Abstract

The manufacturing sector is significant to economic development. In

considering the Nigeria economic development experiences, this study is an
insight on how manufacturing sector can influence Nigeria’s economic
growth by facilitating the transfer of technology and other associated
benefits. The objectives of the study were to determine the impact of
manufacturing sector on Nigeria’s economic growth; and to investigate the
major constraints confronting the Nigerian manufacturing sector. Data for the
study was obtained from secondary sources, and the technique used in this
research was the ordinary square regression method. The endogenous growth
model was adopted as the theoretical framework of analysis. The study found
out that industrial output is not statistically significant in terms of its
influence on economic growth. Recommendations were made that;
Government must ensure political stability and also invest in the people, since
high economic performance is a function of the people working in the
country (Capacity Development); Government should pursue favorable
policy framework and provide necessary infrastructures and create an
enabling environment that will foster huge investment in research and
development.

1
 CHAPTER ONE
1.1 Background of Study

The manufacturing sector plays a significant role in economic development.

Industries act as a catalyst that accelerates the pace of structural transformation

and diversification of economy to enable a country to fully utilize its factor

endowment and to depend less on foreign aid and supply of finished goods or

raw materials for its economic growth, development and sustainability. In other

words, in Nigeria, it has always been realized that economic development

requires growth with structural change. In considering the Nigeria economic

development experiences therefore, it is instrumental to examine the growth and

structural change in certain major aspects of the economy (Ajakaye, 2002).

Productivity is more in the manufacturing sector than in the agricultural

sector.

The extended economic recession occasioned by the collapse of world oil

market from the early 1980s and the associated sharp fall in foreign exchange

earnings have adversely affected economic growth and development in Nigeria.

Other problems of the economy include excessive dependence on imports for

consumption and capital goods, dysfunctional social and economic

infrastructure, unprecedented fall in capacity utilization rate in industry and

neglect of the agricultural sector; among others (Ku et al, 2010 Adesina 1992).

These have caused fallen incomes and devalued standards of living amongst

Nigerians.

2
 Despite the introduction of structural adjustment programme (SAP) in

19986, was to address these problems, no notable improvement took place.

From a middle-income nation in the 1970s and early 1980s, Nigeria is today

among the 30 poorest nations in the world. The path to economic recovery and

growth may require increasing production in puts land, labour, capital and

technology and or increasing their productivity (Kayode and Teriba 1997).

A knowledge of the relative efficiency of industries in relations to economic

growth and programs and polices especially in deciding on which industries

should be accorded priority. In the light of the foregone, there cannot be a more

appropriate time to evaluate the role of Nigerian manufacturing sector in the

economic growth and development of the country than now.

1.2 Statement of problem

The Nigerian industrial development and manufacturing in Nigeria is a

classic illustration of how a nation could neglect a vital sector through policy

inconsistencies and distraction attributable to the discovery of oil (Adeola

2005). That the country’s oil is not major source of employment, and its benefit

to the other sector in the economy is limited since the government has not

adequately developed the capacity to pursue the more valued-added activities of

the petrochemical value chain. As a result, the oil industry does not allow for

any agglomeration of the technological spillover effects, Ogbu (2012) stresses.

3
Upon several government policies on the stability of Nigeria economy through

manufacturing industry, there have been a lot of challenges facing the growth of

Nigerian manufacturing sector as industrial by researcher. These challenges

include: corruption and ineffective policies (Anyanwu 2007); lack of integration

of macroeconomic plans and the absences of harmonization coordination of

fiscal policy (Onoh, 2007), gross mismanagement/misappropriate of public

funds (Okemini and Uranta, 2008); and lack of economic potential for economic

growth and development (Ogbele 2010). Despite the emphasis placed on fiscal

policy in the management of the economy, the management of the economy, the

manufacturing sector inclusive, Nigerian economy is yet to come on the path of

sound growth and development because of low out output in the manufacturing

sector to the economy (GDP).

The near total neglect of agriculture and industries their primary source of raw

materials. The absence of locally sourced imparts has resulted in low

industrialization

Some of the constraints traced in this sector include:

High interest rate

 Dumping of cheap products

 Infrastructural in adequate

 Lack of effective regulatory agencies

 Unpredictable government policies

4
  Non-implementation of existing policies

 Low patronage

 Unfair tariff regime

It is in the light of the foregoing that this study seeks to evaluate the role of the

manufacturing sector in the Nigerian economy.

1.3 Research Questions

The study would examine the following questions:

1. To what extent has the Nigerian manufacturing sector contributed to the

economic growth?

2. What the major constraints confronting the Nigerian manufacturing

sector?

1.4 Objective of the study

This study has the central objective of exploring issues relating to how

manufacturing sector can influence Nigeria’s economic growth by facilitating

the transfer of technology and other associated benefits, while in specific terms

the study is set to.

1. To determine the impact of manufacturing sector on Nigeria’s economic

growth.

5
 2. To investigate the major constraints confronting the Nigerian

manufacturing sector.

1.5 Research hypothesis

The hypothesis tested in the course of the analysis is stated below:

1. The manufacturing sector does not contribute significantly to the Nigeria

economy.

2. There exist major constraints confronting the Nigerian manufacturing

sector.

1.6 Significance of the study

The study will contribute greatly in aiding the government, policy makers,

economic planners, researchers and the academia generally. This will provide

an insight and understanding to the government on how to be prudent in

spending public funds to boost the manufacturing sector to bring about

economic growth and development.

It will influence various economic units both in the public and private

sectors of the Nigerian economy. The research report will be a veritable source

of information to various categories of students as well as researchers wishing

to conduct further research in this area. The findings of this research will assist

monetary authorities in assessing the performance of the fiscal policy in Nigeria

particularly in terms of their impact on the output of manufacturing sector. This

6
work is also immense benefit to the policy makers and economic planners in

terms of using its findings in formulating and implementing appropriate policy

measures towards accelerating economic growth through the manufacturing.

1.7 Scope of the study

The study shows the role of Nigerian manufacturing sector in relation to the

growth of the economy.

The major constraints that confronting the sector would be identified in the

course of examining the overall development in the sector. The analysis of the

contribution of the manufacturing sector to the economic growth of Nigeria is

restricted to the period between 2013 and 2017 using only relevant performance

indicators such as index of manufacturing production, manufacturing capacity

utilization rate.

1.8 Definition of terms

1. Productivity: Is an economic measure of output per unit of input. Inputs

include labour and capital while output is typically measured in revenues

and other gross domestic product (GDP) components such as business

inventories.

2. Economic development: The focus of federal, state and local

government to improve our standard of living through the creation of

7
 jobs, the support of innovation and new ideas, the creation of higher

wealth and the creation of overall better quality of life.

3. Trade liberalization: This is the removal or reduction of restrictions or

barriers on the free exchange of goods between nations. This includes the

removal or reduction of tariff obstacles, such as duties and surcharges and

non-tariff obstacles such as licensing rules, quotas and other

requirements.

4. Industrial Policy: Industrial policy of a country sometimes denoted IP, is

its official strategic effort to encourage the development and growth of

part or all of the manufacturing sector as well as other sectors of the

economy.

5. Economic liberalization: This is the lessening of government

regulations and restrictions in an economy in exchange for greater

participation by private entities, the doctrine is associated with classical

liberalism.

8
9
 CHAPTER TWO
LITERATURE REVIEW

Copious literature exists in manufacturing in Nigeria written by various authors

and for various purposes. This fact underscores the essence, importance and

relevance of this sector in the growth of any given economy. The experiences of

developed economies in relation to the roles played by the manufacturing sector

buttress the fact that the relevance of the manufacturing sector cannot be

overemphasized especially among the less developed countries (LDCs) or rather

developing countries.

In view of the above, this division of the study presents relevant literature by

other scholars under the following sub-headings:

2.1 Conceptual Framework

2.1.1 Concept of Manufacturing: The process of converting raw materials,

components, or parts into finished goods that meet a customer's expectations or

specifications. Manufacturing commonly employs a man-machine setup with

division of labor in a large scale production. Manufacturing commonly employs

a man-machine setup with division of labor in a large scale production.

2.1.2 Foreign Direct investment (FDI) represents Investment involving a long-

term relationship and reflecting a lasting interest and control of a resident entity

in one economy (foreign direct investor or parent enterprise) in an enterprise

resident in an economy other than that of the foreign direct investor. Opaluwa et

al (2012) examined the effect of Foreign Direct Investment (FDI) on the

10
Nigerian manufacturing sector. According to Opaluwa et al (2012), most

countries strive to attract Foreign Direct Investment (FDI) in the manufacturing

sector because of its acknowledged advantages as a tool of economic

development. For the purpose of this study, we expect FDI to be positively

related to manufacturing output.

2.2 Theoretical Literature

Ajayi (2008) in a study of the collapse of Nigeria’s manufacturing sector on

economic growth. He used cross-sectional research design and found out that

the main cause of collapse in the Nigerian manufacturing sector is low

implementation of Nigerian budget especially in area of infrastructure. This

means that low implementation of fiscal policy affects the level of growth in

Nigerian manufacturing sector. Rasheed (2010) investigated the productivity in

the Nigerian manufacturing subsector using co-integration and an error

correction model. The study indicates the presence of a long-run equilibrium

relationship index for manufacturing production, determinants of productivity,

economic growth, interest rate spread, and bank credit to the manufacturing

subsector, inflation rates, foreign direct investment, exchange rate and quantity

of graduate employment. This finding has research gap on the area of factors

that affect manufacturing sector in Nigeria.

2.2.1 Historical Performance of the Nigerian Manufacturing Sector

Adenikinju and Chete (2000) conducted an empirical analysis of the

performance of the Nigerian manufacturing sector over a 30-year period and

11
observed that the sector was performing with satisfactory growth levels from

1970 to 1980. However, after that phase there was a sharp decline in the growth

and profitability of the Nigerian manufacturing sector. Especially after 1983, the

negative effects of the oil price collapse in the international oil market can be

clearly seen on the sector’s performance. Due to that global oil crisis, the

revenues of the Nigerian government sharply declined which resulted in

reduction in foreign exchange earnings. This in turn forced the government to

take several initiatives with the intention of strictly controlling its trade. There

were several import duties enacted in the form of import licenses and tariffs,

and some quantitative restrictions were also imposed on the importation of

certain items. As a result, the manufacturing sector was badly affected because

the manufacturers faced multiple problems when obtaining raw materials and

spare parts for their products and processes. As a result of massive cutbacks in

raw materials and spare parts, many of the country’s industries were shut down

and the capacity utilization in the manufacturing sector declined.

2.2.2 Structure and Performance of the Nigerian Manufacturing Sector

The manufacturing sector is one of the most dynamic sectors in Nigeria.

Manufacturing sector grew between 1970 (when the civil war ended) and 1982

using the index of manufacturing output. The average annual growth rate of

manufacturing was more rapid during the later-half of the 1970s than during the

first and began to accelerate at the first half of 1980s and manufacturing

declines after 1982. The index of the manufacturing production showed the

12
negative growth rate; 28.6, 12.0, 64.3 and 21.8 percent were recorded for the

years 1982, 1984, 1985 and 1986 respectively (Manufacturers Association of

Nigeria, 2012). Manufacturing industries in Nigeria so far has done well in

production of goods to the nation.

Recently, study has shown that Nigeria goods are exported to other

countries. Nigerians now patronize made in Nigeria goods. The performance of

the industry sector improved slightly during the first half of 1997 where the

industry production index 132.6 increased by 0.69 over its level in the first half

of 1996 but declined by 0.2% below that level in the second half of the same

year. The rise in output relative to the position during the corresponding period

in 1996 was accounted for by 1.0 and 0.4% increase in mining and

manufacturing production.

The structure of industrial growth was heavily based in favor of

consumer-goods industries because food, beverage, tobacco, beer, spirit and

textile industries dominated the structure of manufacturing activities. The

overwhelming dominance of the consumer-goods sector both in value added

and employment is evident. Durable consumer-goods industries which began to

expand rapidly in the middle of the 1970s were yet to make significant impact

by 1985. Similarly, the contribution of machinery and transport, equipment,

mental fabrication, chemicals, energy and engineering industries to manufacture

value added were insignificant. In 1981, due to the slump in international oil

13
market, there was a sharp decline in the performance of the manufacturing

sector.

This weak performance exposes the inherent weakness of the sector that

had largely been sheltered by competition by the Import Substitution

Industrialization (ISI) policy that the country adopted after independence in

1960. The ISI process was thus marked by the pyramid tariff structure with

relative low duties on intermediate and capital goods import and progressively

increasing duties on consumer goods imports. Under SAP (Structure

Adjustment Programme), there was a modest increase in import substitution in

durable consumer goods production while there was a significant decline of

import substitution in nondurable consumer production. This showed that the

manufacturing sector received the lion share of foreign exchange at the auction

market. Industrial growth, especially raw material, machineries and spare parts

typically absorbed 70-80% of auction funds with the remainder going to

finished consumer goods.

The poor performance of the manufacturing sector can be attributed to

many factors. These include the existence of trade barriers in industrial

countries, the general poor macroeconomic performance of the economy which

means weak aggregate demand, weaker demand for local manufacturers

because of poor quality product and the influx of relatively cheaper imports.

The high price of domestic manufacturers is partly due to the increased cost,

14
inefficient and old equipment, inadequate infrastructure and the depreciating

naira.

The failure of infrastructural service extends to the area of water supply

and telecommunication. They have implications on the cost of producing

manufactured goods and any extension, and on the competitiveness of domestic

industries. Per Central Bank of Nigeria (CBN), as manufacturers are required to

invest huge capital funds to provide alternative infrastructure facilities for their

operation, domestic industries carry high cost/price structure which results in

loss of competitiveness for their product in both domestic and foreign market.

Since 1992-1993, industrial GDP has been tracked closely by crude petroleum

and natural gas implying that crude oil exploration accounts largely for it. This

leads to a paradox in definition, as the crude component as the name implies is

“crude” with no real value added with a mining component defined as coal,

metal ores and quarrying all primary products.

Industrial GDP fails to capture the term “industrial” in the popular sense

of the word. It does not refer to the sum of productive processes involved in

value adding to primary/raw materials to create a final good that can be

consumed (Olapade and Olapade, 2010). More clarity can be obtained by

painting a picture that takes into cognizance the nature of output and value

addition. A bit of theory here, the Lewis 2- sector theory named after Arthur

Lewis the first and only Blackman ever to win a Nobel Prize in Economics,

proposes that every economy is made of two sectors initially. The first sector is

15
a primary often agrarian labour intensive sector with the other being a capital

intensive industrial one. Lewis left out the services sector as he felt that

distributive activities take prominence after a country attains a high economic

growth. More clearly, after countries have attained high growth rates, their

citizens became less interested in efficiency and more agitated about equitable

distribution of growth.

2.2.3 Constraints of Manufacturing Sector of Nigeria

Nigeria’s manufacturing sub-sector consists of wide range industrial

activities which include large to medium and small scale manufacturing

enterprises as well as cottage and hand-craft units in the informal sector, using

simple technology. The ownership of Nigeria’s manufacturing sub-sector is

shared between the public and private sectors of the economy (Adegbie and

Adeniji, 2012). Employment figures in the first half of 2010 dropped from

998,086 (January – June 2009) to 996,395 in the later-half of 2010 (Peter,

2012). However, there are many jobs that workers can do in the manufacturing

industry. These include: upholsterer; machine operator; plant operator; textiles

designer; instrument fitter; lock smith, etc. The most common hazards in the

manufacturing workplace or any other workplace have been classified by

Evans, Head and Speller (1994) under the following categories:

1. Mechanical hazards: determined by type of agent are; Impact force,

collisions, fall from height, struck by objects. confined space slips and trips,

16
falling on a pointed object compressed air/high pressure fluids (such as cutting

fluid), entanglement, equipment related injury.

2. Types of Injuries: Crushing, cutting, friction and abrasion, shearing, stabbing

and puncture

3. Physical hazards: Noise, vibration, lighting, barotrauma

(hypobaric/hyperbaric pressure), ionizing radiation, electricity, asphyxiation,

cold stress (hypothermia), heat stress (hyperthermia), dehydration (due to

sweating).

4. Biological hazards include: Bacteria, virus, fungi, mould, blood-borne

pathogens, and tuberculosis.

5. Chemical hazards include: Acids, bases, heavy metals, lead, solvents,

petroleum, particulates, and asbestos and other fine dust/fibrous materials,

silica, fumes (noxious gases/vapours), highly-reactive chemicals.

6. Fire, conflagration and explosion hazards: Explosion, deflagration,

detonation, conflagration.

7. Psychosocial issues include: Work-related stress whose causal factors include

excessive working time and overwork, Violence from outside the organisation,

bullying which may include emotional and verbal abuse, sexual harassment,

mobbing, burnout, exposure to unhealthy elements during meetings with

business associates, e.g. tobacco, uncontrolled alcohol.

8. Musculoskeletal disorders: Injuries to bones and muscles and deformities are

avoided by the employment of good ergonomic design. The chance that these

17
hazards will result in an injury for workers is higher when they are combined

with risk factors such as: lack of supervision; inexperience; lack of training;

being uninformed about their rights; and feeling invulnerable that nothing can

hurt you. When hazards are combined with risk factors (these are called

dangerous combinations), the chance of injury, and the possible seriousness of

the injury, increases. In Nigeria, a lot of workers have sustained work-related

injuries and diseases which vary from minor irritations to injuries due to high

exposure to hazardous and exploitative working conditions (Kalejaiye, 2013).

The number of workers affected by work-related hazards and diseases continues

to increase as more workers are employed to work in factory of obsolete

machines with safety guards removed and companies simply cut corners on

safety (Afolabi et al, 1993). Accordingly, Kalejaiye (2013) submitted that there

has been annual mortality rate of 1, 249 per 100, 000 workers in Nigeria in past

decades. Corroborating this, National Institute for Occupational Safety and

Health (2002) reported that over 200 deaths occur in Nigerian work place while

about 50 million workers are exposed to workplace fatalities (i.e. high enough

to disable them) annually.

More findings revealed that no fewer than 400 workers have lost their

lives in the powder sector in the last two years while over 100 cases of work-

related accidents occurred in the maritime sector with over ten deaths, numerous

incapacitations and innumerable serious body injuries (Bello, 2010). This is an

astronomical figure that remains completely below the radar and the real gravity

18
of the situation often goes unrecorded. Another is the fire incident that razed a

plastic factory in Ikorodu, Lagos in 2002 where many workers were roasted to

death at night when the owners of the company locked the workers in the

factory and went to sleep. Furthermore, Bello (2010) revealed that mill

operators suffers high rate (83%) of upper limb, back and lower injuries while

moving planks of wood into the machines. Also, Adebiyi et al (2006) estimated

the cost of accidents in agro-allied industries in South-western Nigeria at 87.89

million dollars annually. In addition, per Oludele and Mayowa (2014), the

Nigerian Institute of Safety Professionals reported in 2000 that overall 11,000

people were injured due to on-the–job accidents each year in chemical industry

alone in Nigeria. In many workplaces hazard-victims and their families receive

little or no compensation which put them in a more vulnerable position in the

society (Kalejaiye, 2013)

2.2.4 Problems of Manufacturers in Nigeria

Dipak and Ata (2003), argue that the main problems facing the Nigerian

manufacturing sector are the ongoing advancements in technology, as these are

taking the international manufacturing market towards higher levels of

consumption. When there is less protection for companies, these unprotected

companies have to focus more and more towards the quality of their products

and do so by increasing their expenditure on research and development. In

Nigeria however, the research and development work is not being done at a

good level required for the constituents to even see a steady growth in the

19
performance of manufacturing organizations. It becomes necessary then, for the

Nigerian government and the private partners to intervene in order for the

situation to improve.

Enebong (2003) predicts that the level of the Nigerian manufacturing

organizations‟ performance will continue to see a decline because as it is now,

the manufacturers will have even more problems in accessing raw materials due

to stiff competition from foreign firms. He theorizes that many of the policies

implemented by the government in the late 1990s are still acting as barriers to

manufacturing sector growth. Some of these policies include backward

integration and the inward orientation strategies towards import substitution.

The private sector also failed to play a significant role in the manufacturing

industry; and there are certain reasons behind this such as import barriers,

tariffs, licenses and other policies that resulted in raw materials unavailability.

Adenikinju (2002) blamed the government for the current inefficient

performance of the Nigerian manufacturing sector. The researcher claimed that

the increased interference of the government in different issues related to the

manufacturing industry minimized the role of the private sector and as such, the

contribution of the private manufacturers seems to be very low in terms of

manufacturing output.

20
2.3 Empirical Review

Adenikinju and Alaba (2000) conducted an empirical study which

evaluated the Nigerian manufacturing sector’s performance with regards to the

relationship between productivity, performance and energy consumption within

the manufacturing organizations. Utilizing an aggregate model, the researchers

measured the changes in the total factor productivity of the sector relative to the

change in energy consumption. The research concluded that efficiency and

productivity of the Nigerian manufacturing organizations are indeed related to

the energy supply and energy price. While the energy resources were found to

play a critical role in the manufacturing sector though, it was also discovered

that the energy source alone cannot effectively improve the performance of the

manufacturing sector in Nigeria. An important point identified in the research

was that the manufacturing sector is too wedded to using old technology and as

such, there is a great need for the adoption of more advanced energy-efficient

technological devices and techniques. For this reason, reforms concerning the

prices of energy options alone do not significantly affect the performance of the

sector because it is hindered by the need for improved technology and energy

supplies. Thus, the reforms in the energy sector need to happen alongside

technological reforms, otherwise the manufacturing organizations cannot

entirely enjoy the advantages of the energy resources.

Sangosanya (2011) used panel regression analysis model and Gibrat’s

law of proportionate effect in investigating firm’s growth dynamics in Nigerian

21
manufacturing industry. The study observed that the manufacturing firms

finance mix, utilization of assets to generate more sales, abundance of funds

reserve and government policies are significant determinants of manufacturing

industry growth in Nigeria. The gap in this study is that the authors did not

identify those environmental factors that affect the manufacturing sector and the

implementation of fiscal policy.

Ojowu (2003), with his analysis of the situation of the Nigerian

manufacturing sector, came to the point that capacity utilization is an important

issue that must be properly addressed in all discussions and all measures to be

taken in the future. The researcher argues that the sector is progressing very

slowly due to low capacity utilization. Issues associated with capacity

utilization such as capacity decline, capacity expansion and capacity mortality

are essential discussion points in the issue of bringing quality into the

performance of the Nigerian manufacturing sector. On top of these issues, the

burden of external debt is also affecting the sector’s performance. The

researcher also argues that the government is not giving enough attention

towards the policies related to the manufacturing sector as compared to those of

other sectors. To contend with Ojowu’s last point though, reforms must also be

applied to different sectors that are associated with the manufacturing sector and

not just the manufacturing sector itself; as the high or low performance of one

sector can affect the progress of the others. For example, if the government

22
works to improve infrastructure then the manufacturing of products will also be

improved.

Alli (2010) however, points out that the government plays a very

important role in the entire scenario of bringing improvements into the Nigerian

manufacturing sector. The researcher observed some positive signs from the

present Nigerian government and identified some of the major strategies that are

being adopted with the intention of improving manufacturing sector

performance.

According to Alli (12010), the government has realized that the

manufacturing sector can act as the backbone of the economy and as it

progresses in a positive direction, the country will consequently grow and

prosper also. In this regard, the government has decided to make sure that the

manufacturing sector will receive access to the domestic, regional and

international markets. This is of course after adding value to the companies’

products; and for this, the sector will need to take advantage of the country’s oil

and gas sector. The Nigerian government also seeks to apply the Public Private

Partnership (PPP), wherein the government will invest in the development of

infrastructure and will become a facilitator to the manufacturing sector. In

effect, the manufacturing industry will gain great advantages from the improved

infrastructure and the private sector will also be encouraged to invest in

different productive manufacturing industries. Moreover, the government is also

23
considering the cluster concept suitable for the economic condition of the

country, keeping in view the geographical proximity and other ground realities.

Loto (2012) examined the relationship between global economic

meltdown and the manufacturing sector performance in the Nigerian economy

using descriptive analysis and pooled data. The result indicates that the global

economic meltdown has insignificant effect on the manufacturing sector of the

Nigerian economy. These empirical findings support previous literature on

economic growth but it failed to use t-test or statistics in testing pre and post

global economic meltdown which is research gap.

Dipak and Ata (2003), argue that the main problems facing the Nigerian

manufacturing sector are the ongoing advancements in technology, as these are

taking the international manufacturing market towards higher levels of

consumption. When there is less protection for companies, these unprotected

companies have to focus more and more towards the quality of their products

and do so by increasing their expenditure on research and development. In

Nigeria however, the research and development work is not being done at a

good level required for the constituents to even see a steady growth in the

performance of manufacturing organizations. It becomes necessary then, for the

Nigerian government and the private partners to intervene in order for the

situation to improve.

Enebong (2003) predicts that the level of the Nigerian manufacturing

organizations‟ performance will continue to see a decline because as it is now,

24
the manufacturers will have even more problems in accessing raw materials due

to stiff competition from foreign firms. He theorizes that many of the policies

implemented by the government in the late 1990s are still acting as barriers to

manufacturing sector growth. Some of these policies include backward

integration and the inward orientation strategies towards import substitution.

The private sector also failed to play a significant role in the manufacturing

industry; and there are certain reasons behind this such as import barriers,

tariffs, licenses and other policies that resulted in raw materials unavailability.

Adenikinju (2002) blamed the government for the current inefficient

performance of the Nigerian manufacturing sector. The researcher claimed that

the increased interference of the government in different issues related to the

manufacturing industry minimized the role of the private sector and as such, the

contribution of the private manufacturers seems to be very low in terms of

manufacturing output

However, according to Mazumdar and Mazaheri (2003), despite this uncertainty

in the business environment some Nigeria companies are successfully operating

in the country and getting high returns on their investments through superior

competitive performance. The researchers analyzed the strategies and

management planning of two Nigerian firms that have achieved a high level of

performance in the business sector. They then highlighted the main factors that

contributed towards the success of these organizations. Some of these factors

25
were the introduction of transparent management policies, proactiveness in

competitive strategies, among others

2.4 Theoretical Framework

There are a range of competing theories to the study of economic growth,

development and diversification. Each approach has its strength and weaknesses

with different ideological, theoretical and empirical conclusions. Consequently,

alternative theories or models or hypotheses seeking to explain the growth of

firms have been developed. These theories include;

(i) the neo-classical theory

(ii) the endogenous growth models

(iii) managerial theory

(iv) models with Penrose effects

(v) theory of optimum firm size.

This study is anchored on the endogenous growth model. The motivation

for the endogenous growth model stems from the failure of the neoclassical

theories to explain the sources of long-run economic growth. The neoclassical

theory does not explain the intrinsic characteristic of economies that causes

them to grow over an extended period of time. The neoclassical theory focuses

on the dynamic process through which capital-labour ratios approach long-run

equilibrium. In the absence of external technological change, which is not

clearly explained in the neoclassical model, all economies will converge to zero

growth.

26
Neoclassical Theory

The neoclassical theory sees rising GDP as a temporary phenomenon

resulting from technological change or a short-term equilibrating process in

which an economy approaches its long run equilibrium. The neoclassical theory

credits the bulk of economic growth to a completely independent process of

technological progress.

According to neoclassical theory, the low capital-labour ratios of

developing countries promise exceptionally high rates of return on investment.

Based on this premise, it was expected that the free market reforms imposed on

highly indebted countries by the World Bank and the International Monetary

Fund should have prompted higher investment, rising productivity, and

improved standards of living. Yet even after the prescribed liberalization of

trade and domestic markets, many LDCs experienced little or no growth and

failed to attract new foreign investment or to halt the flight of domestic capital.

The anomalous behaviour of developing world capital flows (from poor

to rich nations) helped provide the impetus for the development of the concept

of endogenous growth or, more simply, the new growth theory. The new growth

theory represents a key component of the emerging development theory. The

new growth theory provides a theoretical framework for analyzing endogenous

growth, persistent GNP growth that is determined by the system governing the

production process rather than by forces outside that system. In contrast to the

27
traditional neoclassical theory, these models hold GNP growth to be a natural

consequence of long-run equilibrium.

Endogenous Growth Model

The principal motivations of the new growth theory are to explain both

growth rate differentials across countries and a greater proportion of the growth

observed. In particular, endogenous growth theorists seek to explain the factors

that determine the rate of growth of GDP that is left unexplained and

exogenously determined in the Solow neoclassical growth equation (that is, the

Solow residual). Models of endogenous growth bear some structural

resemblance to their neoclassical counterparts, but they differ considerably in

their underlying assumptions and the conclusions drawn. The most significant

theoretical differences stem from discarding the neoclassical assumption of

diminishing marginal returns to capital investments, permitting increased

returns to scale in aggregate production, and frequently focusing on the role of

externalities in determining the rate of return on capital investments.

By assuming that public and private investments in human capital

generate external economies and productivity improvements that offset the

natural tendency for diminishing returns, endogenous growth theory seeks to

explain the existence of increasing returns to scale and the divergent long term

growth patterns among countries. And whereas technology still plays an

important role in these models, it is no longer necessary to explain long-term

growth. A useful way to contrast the new (endogenous) growth with traditional

28
neoclassical theory is to recognize that many endogenous growth theories can

be expressed by the simple equation Y = AK, as in the Harrod-Domar model. In

this formulation, A is intended to represent any factor that affects technology,

and K again includes both physical and human capital. And there are no

diminishing returns to capital in this formula, so the possibility exists that

investments in physical and human capital can generate external economies and

productivity improvements that exceed private gains by an amount sufficient to

offset diminishing returns. The net result is sustained long-term growth an

outcome prohibited by traditional neoclassical growth theory.

Thus, even though the new growth theory reemphasizes the importance of

savings and human capital investments for achieving rapid growth, it also leads

to several implications for growth that are in direct conflict with traditional

theory. First, there is no force leading to the equilibration of growth rates across

closed economies; national growth rates remain constant and differ across

countries depending on national savings rates and technology levels.

Furthermore, there is no tendency for per capita income levels in capital-poor

countries to catch up with those in rich countries with similar savings and

population growth rates. A serious consequence of these facts is that a

temporary or prolonged recession in one country can lead to a permanent

increase in the income gap between itself and wealthier countries. Perhaps the

most interesting aspect of endogenous growth models is that they help explain

29
anomalous international flows of capital that exacerbate wealth disparities

between developed and developing countries.

The potentially high rates of return on investment offered by developing

economies with low capital-labor ratios are greatly eroded by lower levels of

complementary investments in human capital (education), infrastructure,

research and development (R&D). In turn, poor countries benefit less from the

broader social gains associated with each of these alternative forms of capital

expenditure. Because individuals receive no personal gain from the positive

externalities created by their own investments, the free market leads to the

accumulation of less than the optimal level of complementary capital. Where

complementary investments produce social as well as private benefits,

governments may improve the efficiency of resource allocation. They can do

this by providing public goods (infrastructure) or encouraging private

investment in knowledge-intensive industries where human capital can be

accumulated and subsequent increasing returns to scale generated. Unlike the

Solow model, new growth theory models explain technological change as an

endogenous outcome of public and private investments in human capital and

knowledge-intensive industries. Thus in contrast to the neoclassical

counterrevolution theories, models of endogenous growth suggest an active role

for public policy in promoting economic growth and development through

direct and indirect investments in human capital formation and the

30
encouragement of foreign private investment in knowledge intensive industries

such as computer software and telecommunications.

Managerial Theory

Managerial theories of the firm place emphasis on various incentive

mechanisms in explaining the behaviour of managers and the implications of

this conduct for their companies and the wider economy. According to

traditional theories, the firm is controlled by its owners and thus wishes to

maximize short run profits. The more contemporary managerial theories of the

firm examine the possibility that the firm is controlled not by its owners, but by

its managers, and therefore does not aim to maximize profits. Although profit

plays an important role in these theories as well, it is no longer seen as the sole

or dominating goal of the firm. The other possible aims might be sales revenue

maximization or growth (Davies 2005).

Penrose Effect

Penrose (1959) theoretically developed the research proposition that the

finite capacities of a firm’s internally experienced managers limit the rate at

which the firm can grow in a given period of time. One empirical implication

that follows logically from this line of reasoning is that a fast-growing firm will

eventually slow down its growth in the subsequent time period because its firm-

specific management team, which is posited to be inelastic at least in the short

run, is unable to handle effectively the increased demands that are placed on

these internally experienced managers due to increased complexity as well as

31
the time and attention that the new managers require from these internally

experienced managers. Consequently, inefficiency in the firm’s current

operations will follow if the firm maintains its high rate of growth. The research

proposition that a firm cannot remain operationally effective if it maintains high

rates of growth in successive time periods, and that consequently those firms

with foresight typically will slow down their growth in the subsequent time

period is known as the “Penrose effect” in the research literature, and this effect

of dynamic adjustment costs has been examined and corroborated in a few

empirical research studies.

How a firm evolves over time has been an important issue in the fields of

strategic management and industrial organization economics (Kor and

Mahoney, 2000; Nelson and Winter, 1982). Looking at the historical business

record from an organizational capabilities and technology trajectories

perspective, Chandler (1990) suggests that modern business enterprises arise

from the economies of scale and scope that are made possible by the

development of new technologies. Furthermore, a number of researchers who

approach these business issues more deductively in economic science come to a

similar conclusion to Chandler’s (1990) more inductive business history

methodology by maintaining that a firm’s behavior is best understood as a path-

dependent process, and that organizational capabilities develop dynamically.

Gander (1991) examines empirically the managerial limitations on firm

growth by investigating whether there are decreasing (growth) returns to

32
managerial resources (i.e., managerial diseconomies). Gander (1991) suggests

that as the firm doubles its size, the firm has to utilize more than double its

managerial resources to maintain effective coordination. Hence, Gander (1991)

expects that managerial intensity in an industry (proxied by the ratio of

managerial employment to industry asset size) should increase with the size of

firms in the industry.

According to Penrose (1959), planning and executing expansion projects

require the services of internally experienced managers. The reason being that

the process of decision-making and coordination is too complex to be codified

as a management “blueprint” that newly-hired managers could implement, and

consequently the firm must, to some extent, rely on managers’ experience

internal to the firm and on their experience working with other people within

the firm as a team (Penrose, 1959). Since internally experienced managers could

not be hired from managerial labor markets and could only be developed within

the firm over time, there are limits to the rate at which a firm can grow at any

time.

A firm that expands faster than it can increase its internal managerial

capacities is likely to incur managerial problems and reduced effectiveness in its

current operations (Ingham, 1992; Slater, 1980). These managerial problems

then may hamper the firm’s growth and the development and deployment of

dynamic capabilities in the subsequent time period. International expansion via

direct investments is a corporate-level strategy that allows a firm to deploy and

33
develop its organizational capabilities (Chang, 1995), but it also requires the

services of a firm’s experienced managers.

Theory of Optimum Firm Size

Optimum firm is that firm which fully utilizes its scale of operation and

produces optimum output with the minimum cost per unit production (Emerson

1983). In the short-run, a firm would build the scale of plant and operate it at a

point where the average cost is at its minimum. This is regarded as the optimum

level of production for the firm concerned, if the demand for the product

increases from this least cost output; it cannot change the amount of land,

buildings, machinery and other input in short period of time. It has to move

along the same scale or type of plant. The average total cost, therefore, begins to

rise due to the diseconomies of the scale.

In the long run, all inputs are variable. The firm can build larger plant

sizes or revert to smaller plants to deal with the changed demand for the

product. If the size of plant increases to cope with the increased demand, the

average cost per unit begins to fall due to the economies of scale such as

increased specialization of labor, better and greater specialization of

management, efficient utilization of productive equipment, etc., etc. So long as

the resources are successfully utilized, the average cost of production continues

declining.

34
 According to Emerson (1989), a stage comes when the firm is not able to

use the least cost combination of inputs. The building of a still larger plant

cause the average cost of production to go up. The point at which the per unit

cost is the lowest is the optimum level of production for the firm

35
 CHAPTER THREE

Methodology

3.1 Research Design

The period of analysis extends from 2005 to 2016. The econometric approach is

multiple regression of time series data. The theory employed to examine the

relationship between manufacturing output and economic growth, is the

triangulation of Kaldor first law and the endogenous growth theory.

3.2 Model Specification

Kaldor first law states that there exists a close relationship between the growth

of the manufacturing output and economic growth.

The linear specification is;

RGDP = F MANU 1

Where; RGDP and MANU are the growth of total output which (represents

economic growth) and manufacturing output.

The endogenous growth model reveals the essence of technological usage or

technical efficiency in kick-starting economic growth with an economy.

Technical or technical progress has been argued to depend on the strength of

institutions which are the formal and informal constraints on political, economic

and social interactions.

The Endogenous growth model is of the form

Y = AK L 2

Where:

36
Y = Real Gross Domestic Product (RGDP) used as proxy for economic growth

A = total factor productivity or the efficiency parameter also called

technological progress.

K = capital stock

L = labour.

Assuming symmetry across industries, the same level of capital and labour is

utilized by each productive unit or industry. The production function is

expressed as;

Where α&βare elasticity coefficient.

Y = AK L 3

It is assumed that A which is the efficiency parameter will depend on both the

level of technology and quality of institution in the economy. The quality of

institutions can be proxied by contract intensive money (CIM).

A = F TECH, CIM 4

Where:

Tech = technology (time variable, one year represents one data point).

CIM = contract intensive money, calculated as broad money supply minus

currency in circulation divided by broad money supply used as an indicator

of institutional quality.

Substituting equation 4 into 3

37
 Y = F TECH, CIM, K, L 5

For Nigeria to achieve sustained economic growth, the manufacturing sector

must be willing to invest in both human and material capital development.

Labour force must be trained in the field of research and development with

emphasis on the technology. The model is further transformed, by substituting

equation 4 into equation one which is the model of the kaldor’s law;

RGDP = F MANU, TECH, CIM, K, L 6

Where:

RGDP = Real gross domestic product (RGDP)

CIM = Contract Intensive Money

MANU = Manufacturing output

K = capital proxied by Gross fixed capital formation

L = Labour force.

A parsimous specification of equation (5) in log form will be estimated for

Nigeria; the time series properties of all variables will be tested to avoid

spurious regression results.

3.3 Nature and Sources of Data

Data refers to facts, information, ideas which can be represented in figures,

charts and graphs (Ozo, Odo, Ani and Ugwu, 2007). The nature and sources

of data for this research is secondary data sources. The secondary data source is

through the Annual Reports and Accounts of the Central Bank of Nigeria

38
(CBN) under consideration in the research. Data will be collected from the

Annual statements and accounts of the Central Bank of Nigeria (CBN).

3.4 Technique of Data Analysis

The technique used in this research is the ordinary least square regression

method. It is a method for estimating the unknown parameters in a linear

regression model, with the goal of minimizing the differences between the

observed responses in some arbitrary dataset and the responses predicted by the

linear approximation of the data.

39
 CHAPTER FOUR

Data Presentation and Analysis

CHAPTER FOUR

4.0 DATA PRESENTATION, ANALYSIS AND INTERPRETATION

OF RESULT

4.1 DATA PRESENTATION

Table 4.1: Data on Year, Real GDP(Gdp), Manufacturing output (Manu),

Contract Intensive Money (CIM) and Technology Output (TECH) in Billion
Year Gdp Manu CIM Tech
2005 22,269.98 1,778.73 414.76 6,032.33
2006 28,662.47 2,082.49 551.63 7,513.30
2007 32,995.38 2,401.19 733.67 8,551.98
2008 39,157.88 2,761.55 975.78 10,100.33
2009 44,285.56 3,170.82 1,297.79 11,625.44
2010 54,612.26 3,578.64 1,570.97 13,048.89
2011 62,980.40 4,527.45 1,905.57 14,037.83
2012 71,713.94 5,588.82 2,188.72 15,816.00
2013 80,092.56 7,233.32 2,676.28 16,816.55
2014 89,043.62 8,685.43 3,188.82 18,018.61
2015 94,144.96 8,973.77 3,472.26 19,636.97
2016 101,489.49 8,903.24 3,606.56 21,523.51

Source: Central Bank of Nigeria Statistical Bulletin, 2016.

40
4.2 DATA ANALYSIS

Table 4.2.1: Test of Normality

Shapiro-Wilk
Statistic df Sig.
Gross Domestic Product .944 12 .552

Manufacturing Output .867 12 .060

.926 12 .344
Contract Intensive Money
Technology Output .972 12 .935
Hypothesis:
H0: The data follows normal distribution.
H1: The data does not follow normal distribution.
Decision Rule
Accept the null hypothesis if p – value is greater than α = 0.05, otherwise reject.
Interpretation
According to the decision rule all the p – values is greater than α = 0.05,
concluding that the data follows the normal distribution.

Regression
Variables Entered/Removed
Model Variables Entered Variables Method
Removed
Technology . Enter
Output,
Manufacturing
1 Output, Contract
Intensive Moneyb

41
Model Summary
Table 4.2.2: Model Summary
Model R R Square Adjusted R Square Std. Error of the
Estimate

.999a .997 .996 1630.05572

1

Interpretation
The multiple regression coefficient R, coefficient of determination and the
Adjusted R Square explain 99.6% of the variability in the dependent variable.
The Manufacturing output, Contract Intensive money and Technology output
explains 99.6% of the variability in the Real Gross Domestic product.

Table 4.2.2: ANOVA Table

Model Sum of Squares Df Mean Square F Sig.

8104376609.027 3 2701458869.676 1016.701 .000

Regression
1
Residual 21256653.317 8 2657081.665
Total 8125633262.344 11
Interpretation

F - Test

Hypothesis

H 0 : β 1 =β 2=β 3
H 1 : β 1 ≠β2 ≠β 3
Decision Rule

α
p− value <
Reject the null hypothesis if 2, otherwise do not reject the null

α 0 . 05
= = 0. 025
hypothesis, Where 2 2

42
Conclusion

α
p−value=0. 000< =0 .025
Since the 2 , I do not accept the null hypothesis and I
conclude that the model is significant.

Table 4.2.3: Coefficients Table (T - Test)

Model Unstandardized Standardize t Sig.

Coefficients d
Coefficient
s
B Std. Error Beta
(Constant) -5522.118 7250.639 -.762 .0014
Manufacturing 2.915 2.255 .300 1.293 .017
Output
1
Contract Intensive 1.087 9.960 .046 .109 .014
Money
Technology Output 3.621 1.161 .661 3.119 .012
INTERPRETATION

Regression Model

Re alGDP=−5522 . 118+2 . 915 Manu+1 .087 CIM +3 . 621TECH

For Manufacturing Output

For every 1 unit increase in Manufacturing Output the model predicts that Real

GDP will decrease by 2.915 units.

For Contract Intensive Money

For every 1 unit increase in contract intensive money the model predicts that

RealGDP will increase by 1.087 units.

43
For Technology

For every 1 unit increase in technology the model predicts that RealGDP will

increase by 3.621 units.

T - Test

Hypothesis

H 0 :t i =0
H 1 :t i≠0
Decision Rule

α
p− value <
Reject the null hypothesis if 2, otherwise do not reject the null

hypothesis

α 0 . 05
= = 0. 025
Where 2 2

Conclusion

α
p− value= 0. 000< =0 .025
Since the 2 , I do not accept the null hypothesis and I
conclude all the Independent variables contribute to the dependent variable. I
conclude that manufacturing, contract intensive money and technology.

44
 Chapter Five

Summary conclusion and recommendations

5.1 Summary

In an attempt to explore the impact of industrial output on the economy

with the inclusion of other variables affecting the economy (GDP) in Nigeria

such as savings, inflation, and net foreign Direct Investment using the

Ordinary Least Square (OLS) estimator, the findings were made.

1. Manufacturing sector was statistically significant in terms of its influence

on the economic growth.

2. The sign observed is positive but not strong to be significant. It is deserved

that industrial output is not significant to improving the level of economic

growth, although it has a positive relationship with GDP but was not

significant to improve the level of economic growth.

3. Inflation had a negative relationship with GDP. Manufacturing sector had

a positive relationship with GDP while savings had a positive relationship

and also a significant impact on economic growth.

4. The above findings call for strategic policy recommendation so as to

restructure industrial output on the right track so as to impact significantly

on economic growth (GDP).

5.2 Conclusion

The result of the analysis however, shows that manufacturing sector

positively and significantly impact on economic growth in Nigeria for the

45
period under review. This contradicts the conclusion of some existing studies

reported in our literature. The work of Borenztein et al. (1998), Oyaide (1977),

Eke et al. (2003), and Egbo (2010), however, shows a positive and significant

relationship between manufacturing sector and economic growth. The reason

for the non-conformity with some study could be as a result of unfavoraurable

macroeconomic environment in Nigeria, like the general price level, interest

rate, exchange rate etc. It may also be as a result of the data employed. The

previous works reported in our study did not adjust the figures of GDP to take

care of inflationary influence, but our study did. From the result of the

Granger causality test, it was discovered that there is a unidirectional causality

between FDI and GDP such that causality runs from GDP to FDI. Looking at

this result, we conclude that it is the growth in the domestic economy that

attracted the inflow of FDI into the Nigeria economy for the period under

consideration. This is based on the understanding that an economy with a

potential for providing higher return on investment will attract more foreign

investors as they (foreign investors) prefer to invest in an area that promises

higher returns on investment.

46
5.3 Recommendations

Government should ensure political stability and also invest in the people

since high economic performance is a function of the people working in the

country (Capacity Development).

Government should pursue a favorable policy framework and provide

necessary infrastructures and create an enabling environment will foster huge

investment in research and development.

Government industrialization policies should be one that creates fair

playing grounds for foreign investors as this will go a long way in increasing

our Foreign Direct Investment which in turn leads to enhanced economic

growth. Some of Nigeria’s key medium term challenges to attracting

investment in the manufacturing sector are its challenging business

environment, widespread corruption, and high levels of poverty. These issues

could see companies looking to enter the West African market choosing

Ghana rather than Nigeria, especially since Ghana has a significantly more

investor-friendly business climate.

The Bank of Industry (BOI) should be ready to aid Nigerian

industrialization along Nigeria’s line of development and not a total shift to

accepting models which worked elsewhere given their environment and

circumstance which differs from place to place. There is also the need for

proper allocation and management of existing industries so as to ensure proper

and positive linkage effects on the economy. Awareness also needs to be made

47
for people or investors and industrialization to be aware of opportunities

available whereby they can obtain credit form the World Bank. The general

and common problem faced by a developing economy like ours – inadequate

infrastructure should be tackled by the government efficient production and

distribution need reliable supply of electricity, water a good transportation

network. The presence of these lessens the burden of industrialists and thus

enhances their ability to service their debt obligations.

The Nigeria industrialist could as well assist in many wastes to achieving

the nation’s long goal of industrialization – through better organization of their

businesses and by preparing good feasibility studies and keeping proper books

of accounts. This applies more specifically to the small-scale industries that

seem more favored by the Bank of Industry who see based on experience

government’s king size industrial dreams as wastepipes through which scarce

resources are lavished. Productivity is the most desirable form of economic

growth. Hence, there is need to encourage and accelerate the factors that affect

productivity in the country especially manpower and skills for as long as

productivity is low, there cannot be a meaningful growth. Effort should be

made to increase agricultural productivity through the supply of necessary

inputs to farmers.

Since the issue of electricity is one of the biggest obstacles for the

development of the industrial sector, and therefore improving electricity

48
generating capacity will be an important driver of industrial growth and

development.

49
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