962) noted that changes in the economic infant stage. It accounted for only about 6.18% of the
environment would stimulate the successful transfer Gross Domestic Products in 1998. The industrial
of Nigerian entrepreneurial talent into a large scale- base is small, but there is great scope for expansion.
manufacturing sector. Manufacturing industries have Nigerian Industries are concentrated in light
been growing slowly and the value added of Nigerian consumer goods. There is hardly any production of
industries has increased slightly over the years. The capital and intermediate goods. Another feature of
contribution of the Nigerian manufacturing sector to the manufacturing sector is its over-dependence on
gross domestic product is still very insignificant. imports for the supply of raw materials and spare
parts. There is no single industrial product in which
One of the main reasons for industrialization is the the country is entirely self-sufficient. Nigeria’s
expansion and generation of employment. According import bill is dominated by the cost of raw materials
to Olalokun et al (1979), the proportion of labour and spare parts. This explains why in the 1980’s the
employed in manufacturing has slowed down greatly. economic stabilization measures designed to
This according to them may be due to the under- conserve foreign exchange affected industries most
utilization of capacity. In the manufacturing industry, adversely. As a result of this, many factories reduced
the capacity utilization in 1980 was 70.1% and by their scale of operations significantly while some
2000, it was below 35% (CBN Publication). closed down completely leading to increase in
unemployment rates.
Kayode (1987), observed that the industrial sector
and in particular, the manufacturing sub-sector is the Many literatures confirmed the insignificant nature
heart of the economy. He went further to confirm of the Nigerian manufacturing industries in terms of
that faulty or poor industrial development policies its contribution to economic development Enisan
have long been recognized as major factors that Akinlo (1996) also confirmed this by saying that the
adversely affect the well being and socio-economic industrial sector of the Nigerian economy was
improvement of the people in developing countries. relatively insignificant starting from independence in
He stressed that such policies are the major terms of contribution to the Gross Domestic Product
contributing factors to low value added and low (GDP). Most of the earliest manufacturing
economic growth. Uzaoga (1981) threw more light industries, established by the colonial trading
on the low performance of the manufacturing sector companies and a handful of other international firms,
in Nigeria. He noted that Nigeria, being a colony of concentrated on the production of light industrial
Britain, has to specialize on the production of raw commodities such as detergents soft drinks, leather
materials while Britain serves as the main supplier of work, textiles and confectionery (Olukoshi 1991). He
manufactured goods. According to him, this went further to point out that the pre-owned post-
unfortunate pattern of investment promoted colonial production policy caused distortions in the
specialized manufacturing based on a static scheme sector, which was as a result of neglecting research
of comparative advantage whereby diversifying the and an excessive reliance on foreign input. The
Nigerian economy into activities that offered little manufacturing sub-sector is still characterized by
opportunity for technical progress. The few distortions despite the adjustment programme. This
industries established depended on foreign inputs. needs to be eliminated according to him if the sector
All these distortions according to him affected the is to experience substantial growth.The industrial
performance of the industrial sector in terms of its development survey published by the United Nations
contribution to the gross domestic product, pointed out the factors that determine the growth of
employment generation; capacity utilization and manufacturing output. These are called growth
value added which are indices for measuring the factors. They include:
performance of the manufacturing sub-sector. 1. The growth rate of GDP
2. The growth rate of per capital GDP
Investment structure in the manufacturing sector also 3. The level of per capital GDP
affected the performance of the sector from the point 4. The growth rate of total export
of view of aggregate investment behavior in the 5. The growth rate of gross capital formation
sector. Value added is a crucial indictor in measuring 6. The level of investment.
the significance of manufacturing in an economy.
Zaid and Debauriya (1991) made us to believe that if

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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(6):991-996 (ISSN:2141-7024)

METHODOLOGY foreign exchange to pay for imports

This study examines the output expansion capacity of especially raw material to improve capacity.
the manufacturing sub-sector of the Nigerian 5. Political Stability: this is a dummy variable
economy. The study relies on secondary data from that can also affect output expansion. When
the Federal Office of Statistics (FOS) and Central the country is stable politically, there is
Bank of Nigeria (CBN) for the period 1980-2010 for tendency for increase in investment
analysis. The study is actually concerned with especially from outside the country to take
identifying the determinants of the expansion of place. This will also promote output
output in the manufacturing sub-sector as well as expansion.
assessing their magnitude and relative impact. It is in 6. Real GDP: growth in GDP is associated
response to the challenges posed by the country’s with efficient performance in manufacturing
output expansion problem (capacity under- sub-sector. A positive relationship is
utilization) that this study attempts a crucial expected.
diagnosis of the output expansion capacity of the 7. Domestic Capital Formation: a positive
manufacturing sub-sector of the economy. relationship is expected between
Determinants of outputs expansion in manufacturing manufacturing output and domestic capital
will be identified and the way each of them affects formation.
the ability to expand output will be reviewed. The
magnitude and relative impact of these factors in In order to assess the relative impact of each of the
determining output in the manufacturing sub-sector factors that have been identified to affect output
would be assessed using econometric analysis. expansion in the manufacturing industry, the
techniques of multiple regressions was used. Other
In analyzing the manufacturing performance, we tests were also performed, such as unit root,
specified a production function (the linear production cointegration,and error correction. The whole aim
function) in which the output level of the was to bring about stability in the model and also in
manufacturing constitutes the dependent variable. the results. The model was specified as follow:
The various factors assumed to influence output Yt = α0 + α1 RGGR + α2PCGDP + α3 GDCF
expansion in manufacturing were identified and the + α4RIF + α5CU + α6EXPM + e 2
nature of a prior relationship between each of these Where
factors and increase in output were reviewed. These Yt = manufacturing Output
expected or a prior patterns of relationship constitute RGGR = Real GDP Growth Rate
the various hypothesis tested. PCGDP = Per Capita Level of Real GDP
GDCF = Gross domestic Capital Formation
MODEL SPECIFICATION RIF = Rate of Inflation
Determinants of Manufacturing Performance: CU = Capacity Utilization
The important factors assumed to affect the EXPM = Export of Manufactured goods
expansion of output in the manufacturing sub-sector e = Dummy variable for political stability
includes: The variables were expressed in logarithmic form;
1. Per Capita Level of Real GDP: if the per such that equation (i) now becomes:
capital level of real GDP is high, there is Logyt = α0 + α1log RGGR + α2logPCGDP +
tendency for the purchasing power of the α3logGDCF + α4logRIF + α5logCU +
people to increase (i.e. effective demand) if α6logEXPM + e (2)
this happens, a high demand for output leads
to expansion in order to meet demand, and EMPIRICAL FINDINGS
this will in turn lead to increase in demand Time series data spanning from 1980 – 2010 were
of the inputs needed to produce the required used for the regression analysis. The method of
increase in output. analysis was the OLS method. Since in the
2. Capacity Utilization: A positive relationship literature, it has been shown that the regression
is expected. If there is increase in demand analysis through OLS could be spurious, it is very
for manufactured goods, the production important to check the variables used of stationarity.
capacity must be increased to meet the The long-run stability of the variables used was tested
increase in demand and at the same time will by making use of the Unit-root test. The co-
increase output. integration test was also performed to detect whether
3. Rate in Inflation: a negative relationship is the variables moves along the same path in the long-
expected. An increase in inflation rate will run. The error correction test was also performed to
dampen output expansion, since inflation detect the speed of adjustment to equilibrium in the
reduces the purchasing power of the people. case of sudden shock. All these are presented in
4. Export of Manufacture: a positive tables 1 – 5 below .Equation (2) was used to test for
relationship is expected. Increase in the determinants of output expansion in the Nigerian
manufacturing exports will generate needed manufacturing industries between 1980 and 2010.

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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(6):991-996 (ISSN:2141-7024)

Dependent Variable (MfgGDP) it was confirmed that all the variables were stationary
Method: Lest Squares at levels. The test for Johansen cointegration was also
Sample: 1980/2010 performed. These are shown in the tables below.
Included Observations: 31
This test shows that at level, non of the variables was
Table 1 stationary. All the variables became stationary at first
Variable Coefficient Std. t- Prob. difference with real gross domestic product having
Errors statistics the highest absolute value.
C -5.1659 0.584 -8.8513 0.0000
PCLGDP 0.0124 0.00088 14.1445 0.0000
CU 0.00042 0.0084 0.05013 0.9604 Since differencing produces stationarity, we conclude
In/ratio -0.0032 0.00484 -0.6615 0.5146 that each of the series is integrated of order one (i.e.
Mfg Export 0.0118 0.01195 0.99347 0.3304 1(1). The study now went further to perform the next
Real GDP -0.069 0.01052 -6.5393 0.0000 operation which is the test of co-integration. This test
GFDCF 0.0631 0.0059 10.6933 0.0000
will be useful in showing whether the time series
R-Squared 0.98 Mean dependent 5.11
Variable keeps the same track or whether they could be used
Adjusted 0.97 S.D dependent var 1.63 together to serve as a meaningful result in the long-
R.Sq. run. To perform this test, the Johansen co-integration
S. E. of 0.43 Akaike infro criterion 1.32 test developed by Johansen (1987) was proffered in
regression
Sum of 1.33 Schwarz Criterion 1.6
the sense that the Granger procedure could be biased
Squared and also, the assumption of arbitrary normalization of
Resid. the co-integrating vector.
Log -3.5 F-statistics 155.9
likelihood
Table 3: Present The Result Of The Johansen Co-
Durbin 2.01 Prob. (f-statistic) 0.0000
Watson stat. Integration Test Series: MFGGDP, PCLGDP, CU,
INFL, MFG EXP, REAL GOOD GFDCCF
The coefficient of the multiple determination stood at EIGEN LIKELIHOOD 5% HYPOTHESIZED
VALUE RATIO CRITICAL
0.98 (98%). This shows that the explanatory variables VALUE
accounted for 98% of the total change in the 0.88067 189.6 124 None **
dependent variable. 0.81651 128.0 94 At most 1
0.70442 78.7 69 At most 2
0.45473 43.4 47 At most 3
The test for the presence of auto correction that is
6
represented by the Durbin Waston statistics was 0.39950 25.8 30 At most 4
found to be within the normal bound at 2.01. This 0.30349 11.0 15 At most 5
result is shown in table one below. 0.01740 0.6 4. At most 6
6
Table 2 presents the results of the unit test. *(**) denotes LR test rejection of the hypothesis at
Unit Root Test 5% significance level.
VARIABL ADF VALUE MACKINNO ORDER OF
E AT FIRST N INTEGRATIO LR test indicates one co- integrating equation at 5%
DIFFERENC CRITICAL N significance level
E VALUE 5%
Mfggdp -4.7662 -2.9705 1
Pclgdp -8.9249 -2.9665 1 Looking at the likelihood ratios as compared to the
Cu -4.5803 -2.9665 1 critical values at 5%, we reject the hypothesis that
Infrate -5.3350 -2.9665 1 there is no co-integration vector. The results show
Mfgexport -5.2147 -2.9665 1 that there is atleast one co integrating equation
realgdp -10.0684 -2.9665 1
(vector).

After comparing the ADF value against the

Mackinnon critical value art 5% and 1% respectively,

Table 4: Unnormalized Co Integrating Coefficients

MFGDP PCLGDP CU INF MFG EXPORT REAL GDP GFDCF
RATE
-1.106 0.015 0.006 0.004 0.024 -0.243 0.226
-0.500 0.007 0.022 0.005 -0.005 0.014 -0.024
0.288 -0.006 0.002 0.010 0.032 0.099 -0.074
-0.171 0.002 -0.014 -0.005 0.002 0.071 -0.069
-0.341 0.0009 0.007 0.004 -0.004 0.076 -0.062
-0.736 0.0081 0.19 -0.005 0.027 -0.095 0.100
-0.182 0.0054 0.007 0.004 -0.017 -0.265 0.250
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(6):991-996 (ISSN:2141-7024)

As shown in table 3, it is revealed that there is The error correction result as shown in table 4 below
existence of equilibrium condition that keeps the tested the degree of dynamism in the model.
variables in proportion to each other in the long-run.

TABLE 5: ERROR CORRECTION MODEL

Dependent Variable: mfggdp; Method: Least Square
Sample Adjusted 1983: 2010; Included observations: 28 after adjusting end points
VARIABLE COEFFICIENT STD ERROR T-STATISTICS PROBLEM
C -2.612 0.598 -4.368 0.000
PCLGDP 0.008 0.003 2.728 0.0163
CU -0.034 0.0192 -1.730 0.106
Infl. Rate -0.014 0.005 -2.682 0.0179
Export (Mfg) -0.004 0.015 -0.268 0.793
Real GDP +0.103 0.029 +3.554 0.329
GFDCF -0.028 0.053 -0.526 0.607
ECM (-1) -1.0063 0.3027 -3.32 0.000
R-squared 0.98 Mean dependent variable 7.75
Adjusted R-Sq. 0.97 S. D. dependent variable 1.96
S. I. of regression 0.323 Akaike Inf. Criterion 0.88
Sum Squared resid. 1.464 Schwarz criterion 1.47
Log likelihood 0.508 F-statistic 62.17
Durbin Watson 2.010 Prob (f-statistic) 0.0000000
Statistic

The ECM coefficient carries the correct sign and it is the small standard error of the coefficient, inflation
also statistically significant, with the speed of rate is very significant and negative in explaining
convergence to equilibrium of 100% of the past years variations in the manufacturing output expansion.
deviation from equilibrium. This particular With the positive association of real GDP growth rate
adjustment is very crucial for keeping the long-run to output expansion, a 1% increase in the rate of
equilibrium and for reducing the existing growth of real GDP will bring about 10.3% increase
disequilibrium over time. in manufacturing output. A 1% increase in the rate of
growth of per capita real GDP is associated with a
DISCUSSION OF RESULTS 0.8% of increase in the rate of manufacturing output.
The study modeled the manufacturing industry’s by
making use of a time series data from 1980 – 2010 to RECOMMENDATIONS AND CONCLUSIONS
analyze the determinants of output expansion in the One of the important findings of the preceding
manufacturing sector in the Nigerian economy. The analysis is that inflation rate plays the highest
result of the regression shows that manufacturing significant role in explaining manufacturing output
output expansion is positively related to real GDP expansion between 1980 -2010. Any policy measure
growth rate and also to the per capita level of real that can curb inflation will surely increase output.
GDP. This association is expected in the sense that if Real GDP and per capita real GDP have positive and
there is increase in real GDP, per capita real GDP significant roles to play in the manufacturing output
will surely increase. If there is increase in per capita expansion. The inverse relationship between output
real GDP, there is tendency for consumption of expansion and capacity utilization in manufacturing
manufactured goods to increase which will lead to is not surprising. Low demand due to ineffective
increase in demand. In order to meet this increase in purchasing power caused by inflation will result into
demand, output must expand. excess capacity. A negative relationship between this
variable and manufacturing output expansion is not
Manufacturing output expansion is inversely related surprising, simply because, if inflation is growing
to Gross domestic capital formation; rate of inflation, there will be higher prices which could increase the
capacity utilization, export of manufactured. The value of output at the expense of lower capacity and
results are expected in the sense that if for example, lower demand.
the domestic rate of inflation is increasing, it will
reduce the purchasing power of the people. Demand LIMITATION OF THE STUDY
for manufactured will reduce, which will also affect The major limitation of the study is paucity of data. A
capacity utilization. Domestic capital formation will primary data at firm or industry level would have
also be impaired. Based on the magnitude of the been ideal. This would have given room to knowing
coefficient of inflation in the regression equation and the peculiarities of individual firm or industries.

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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 3(6):991-996 (ISSN:2141-7024)

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