the impact of industrial output on the economy of nigeria (1980-2010)

THE IMPACT OF INDUSTRIAL OUTPUT ON THE

ECONOMY OF NIGERIA

(1980-2010)

A RESEARCH PROJECT SUBMITTED IN PARTIAL

FULFILLMENT OF THE REQUREMENTS FOR

THE AWARD OF BACHELOR OF SCIENCE

(B. Sc) DEGREE OF ECONOMICS

BY

OBICHUKWU UJU I.

EC/2009/697

DEPARTMENT OF ECONOMICS FACULTY OF

MANAGEMENT AND SOCIAL SCIENCES

CARITAS UNIVERSITY, AMORJI-NIKE

ENUGU STATE

AUGUST,2013.

Impact Of Industrial Output On The Economy Of Nigeria (1988-2010)

Supervisor: Sir Uche Page i

TITLE PAGE

Impact of Industrial Output on the Economy of Nigeria.

(1980-2010)


Supervisor: Sir Uche Page ii

APPROVAL PAGE

This is to certify that the research project carried out by Obichukwu Uju

Ifeoma has been read and approved having met the standard requirements

by the Department of Economics, Faculty of Social Science, Caritas

University, Amorji-Nike, Enugu State for the award of (B. Sc) Degree in

Economics.

……………… …………..

MR. UCHE.O. DATE

PROJECT SUPERVISOR

……………… …………..

BARR. ONWUDINJO, P.C DATE

HOD

………………. …………..

Prof. UMEH C.C DATE

DEAN, FACULTY OF MANAGEMENT

AND SOCIAL SCIENCES

……………… ……………

EXTERNAL EXAMINER DATE


Supervisor: Sir Uche Page iii

DEDICATION

This research project is dedicated to the Almighty God for His bestowed

strength and fortitude during the time period.

This work is as well dedicated to my parents Mr and Mrs G. C

Obichukwu who have sacrificed a lot towards the upliftment of their

daughter during the of years of study.


Supervisor: Sir Uche Page iv

ACKNOWLEDGMENT

First and foremost my appreciation goes to the Almighty God who has

given me the utmost wisdom and knowledge to make this research project

work come to reality.

My sincere gratitude goes to my beloved parents Mr G.C Obichukwu and

Mrs N.N Obichukwu. I must admit that I lack words to express my

profound gratitude. However, your contributions towards my academic

pursuits have remained unmatched, unequalled, and unparalleled. You

both are the best the world could offer.

To my indispensable supervisor and lecturer in the person of Mr E. O

Uche. Thanks for your positive incursions in my academics and your

resourcefulness and tireless encouragement. Sir, I appreciate you in a

unique form. Not forgetting Mr R.O Ojike who also was of great

assistance to me towards my Regression Analysis and his encouragement

towards my academic pursuits. Sir, I must say am indeed grateful to you.

As this appreciation train gathers momentum, I cease this opportunity to

acknowledge the positive impacts of my siblings Mr Kenechukwu, Miss

Ogochukwu, Miss Nneamaka, and Miss Chiagozie in my academic

pursuits. I must say am indebted to you all.


Supervisor: Sir Uche Page v

I must also appreciate the efforts of P.C Onwudinjo the Head of

Economics Department Caritas University.

Also my appreciation goes to all the lecturers in Economics Department

Caritas University in the person of Dr C. C Umeadi, Mr Odoh, Mr P.E.C

Osoduru, Mr J.C Odionye, Mr Odike, Prof Udabah, Prof A. W Obi, and

Prof Onah. I must say thank you all towards your efforts in impacting

knowledge in me through any four years programme.

Worthy of mention are my friends, roommates, course mates and all

others too numerous to list here I appreciate your encouragements

morally, physically, socially e.t.c.

Finally I thank the management and staff of Caritas University, Enugu for

offering me admission into the institution and impacting the knowledge I

needed in the pursuit of my Degree Programme and also for preparing me

for the “ world”.

Obichukwu .I. Uju.


Supervisor: Sir Uche Page vi

ABSTRACT

This research work is on the “Impact of Industrial Output on the Economy of

Nigeria” between the period of thirty years (30) covered from 1980-2010.

Impact of industrial output on the economy of Nigeria is a continuous

discussion to every economy especially developing economics which will give

rise to economic growth and development of a nation. Secondary data was

used on PC Give 8.00 version package to regress the model with GDP as the

dependent variable, and industrial output, savings, net foreign capital flow,

and inflation as independent variables. The model explain that the influence

of industrial output on economic growth is not statistically significant, though

the sign obtained from its à priori expectation is positively related to GDP

but does not hold strong enough. Savings has a positive relationship and also

significant impact on the economy. Inflation has a negative relationship while

net foreign capital flow is positively significant on the impact of economic

growth. R-squared shows a 76% increase on the GDP. Based on the findings,

it is therefore recommended that some policies is to be made in ways to

improve the establishment of industries especially the manufacturing

industries to encourage industrialisation of the Nigerian economy so as to

contribute to the strengthening of economic growth in the nation’s economy.

Tax incentives through subsidies and government expenditure relate to

increase in output and positive impact on economic growth. Increase in

savings will make money available for the economy through high interest rate

and income adjustments from the monetary policy.


Supervisor: Sir Uche Page vii

TABLE OF CONTENT

Title page - - - - - - - - - -i

Approval page - - - - - - - - - -ii

Dedication - - - - - - - - - -iii

Acknowledgement - - - - - - - - -iv

Abstract - - - - - - - - - - -vi

Table of content - - - - - - - - -vii

CHAPTER ONE: INTRODUCTION

1.1 Background of study - - - - - - - -1

1.2 Statement of research problem - - - - - - -3

1.3 Objective of the study - - - - - - - -4

1.4 Statement of research hypothesis - - - - - -4

1.5 Significance of the study - - - - - - -5

1.6 Scope and limitation of the study - - - - - - 5

1.7 Methodology and sources of data - - - - - -5

1.8 Limitation of the study- - - - - - - - -6

CHAPTER TWO: LITERATURE REVIEW

2.1 Theoretical literature - - - - - - - -7

2.1.1 Sources of industrial growth and industrial Policies in


Supervisor: Sir Uche Page viii

Nigeria -- - - - - - - - - -10

2.1.2 Characteristics of Nigeria industries - - - - -12

2.1.3 Manufacturing in Nigeria- - - - - - -13

2.1.4 The era of manufacturing in Nigeria - - - - -14

2.1.5 Structure and performance of Nigerian Manufacturing

Sector - - - - - - - - - -16

2.1.6 The roles of manufacturing industries in then Development

Of the Nigerian economy - - - - - - -21

2.1.7 Problems of industrial development in Nigeria - - - -25

2.2. Empirical review - - - - - - - - -28

CHAPTER THREE: RESEARCH METHODOLOGY

3.0 Methodology - - - - - - - - -33

3.1 Model specification - - - - - - - -33

3.2 Model Estimation /procedure - - - - - - -35

3.3 Sources of Data- - - - - - - - -37

CHAPTER FOUR: PRESENTATION AND ANALYSIS OF

REGRESSION RESULT.

4.1 Presentation of result and analysis- - - - - -38

4.1.2 Interpretation of result - - - - - - - -39

4.2 Evaluation of result - - - - - - - -40

4.2.1 Evaluation based on economic a priori expectation- - -40


Supervisor: Sir Uche Page ix

4.2.2 Evaluation based on statistical criteria - - - - -41

4.2.2.1 Statistical test of significant of parameter estimated

(T-statistics) - - - - - - - - -42

4.2.2.2 Adequacy of regression equation (F-Test) - - - -43

4.2.2.3 Goodness of fit test (R2) - - - - - - -44

4.2.3 Evaluation based on economic criteria - - - - -45

4.2.3.1 Test for auto-correlation - - - - - - -45

4.2.3.2 Test for Heteroscedasticity - - - - - - -46

4.2.3.3 Test for normality - - - - - - - -48

4.2.3.4 Test for multicollinearity - - - - - - -48

4.3 Evaluation research hypothesis - - - - - -50

CHAPTER FIVE: SUMMARY OF FINDINGS, POLICIES

RECOMMENDATION AND CONCLUSION.

5.1 Summary of findings - - - - - - - -51

5.2 Policy recommendation - - - - - - - -52

5.3 Conclusion - - - - - - - - - -53

Bibliography - - - - - - - - -54

Journal - - - - - - - - - -56

Appendices


Supervisor: Sir Uche Page 1

CHAPTER ONE

INTRODUCTION

1.1 Background Of Study

The oil boom of the 1970s made Nigeria neglected its agricultural and light

manufacturing bases in favour of an unhealthy dependence on crude oil. In

2000, oil and gas export accounted for more than 98% of export earning and

about 83% of federal government revenue. New oil wealth, the concurrent

decline of other economic model fuelled massive migration to the cities and led

to increasingly wide spread poverty especially in rural areas. A collapse of basic

infrastructures and social services since the early 1980s accompanied this trend,

(CIA, 2010).

By 2000, Nigeria‟s per capita income had plunged to about one quarter of its

mid 1970s high, below the level at independence. Along with the endemic

malaise of Nigeria‟s non-oil sector, the economy continues to witness massive

growth of „informal sector‟ economic activities estimated by some to be as high

as 75% of the total economy. The U.S United State remains Nigeria‟s customer

for crude oil accounting for 40% of the country‟s total oil export, Nigeria

provides about 10% of overall U.S oil import and ranks as the fifth-largest

source for U.S imported oil and ranked 44th worldwide and third in Africa in

factor output. (Adeolu B Anyawale, 1997).



Nigeria economy is struggling to leverage the country‟s vast wealth in fossil

fuels in other to displace the crushing poverty that affects about 57% of its

population. Economics refers to the consistence of vast wealth in national

resources and extreme poverty in developing countries like Nigeria as a

„resource course‟. 80% of Nigeria‟s revenue flow to the government, 16%

covers operational cast and the remaining 4% goes to investors. World Bank has

estimated that as a result of corruption, 80% of energy revenues, benefit only

1% of the population (Econspapers, hosted by Swedish Business School Orebro

University).

Generally, the manufacturing sector which plays a catalytic role in a modern

economy has many dynamic benefits crucial for economic transformation is a

leading sector in many aspects (Oguma, 1995) says it creates investment capital

at a faster rate than any other sector of the economy. Available evidence showed

that the share of manufacturing value in the Gross Domestic Product (GDP) was

3.2% in 1960. In 1977, its share of GDP increased to 5.4% and in 1992 grew to

13%. The share of the manufacturing in GDP fell to 6.2 in 1993, while overall

manufacturing capacity utilization rate fluctuated downwards to 2.4% in 1998.

In 2003, the manufacturing sector accounted for 4% of the Gross Domestic

Product (GDP) (Ojo, 1987:256). A country is industrialised when at least one-

quarter of this Gross Domestic Product(GDP) is produced in its industrial

output arises in the manufacturing section of industrial sectors, and when at



least one length of its total population is employed in the industrial sectors of

the economy. The manufacturing sector is to be dominant in terms of

contribution to the Gross Domestic Product of any economy especially that of

Nigeria (Auty, 1993).

1.2 Statement Of The Research Problem

The malfunctioning of industrial sector in a country is widely seen as a major

handicap improving a country‟s economy and power pushing many

governments to encourage or enforce industrialization (Wikipedia, free

encyclopaedia). One of the problems bedevilling the Nigeria economy is that of

output from its industrial sector of the economy. Admittedly, the decay in the

manufacturing sector is the result of diverse factors that conspire to render many

industries comatose (ill). The study is therefore necessary to enable a thorough

investigation of the problems of the industrial sector especially that of

manufacturing industries and various government agencies set up to provide

credit facilities to the industrial sector to ensure continual growth of this sector

for rapid economic development of this nation. In the light of this exposition,

the research work is guided by the following question.

1. What is the impact of industrial output on economic growth of

Nigeria?



2. What are the roles of manufacturing industries in the development of

the Nigerian economy?

1.3 Objectives Of The Study

The broad objective of this study is to examine the impact of industrial on

economic growth in Nigeria between the periods of (1980-2010).

The specific objective includes,

1. To appraise the origin and structure of Nigeria‟s manufacture sector.

2. To analyse industrial output and to determine the effect it has on the

economic growth and development of the country.

3. To recommend possible solutions to the country‟s manufacturing

sector.

1.4 Statement Of Research Hypothesis

The hypothesis of this study is stated as follows:

Ho: Industrial output rate has no significant impact on the level of

economic growth (GDP).

H1: Industrial output rate has profound significant impact on the level of

economic growth (GDP).



1.5 Significance Of The Study

The significance of this study lies in the fact that the work will expose the

extent of which industrial output has contributed to economic growth in Nigeria

thereby highlighting some obstacles hindering increase in industrial output. This

work will be relevant to the government policies and entrepreneurs directing

them on industrial development plan. It adds to the already existing literature on

industrial output in Nigeria.

Furthermore, the work will assist potential industrialist, economist, investors

and other related users of this veritable material in this field of study, it is

interesting to know that industrial output is the shortest route to economic

development.

1.6 Scope Of The Study

The researcher tends to find out the impact of industrial output on economic

growth. The study covers a general contribution of manufacturing industries in

Nigeria toward the attainment of economic growth from (1980-2010).

1.7 Methodology and Sources of Data

The validity and reliability of this research work will depend on the use of

statistical data using simple regression model and the hypothesis setting that

requires testing the validity of the analysis.



The researcher made use of secondary data obtained from the publications of

the Central Bank of Nigeria, Central Bank of Nigeria statistical bulletin and the

annual report of accounts as well as resource materials from the library and the

internet.

1.8 Limitation Of The Study

A study of this nature cannot be researched without encountering constraints,

some of which includes;

1. Finance: Financial constraint or inadequacy was the major limitation for

this research to gather materials, logistics etc.

2. Data: There was a problem of acquiring all necessary data through the

researcher has to rely on the ones available.



CHAPTER TWO

LITERATURE REVIEW

2.1 Theoretical Literature

The total output of all the facilities producing goods with a country‟s

manufacturing output; the output of all factories in a country is a subset of

industrial output.

Industrial output is what an industry produces as a national total output in

spite of its present poor performance; the manufacturing sector is the major

sources of hope for sustainable growth and development.

The process of moving resources into the industrial sector is known as

industrialisation (Oxford Dictionary of Economics by John Black).

Industrialization is a pre-requisite for economic development. The share of

industrial sector should rise higher than other sectors according to the

history of advance countries. Industrialization is necessary for provision of

employment to the unemployed in other sectors. It is also essential because

it brings increasing returns and economics of scale.



Nigeria needs industrialisation to free her from adverse effect of

fluctuation in the price of primary product and determination in their terms

of trade. For economic growth and development, Nigeria has to shake off

dependency on primary product exportation and adopt import substitution

and export oriented industrialization.

Finally, industrialisation brings social transformation, social equality, and

more equitable distribution of income and balance regional development in

the process of economic development. Industrial development, particularly

the promotion of manufacturing sector has been the basic driving force for

a relative high economic growth of both developed and developing

countries of the world.

Nigerian manufacturing sector is faced with capacity under utilization and

this has posed a threat to the economic growth and development of the

country. (Adewale, 2002).

Industrial output is a pre-requisite for economic development (Mjer, 1975)

defined industrial output as the process of developing an economy founded

on the process of manufacturing of goods. (Ezekwe, 1996) defined

industrial output as an extensive development of the manufacturing and



productive system of an area developing countries view on industry as the

leading essential for high rate of present and future growth and

development. Industry is realized to satisfy the rapid growth demanded for

manufactured goods which developing nations could not because of

balance of payment difficulties.

Industrial output stimulates economic growth which implies increase over-

time in a country‟s real output on goods and services appropriately, real

output per capital. Some economists like (Teriba, Edocie, Keyode, 1981)

equated industrial development with industrial output, that in most

developing countries, industrial output has by and large become

synonymous with development. Okowa (1999) also classified

underdevelopment in terms of modern industrial development. But Todars

(1998) defined industrial development in terms of three key inter-related

conditional ties. The core values of development are life substance, which

is the ability to provide basic necessities, self esteem and freedom from

servitude.

Industrial production is a means of changes in output for the industrial

sector of the economy. The industrial sector includes manufacturing,

mining and utilities. Although, these sectors contribute a fraction in the

GDP, they are highly sensitive to interest rate and consumer demand. This



makes industrial production an important tool for forecasting future GDP

and economic performance. Industrial production figures are also used by

Central Bank to measure inflation as high level of industrial production can

lead to uncontrolled level of consumption and rapid inflation (Bank of

Industry, 2010).

2.1.1 Sources of Industrial Growth and Industrial Policies in Nigeria.

Several policies and programmes have been implemented to date to

stimulate industrial growth in Nigeria priori to the achievement of political

independence in 1960. The incentives given to enterprise were

implemented under;

1. Aid to pioneer industries ordinance (1982).

2. The income tax amendment ordinance (1952).

3. The industrial development (import duty relief) ordinance (1958).

4. The industrial development (industrial tax relief) ordinance (1958).

5. Custom duties (dumped and subsidized goods) ordinance (1958).

Under the aid for pioneer industries ordinance “Pioneer Companies” were

granted full exemption from company income tax for a period of five

years. Firms were also granted depreciation allowance under the income

tax (amendment) ordinance while the 1957/1958 industrial development

ordinance were designed to reduced their duties paid by industrialist



(Asiodu,1990: Philip, 1998: Oyelabi, 1997: Teribe and Kayode, 1991;

Trade policies of the 1960‟s and the1970‟s were meant to correct the

Nigeria balance of payment deficit. High tariff rate were also employed for

revenue purpose (Oyejide, 1990, Okigbo, 1992).

However, during the early period of industrialization (even up to the

1990‟s) consumer goods industries were generally more protected by

intermediate and capital goods industries as demonstrated by the various

quantitative estimates of Oyejide (1990). A critical evaluation of effect of

fiscal incentives on industrial growth has been conducted by Philip (1998)

and Asiodu (1990). Philip examined Nigeria‟s company income tax,

Import Duty Relief (IDR) and the approved user scheme. One of the

finding was that there was an enormous loss of revenue arising from the

implementation of these policies. This probably explains why Nigeria‟s

import substation industrialisation lacked the internal dynamism for the

self sustained growth and development anticipated. Even with this trend in

policy implementation, import substitution has been identified as the key

factor in the overall growth of Nigeria‟s manufacturing industry. Again,

statistical estimate by Oyejide (1990) based on Cheney‟s sources of growth

methodology showed clearly that about 80% of the manufactured products

during (1967-1977) could be attributed to import substitution. Particularly,



reference has been made to industrial incentive during the thirteen (13)

years of military rule (1966-1979) in Nigeria. Ayejugbe‟s (2000)

submission on its comprehensive. He positioned that the industrial policies

of any regime rest critically on the class character of the state and other

socio-political pressure. He further stated that Nigeria‟s military

administration did not have defined macroeconomics and industrial

policies, though one may identify the main aspiration, target and

instrument of industrial policies from the various budget statements and

national development plans.

2.1.2 Characteristics of Nigerian Industries

Modern industry in Nigeria is largely the result of colonial preoccupation

with expanding market and minimizing profit. Consequently, the history of

modern industry in Nigeria differs from the industry of its counterpart in

advanced countries, particularly the West. While industries in the West

aim at generating, accumulating and reproducing capital, Nigeria industries

is promised import substitution. To achieve the later objective, industrial

equipment and raw materials are transported, installed and used for routine

industrial activities. Consequently, Nigeria industries like other industries

in many developing countries are characterised by their inability to

revolutionary‟s production. Apart from their assembly line structure,



Nigeria industries have another negative characteristic „Lack of raw

materials‟. The crisis is the flour mill industry in Nigeria typifies the

scenario (Ijomah, 1990). Feeder industries are particularly important

because the potential economics of scale of a new technology are left

unexploited as needed cooperating inputs are not available locally, or their

purchase are constrained by lack of foreign exchange. The problem of

auxiliary or feeder industry as earlier demonstrated by early difficulties

faced by the country‟s iron and steel industries were programmed to

produce a mix of finished product, it was later realized that the programme

did not include the production of steel mental, an important component of

the vehicle assembly industry. The implication of this singular omission

for Nigeria is technological independence through continued importation

of finished parts for vehicle assembly. Consequently, the technological

man power in the automobile industry will continue to perform routine

accessible tasks.

2.1.3 Manufacturing In Nigeria.

Manufacturing is a subset of the industrial sector (processing, quarrying,

craft and mining). Manufacturing, thus involves the conversion of raw

materials into finished consumer goods or intermediate or producer goods.

Manufacturing like other industrial activities creates avenue for

employment, helps to boost agriculture and helps to diversify the economy



while it helps the nation to increase its foreign exchange thus helping local

labour to acquire skills. It minimise the risk of over dependence on foreign

trade and leads to fullest utilization of available resources. The degree of

manufacturing is a measure of the extent to which the other components of

the industrial sector are effectively utilized.

2.1.4 The Era of Manufacturing in Nigeria.

The organisation of manufacturing activities in Nigeria has passed through

four (4) clear stages of development. The first is the “Predependence” era

when manufacturing was limited to its primary processing of raw material

for export and the production of simple consumer items by foreign

Multinational Corporation anxious to get a foot held in a growing market.

During this period, manufacturing was mostly resource based, but some

element of import substitutions and imported raw material base was

already present. The second is the immediate „Post colonial era‟ of the

1960‟s characterised by more vigorous import substitution and the

beginning of decline for the export oriented processing of raw material.

Such a policy of import substitution meant initially to reduce over

dependency on foreign trade and save foreign exchange turned out to be

more assemblage of these items rather than manufacturing. The third is the

(Decade of the 1970s). This was remarkable because the advent of oil and



the enormous resources it provided for direct government investment in

manufacturing made the government exercise almost a complete monopoly

in the following sectors; basic steel production, petroleum refining, petrol

chemical, liquidated natural gas, edible salt, flat steel plants, machine tools,

pulp and paper (basic), yeast and alcohol and fertilizer (nitrogenous and

phosphoric). The period was marked by the limitation of the indigenization

programme and hence intense economic activity but poor result since

government attempts diversification into non traditional product such as

steel, petrol chemical, fertilizer and vehicle assembly yielded little success.

The last phase (Decade of the 1990‟s) is marked by the dividing of

government revenue consequent upon the nose-diving of oil price at world

market.

Hence, many ad hoc attempts by tinkering the economy were made. These

attempts include the adoption of export promotion strategy on the

realization of the pit-fall of import substitution strategy. The SAP

(Structural Adjustment Programme) era beginning from July (1986) have

even emphasized this strategy, especially as it relates to non-oil export,

hence the extension of export production incentives of various description.

Also, due to lop-sided development in the entire manufacturing sector, a

strategy of balanced development was emphasized in other to promote



greater linkage within the sector but its result have been more theoretical

than practical.

Indeed, manufacturing in Nigeria appears a favoured sector; probably

because it‟s a general believe that the main instrument of rapid, structural

change and self sufficient lies in the manufacturing industry,

2.1.5 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 second millennium 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 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, 2010).

The structure of industrial growth was heavily based in favour 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, equipments, mental fabrication, chemicals, energy and

engineering industries to manufacture value added were insignificant. In

1981, due to the slump in international oil 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 Industrialisation

(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 non-durable

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 as a result of poor quality product and the influx of

relatively cheaper imports. The high price of domestic manufacturers is

partly due to the increased cost, inefficient and old equipments, inadequate

infrastructure and the depreciating naira.

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

and telecommunication. All these have implication for the cost of

producing manufactured goods and any extension, the competitiveness of

domestic industries. According to 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. Furthermore 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 total of productive



processes involved in value adding to primary/raw materials to create a

final good that can be consumed.

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 Price in Economics proposes that every

economy is made of two sectors initially. The first sector is 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 distributive

activities takes 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. Furthermore, the services type economy requires a

higher level of human capital than the previous types. Today people talk

about a knowledge economy fired by technological innovation. Clearly

these latter two sectors require much richer quality of human capital than

the earlier two (Manufacturers Association of Nigeria, 2010).

His theory posits that in the beginning the rapid increases in agricultural

output spur growth and create a surplus, which is the leftover of what is not

consumed locally. This surplus is exported and/or fed into industrial or

manufacturing sector as capital. With more growth, this process is made



faster and eventually taking advantage of economies of scale, industrial

output rises faster than primary produce lending to a nation being termed

industrial. Clearly, manufacturing GDP in our present past democratic

decade has declined from what it was in the 1990s. Basically, Nigeria‟s

economy has not been able to utilize the excess surplus created by its

primary sector for industrial growth. It appears that Nigeria‟s real sector

has struggled to contribute more than 10% throughout her history. The

tertiary component comprising services and trade are clearly in second

place implying that Nigeria will transit next to a service type economy

excluding building and construction in the secondary or industrial

component which refers to the production of houses to give a clearer

picture of the real sector‟s contribution to Nigeria‟s GDP. In addition, trade

lies higher than services implying that Nigeria‟s economy is largely a

trading outpost production takes place elsewhere and we are a roadside

market for sale of wares produced in other countries. This explains why the

Central Bank is constantly behind the curve in fighting inflation always

fire fighting with its attendant implications for interest and exchange rate

management.



2.1.6 The Roles of Manufacturing Industries in the Development of

the Nigerian Economy.

Nigeria is fully educated on the manufacturing industry play in the

transformation of her vast resources even though there has been a neglect

of the sector. Even at that, there have been series of incentives and benefits

prepared from time to time to encourage the received and growth of the

manufacturing sector. This could be due to the dependence of the oil sector

which has been experiencing a slump in the price per barrel and even

ragging the desire to develop other sectors of the economy for general and

continuous economic growth and development. Going by the level of

development in our country today, we will take a look at some indices to

access how far we have been able to go over the years especially toward

the end of last century from 1980s to the late 1990 up to 2000. Its role and

contribution are as follows.

A. Industrial Production

Manufacturing industries in Nigeria so far has done well in production of

goods to the nation. Recent, study has shown that Nigeria goods are been

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.

Table 1: Index of Industrial Production.

Year Manufacturing Mining

Weight 31.9 65.6

1988 135.2 95.3

1989 154.3 109.3

1990 162.9 115.1

1991 178.1 120.1

1992 169.5 119.9

1993 145.5 124.6

1994 138.7 129.0

1995 136.2 124.2

1996 136.7 129.0

1997 133.1 141.5

1998 137.7 134.1

1999 138.2 125.5

2000 142.2 144.3

2001 146.2 144.9

2002 146.3 144.6

2003 148.0 146.5

2004 145.7 154.0

2005 145.8 164.8

2006 145.9 174.9

2007 152.2 185.1

2008 156.3 186.2

2009 156.4 186.7

2010 157.0 186.2

Source: Central Bank of Nigeria (CBN) Bulletin (2010).



B. Technology Transfer

Manufacturing industries also facilitate the transfer of technology too. The

economy through foreign manufacturing industries established in Nigeria.

The technical and organised knowledge and information available for the

production of many goods and serve together with the tools for producing,

the goods are made manufacturing industries in Nigeria.

In most cases, the specification blue print engineering material,

equipments, basic production techniques, operational know-how and the

anallary technology used by direct foreign investment. Enterprises are

from foreign industries and indigenous of this country are been trained on

how to make use of the machines in production.

C. Employment Generation.

Manufacturing industries reduce the situation of unemployment in the

country. With the establishment of more industries by Nigerians/private

sectors, the government and foreign industries (owned by foreigners), more

people are been employed and with this, it results to an increase and

standard of living of the people and there reducing crime in the society by

youths as a result of unemployment.



D. Capacity Utilization and GDP.

Capacity utilization entails the ability of industries and firms to operate

within the ambit of the installed capacity. It involves being able to take

advantage of the available raw materials and other inputs both internally

and externally at selective cost so as to make a meaningful impact which

has helped in the growth and development of the economy.

E. Dependency

Manufacturing industries in Nigeria has brought an economically free and

not depending on developed economies for exporting goods and services

thereby creating more demand for goods and services.

However, the role of manufacturing sector towards economic growth

includes;

1. Productivity is high in the manufacturing sector compared to other

sectors of the economy. Though the transfer of resources from

agricultural to manufacturing provides a structural change bonus.

2. Manufacturing is assumed to be more dynamic than any other

sectors. The transfer of productive resources to more dynamic

sector contributes to growth.

3. Manufacturing sector offers special opportunities for capital

accumulation.



4. The manufacturing sector offers special opportunities for both

embodied technological progress (Crowell, 1977) technological

advancement is concentrated in the manufacturing sector and

diffuses from there to other economic sectors.

2.1.7 Problems of Industrial Development in Nigeria.

It has been shown that low industrial output has helped substantially in

re-shaping the economic structure of Nigeria. The problem militating

against rapid industrial growth is discussed as follows:

A. Lack of Capital/Finance.

In almost all discussed of the problems of industries whether by their

owners or those interested in their well being, their financial problems

have tended to overshadow others which also encounter in their daily

struggle for survival. The major source of financing industries in the

world is the owners‟ capital. In Nigeria as in many developing countries,

this problem is accentuated by the unwillingness of sole proprietors to

allow the participation of outsider in what is usually a personal or family

venture.

According to Okeke (1993), industries in Nigeria are afflicted with

difficulties with over abundance of problems; chief among them is lack of

capital and over reliant on lack of market share. Beside the fact the

financial constraint present all small scale industries from producing less



competitive with his large scale counterpart, it also limits his ability to

engage in aggressive selling technologies (Masha, 1998), Oshunbiyi

(2009) was in total agreement with the above observation, he described

„finance‟ as a major problem confronting industrialist at various stages of

their business.

Owuala (2002) observed that the present problems of industries from

multifarious sources which broadly can be classified as endogenous and

exogenous. The endogenous problems including those due to under

capitalization, poor accounting and record keeping management,

incompetence and financial indiscipline. The origin of exogenous

financial problem is partly due to the behaviour of institutional leaders the

capital market and partly to past policy biases against them. It is also

important to state that because of our depressed economy and our dept

problem, industrialists are finding it difficult to obtain enough credit and

source capital abroad to enable them expand their operations. It is also

difficult to attract direct foreign investment capital or obtain multilateral

and due to high rate inflation in the economy.

B. Lack of Technical Know-How:

The death of technological know-how and heritage of managerial

manpower is a problem facing the Nigerian industries. According to

Babinton Ashaye (2005), it is rare for the entrepreneur to have strong



managerial and technical export. He added that many industrial

entrepreneurs engage in industries where they do not have appreciable

technological background.

Akinkugbe (2000) state that lack of efficient organizational structure and

practice of modern management techniques in industries could be

attributed to the lack of understanding of modern management practices.

C. Weak Raw Material Based:

This is another problem of the Nigeria industries. Due to poor state of its

agricultural sector, there has been weak production of raw material these

resulted to excessive reliance on the external sector or capital equipment

and raw materials. Nigerian industries have been dependent on imported

raw material and capital goods. Most of the beverage industries, cosmetic,

cement and some other food industries depend on imported raw material

for their production. The same is applicable to the production industries

where 90% of its raw materials are imported.

D. Inadequate Basic Infrastructural Facilities:

Infrastructural facilities like road network, railway, river transportation,

airways, water facilities, irrigation, machinery and equipment hampered

industrial development in Nigeria. It has resulted to the closing of the

existing industries while new ones are not coming and also

inconsistent/epileptic power supply has contributed to low production of



the Nigerian industries. Although some of them have resolved to the use

of diesel engines to run their industries which will result to high cost of

production. Other problem includes:

a. Institutional and Administrative Bottle-neck:

These includes various policies government put in places such as

excessive tax and this really decreased or reduced the coming of

foreign industries in the country and has folded the existing ones.

b. Militancy;

This is one of the major problems against industrial development of

Nigerian Niger-Delta region; these militants have vandalized the

pipelines giving or supplying gas to these industries, kidnapping of

their workers especially foreign workers thereby requesting a lot of

money from these industries in that region.

2.2 Empirical Review:

Industrialisation plays a significant role in economic development. It acts

as a catalyst that accelerates the pace of structural transformation and

diversification of the economy, it enables a country to fully utilize its

factor endowment and to depend less on foreign or finished goods or raw

material for its economic growth, development and sustainability

(Okafor, 2005). Exchange rate in Nigeria witnessed a radical change from

the long operated fixed system between the 1960s and the first half of



1980s. It shifted dramatically from the second half of 1986 to a flexible

regime when the Structural Adjustment Programme (SAP) began. In

Nigeria, it has always been realized that economic development requires

growth and structural change. In considering the Nigerian economic

development experience, it is instrumental to examine the growth and

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

Productivity is higher in the manufacturing sector than in the other

sectors. The structural change argument focuses on the dynamics of

sectors. Manufacturing is assumed to be more dynamic than other sectors.

A transfer of productive resources to more dynamic sectors results to

growth. When industrialisation is compared to other sector offered special

opportunities for capital accumulation. Capital accumulation can be more

easily realized in spatially concentrated manufacturing than in spatially

disposed sectors (Agriculture, Mining). This is one of the reasons while

the emergence of manufacturing has been so important in growth and

development. Sectoral capital stock estimate for developing countries are

still scarce but what data indicates that after 1960, manufacturing is

indeed far more capital intensive than other sector (Szirmai,2008). The

manufacturing sector is sick.



The production sector is in crisis as its average contribution to the nations

Gross Domestic Product over the past few years has not gone beyond 5%.

Many years of neglect and mal-administration on the part of successive

military and civilian government coupled with corruption and

indiscriminate policy reversal have all conspired to render the

manufacturing sector comatose. Government after government have

failed to pursue policies that could create a vibrant rail sector with the

result that the impact of the manufacturing sector has steady declined

over the years and it contributes to national growth and development has

been disapprovingly low (Banmijoko, 2001).

Some of the factors that exert profound negative influence on

manufacturing sectors includes, institutional framework and management

strategies, inflation rates, trends and outcomes of exchange rate

management strategies, poor or inadequate infrastructural facilities

especially electricity power supply and thus have significant effect on

growth and development of Nigerian which led to economic

diversification to other sectors of the economy. The major objective of

this study is to examine the effect of industrial sector on economic

development in Nigeria.



The agricultural sector was the focus of intense development interest

during the 1990s, with food self-sufficiency the goal. The programme

includes price stabilization plans and schemes to revitalize the palm oil,

cocoa, and rubber sectors. In the manufacturing sector, the government

was backing a policy of local sourcing whereby locally produced raw

materials were converted into finished products. By (1999),

manufacturing accounted for less than 1% of Gross Domestic Product

(GDP) Iwayemi (2000) argued for the importance of energy sector in the

socio-economic development of Nigeria. He submitted that strong

demand and increased supply would stimulate increased income and high

living standards. Okafor (2008) used descriptive analysis to corroborate

the views of these authors by arguing that poor and inefficient electricity

supply drives industrialization process. He submitted that one important

indicator whether a country is industrialized or not, it is only on the

megawatt of electricity consumed. He further argued that country

electricity consumption per capita is Kilo Watt Hours (KWH) is

proportional to the state of industrialization of that country.

Ukpong (2003) established the existence of a positive relationship

between electricity consumption and economic development. In addition

he submitted that the expansion of energy sector on the demand side is an

important factor on the demand side is an important factor in accelerating



the growth of the industrial sector. Ekpo (2009) elaborated on the folly of

running a generator economy and its diverse effect on investment. He

strongly argued that for Nigeria to jump start and accelerate the pace of

economic growth and development, the country should fix power supply

problem. Aigbokaan (1999) argued in this paper that fixing the energy

sector is tantamount to shifting the country‟s economy. Adenikiinju

(2005) provided a strong argument to support the importance of power

supply. The poor nature of electricity supply in Nigeria, his argument has

imposed a significant cost on the industrial sector of the economy. This

result corroborates the survey of the Manufacturer Association of Nigeria

(MAN) 2005. In that survey, MAN indicated that the cost of generating

power constitute about 36% of production.



CHAPTER THREE

3.0 Research Methodology

This chapter deals with how the researcher forms the model building in

analysis of an economic problem. The methodology states clearly the

techniques of data analysis adoption, the specification of model, and the

estimation procedures.

In economics, we are more interested in theoretical and empirical

findings. Because of the importance of empirical result, economists rely

on mathematical, statistical and theoretical foundation in building their

economic models. The combination of the above mentioned three

disciplines form what we call econometrics. The kind of economic tool

the researcher applies is the Ordinary Least Square (OLS) method in

testing the influence of the independent variable on the dependent

variable.

3.1 Model Specification

Model specification is showing or expressing the mathematical and

economic relationships that exist between the dependent and

independent variables. Koutsoyiannis (1977:122) stressed the

importance of expressing the relationship under study in mathematical

form i.e. to specify the model by which the economic phenomenon will

be investigated.



Based on the above theoretical formation, the model will be specified in

the general form as:

GDP=f (JMQ, TSV, FCF, INF)

Where,

GDP=Gross Domestic Product at current basic prices

JMQ=Industrial Output

TSV=Total Savings

FCF=Net Foreign Capital Flow

INF=Inflation Rate

The representation of the econometric form of the model is summarized

as a functional relationship below:

GDP=f (JMQ, TSV, FCF, INF)

Stating the relationship mathematically, we get.

GDP=β0+β1 JMQ+β2 TSV+β3FCF+β4INF>0

Where; β0 is the constant intercept which shows the level of GDP, when

the explanatory variables JMQ, TSV, FCF and INF are zero. Gross

Domestic Product (GDP) is the dependent variable in this study and

dependent on JMQ, TSV, FCF and INF. This means that JMQ, TSV,

FCF and INF are the independent variables and therefore determine the

behaviour of the GDP.

Stating the relationship in an econometric model, it becomes;



GDP=β0+JMQ+TSV+FCF+ INF+ Ui

From the infusion, it becomes an econometric model. Ui is the stochastic

error term or disturbance variable. It takes care of other variable that

influence the dependent variable (GDP) not stated in the model. It

therefore has the following assumptions guiding its behaviour, they

include; assumption of zero mean, assumption of correct aggregation,

assumption of randomness, assumption of homoscedasticity and

assumption on normality (Koutsoyiannis,2003:179).

3.2 Model Estimation/ Procedure

The estimation period is from 1980-2010, the conventional Ordinary

Least Square (OLS) technique will be appropriate in estimating it. The

OLS is a statistical technique which uses sample data to estimate the

true population relationship between parameters. The choice of the OLS

technique according to Koutsoyiannis (1977) is based on the following

considerations:

i. The computational procedure of OLS is fairly simple as

compared to other econometric techniques and the data

requirements are not excessive.

ii. The mechanics of least square are simple to understand.



iii. The parameter estimate obtained by the OLS is some optimal

properties. These optimal properties includes; unbiaseness,

linearity and minimum variance.

iv. The least square method has been in a wide range of economic

relationship with fairly satisfactory results and despite the

improvement on computational equipment and of statistical

information which facilitates the use of other more elaborate

econometric technique, OLS is still one of the most commonly

employed methods in estimating relationship in econometric

model.

v. OLS is an essential component of most other econometric

techniques. With the exception of the Full Information

Maximum Likelihood (FIML) method, all other technique

involves the application of the least square method, modified in

some respects.

Koutsoyiannis (1977) further explains that the technique is based on the

following assumptions:

a. The term Ui is a random real variable.

b. The mean value of Ui in any particular period is zero.

c. The variance of Ui in any period is constant.

d. The variance of Ui is normally distributed.



e. The random terms of different observation are independent.

f. Ui is independent of the explanatory variable.

g. The explanatory values are measured without error.

h. The explanatory variables are not perfectly linearly correlated.

i. The relationship is correctly specified.

3.3 Sources of Data

Using annual time series data, this study runs from 1980-2010, covering

a period of thirty years (30) years. The period marked a phase of high

level of industrial output through the introduction of the third National

Development Plan which laid more emphasis on the manufacturing

sector in Nigeria as the centre stage for commencement of increased

industrial output in Nigeria.

The data used in this research work were secondary data obtained from

the Central Bank of Nigeria Statistical Bulletin (2010), National Bureau

of Statistics (NBS),(various issues), Central Bank of Nigeria Annual

Report and Statement of Account.



CHAPTER FOUR

PRESENTATION AND ANALYSIS OF REGRESSION

RESULT.

4.1 Presentation Of Result

The Ordinary Least Square (OLS) result of the model specified in

chapter three (3) is presented in this chapter. The result is subjected to

economic, statistical and econometric tests. PC Give 8.00 version was

used for the regression analysis. The result is shown in the table

below;

TABLE 4.1

Variable Coefficient Standard

error

t-statistics t-probability PartyRỳ

Constant 1.26540 1.55100 0.816 0.4220 0.0250

INDO 1.1601 0.70456 1.647 0.1117 0.0944

SAV 1.9546 0.84145 2.323 0.0283 0.1719

NFCF 10.416 87.319 0.119 0.9060 0.00050

INF -20276 55715 -0.364 0.7189 0.0051

R-square 0.76456 DW 2.15 F (4, 26) 21.108 (0.0000)

à 4.18036e + 014 for 5 variables and 31 observations.



4.1.2 Interpretation of Result

From the above, the interpretation of the result as regard the coefficient

of various regressions is stated as follows:

The value of the intercept which is 1.26540 shows that the Nigerian

economy will experience a 1.26540 increase when all other variables are

held constant.

The coefficient of industrial output (INDO) is 1.1601. This shows that

industrial output is positively related to GDP and that a unit change

increase in industrial output will increase GDP by 1.1601%.

Inflation (INF) has -20276 as its coefficient. This shows that inflation is

negatively related to GDP and that a unit change increase in inflation

will reduce GDP by 20276%.

Savings (SAV) also has a positive coefficient of 1.9546. The result

shows that a unit change increase in saving will increase in GDP by

1.9546%.

Net foreign capital outflow (NFCF) has a positive coefficient of 10.416.

The result shows that a unit change increase in net foreign capital

outflow will increase GDP by 10.416%.



4.2 Evaluation of Result

4.2.1 Evaluation Based On Economic A priori Expectation

The test is aimed at determining whether the signs and sizes of the

results are in line with what economic theory postulates. Thus, economic

theory tells us that the coefficients are positively related to the

dependent variable, if an increase in any of the explanatory variables

leads to a decrease in the dependent variable.

Therefore, the variables under consideration, their parameter and priori

signs have been summarized in the table below.

This table will be guarded by these criteria:

When β>0=conform

When β<0=not conform

Variables Expected signs Estimate Remark

GDP + β >0 Conform

INDO + β >0 Conform

SAV + β >0 Conform

NFCF + β >0 Conform

INF − β <0 Conform

From the above table, it is observed that all the variables actually

conform to the economic theories.



A positive relationship which exists between GDP, INDO, SAV and

NFCF indicates that no increase in INDO, SAV and NFCF will result in

a positive change in the GDP. This conforms to the à priori criteria

because an increased or high INDO, SAV and NFCF over the years will

increase GDP in the economy.

4.2.2 Evaluation Based On Statistical Criteria

Here, the analysis of the results obtained from the data will be based on

how or whether there meet the economic criteria. Below the tests are

briefly discussed.

a) Autocorrelation: Autocorrelation is a special case of correlation.

It refers to the relationship of two or more variables but between

the successive values of the same variable. Here we are

particularly interested in the autocorrelation of the μ. We use

this test to check the fourth axiom of Ordinary Least Square

(OLS) which is that, the successive values of the random

variable μ are temporally independent. This test is conducted to

check whether corresponding to different observation is

uncorrelated.

b) Test for Multicolinearity: Multicolinearity is a problem which

arises in multiple regressions, when the explanatory variables

are not themselves independent. It makes it impossible to fit



significant coefficient to explanatory variables which are related

to one another.

c) Test for Heteroscedasticity: This is used to test whether the

errors in the regression model have a common or constant

variance.

4.2.2.1 Statistical Test of Significance of Parameter Estimated (t-

statistics).

The test is carried out, to check for the individual significance of the

variables. Statistically, the t-statistics of the variables under

consideration is interpreted based on the following statement of

hypothesis.

Hₒ : The individual parameters are not significant.

H The individual parameters are significant.

Decision Rule:

If t-calculation > t-tabulated, we reject the null hypothesis (Hₒ ) and

accept the alternative hypothesis (Hɪ ), and if otherwise, we select the

null hypothesis (Hₒ ) and reject the alternative hypothesis (Hɪ ).

Level of Significance =at 5%

Degree of freedom: n-k

Where n: Sample size



k: Number of parameter

The t-test is summarised in the table below:

Variables (t-value) t-tab Remark

INDO(1.647) ± 2.056 Insignificant

SAV(2.322) ± 2.056 Significant

NFCF(0.119) ± 2.056 Insignificant

INF(-0.364) ± 2.056 Insignificant

The t-statistics is used to test for individual significance of the

estimated parameters (β₁, β₂ and β₃).

From the table above, we can deduce that SAV (2.322) is greater than

(2.056) which represent the t-tabulated implying that SAV is

statistically significant.

On the other hand, the intercept 0,816, INDO (1.647), NFCF (0.119)

and INF (-0.364) are less than the t-tabulated (± 2.056) signifying that

the intercept, INDO, NFCF and INF are statistically insignificant.

4.2.2.2 Adequacy of Regression Equation (F-test)

The F-statistics is used to test for simultaneous significance of all the

estimated parameters.

Hₒ : β₁=β₂=β₃=β₄

H₁: β₁≠β₂≠β₃≠β₄



Level of significance α at 5%

Degree of freedom k-1

n-k

Decision Rule:

If the f-calculated is greater than the f-tabulated (f-cal >f-tab) reject the

null hypothesis (Hₒ ) that the overall estimate is not significant and

conclude that the overall estimate is statistically significant.

From the result, f-calculated (21.108) is greater than the f-tabulated

(2.69), that is, f-cal> f-tab. Hence we reject the null hypothesis (Hₒ )

that the overall estimate has a good fit which implies that our

independent variables are simultaneously significant.

4.2.2.3 Goodness of Fit Test (R²)

The (R²) shows the amount of the variation in the dependent variables

(GDP) that are explainable by the explanatory variable. The (R²) which

measures the overall goodness of fit of the entire regression shows the

value of 0.76456=76.456% approximately 76%. This indicates that the

independent variables accounts for about 76% of the variation in the

dependent variable.



4.2.3 Evaluation Based On Econometric Criteria.

4.2.3.1 Test for Autocorrelation.

One of the underlying assumptions of the Ordinary Least Square

regression is that the succession values of the random variables are

temporarily independent. In the context of the series analysis, this

means that an error term (Ut) is not correlated with one or more of

previous errors (Ut-1). The problem is usually dictated with Durbin-

Watson (DW) statistics.

The Durbin- Watson‟s test compares the empirical d ⃰ and du in d-u

tables to their transformation (4-d ) and (4-du).

Decision Rule:

If d ⃰ < D , then we reject the null hypothesis of no correlation and

accept that there is positive autocorrelation of first order.

If d ⃰ > (4-d ), we reject the null hypothesis and accept that there is

negative autocorrelation of the first order.

If du<d ⃰ < (4-du), we accept the null hypothesis of no

autocorrelation.

If d < d ⃰ < du or if (4-du) < (4-d ), that test is inconclusive.

Where: d =lower limit

Du=upper limit



D ⃰ =Durbin Watson

From the regression result, we have;

D ⃰ =2.15

D =1.062

Du=1.759

4-d =2.94

4-du=2.24

Conclusion:

Since d ⃰ (2.15) < D , (1.062) then we reject the null hypothesis of no

correlation and accept that there is positive autocorrelation of first

order.

4.2.3.2 Test For Heteroscedasticity

Heteroscedasticity has never been a reason to throw out an otherwise

good model, but it should not be ignored either (Mankiw Na, 1990).

This test is carried out using White‟s general heteroscedasticity test

(with cross terms). The test asymptotically follows a chi- square

distribution with degree of freedom equal to the number of

regressions (excluding the constant term). The auxiliary model can be

stated thus:



Ut= βₒ +β₁INDO +β₃NFCF+β₄INF+β5INDO2+β6SAV

2+β7NFCF

2+

β8INF2+Vi.

Where Vi= pure noise error.

This model is run and an auxiliary R2 from it is obtained.

This hypothesis to the test is stated thus;

Ho: β1=β2=β3=β4= β5= β6= β7=β8=0 (Homoscedasticity)

H1: β1 ≠β2 ≠β3 ≠β4 ≠β5≠β6 ≠β7 ≠β8=0 (Homoscedasticity)

Note: The sample size multiplies by the R2 obtained from the

auxiliary regression asymptotically follows the chi- square

distribution with degree of freedom equal to the number of repressors

(excluding constant term) in the auxiliary regression.

Using e – view software package saves us the above rigour by

calculating the chi- square value.

Decision Rule:

Reject the null hypothesis if x2 cal > x

2 at 5% level of significance. If

otherwise, accept the null hypothesis. From the obtained results, x2 cal

= 21.551 > x2 0.05(8)= 15.5073 we therefore accept the alternative

hypothesis of hetroscedasticity showing variance and reject the null

hypothesis showing that the error terms has a constant variance.



4.2.3.3 Test For Normality

The Jarue- Bera test for normality is an asymptotic, or large- sample,

test. It is also based on the ordinary least square residuals. This test

first computes the skew ness and kurtosis measures of the ordinary

least square residuals and uses the chi- square distribution (Gujarati,

2004).

The hypothesis is:

H0: x1=0

H1: x1≠0 not normally distributed. At 5% significance level with 2

degree of freedom.

JB=+=49.441

While critical JB > (x2(2) df) = 5.99147

Conclusion:

Since 49.441 > 5.99147 at 5% level of significance, we reject the null

hypothesis and conclude that the error term does not follow normal

distribution.

4.2.3.4 Test For Multicollinearity

The term multicollinearity is due to Ragnar Frisch. Originally it

meant the existence of a „perfect‟ or exact, linear relationship among

some or all explanatory variables of a regression model. The tests

were carried out using correlation matrix. According to Barry and



Feldman (1985) criteria; „Multicoollinearity is not a problem if not

correlation exceeds 0.80‟.

GDP INDO SAV NFCF INF

REMARK

GDP 1.000 _

INDO 0.8456 1.000 M

SAV 0.8366 0.8545 1.000 M1M

NFCF 0.6569 0.7941 0.6602 1.000 Nm, Nm,

Nm

INF -0.2829 -0.3112 -

0.08960

0.08960 1.000 Nm, Nm,

Nm, Nm

Where M=Presence of multicolliearity

Nm=No multicollinearity

From the above table, we can conclude that multicollinearity exists in

INDO and SAV. It means that there is a perfect or exact linear

relationship among INDO and SAV, while there is no relationship

existing in NFCF and INF.



4.3 Evaluation Of Research Hypothesis

The research hypothesis was stated in chapter one as:

H0: Index of industrial production has no significance impacted on the

economy (GDP).

H1: Index of industrial production has signification impact on the

economy (GDP).

Conclusion:

From the result and the analysis so far, was to reject H0: index of

industrial production showed a positive impact on the GDP. The t-test

also showed that the impact of industrial output is statistically

insignificant while the f-test implies the model is significant in

explaining the variations in GDP.

We therefore, conclude that the index of industrial production has a

significant impact on Gross Domestic Product (GDP).



CHAPTER FIVE

SUMMARY OF FINDINGS, POLICY RECOMMENDATION

AND CONCLUSION.

5.1 Summary of Findings:

The research work was specified and estimated using the regression

model and the Ordinary Least Square Method (OLS) estimation on an

empirical evaluation of the impact of industrial output on the economy

of Nigeria over the period of 1980-2010. The model used Gross

Domestic Product as its dependent variable while savings, inflation and

net foreign capital flow explains the dependent variables. P.C Give

8.00 version is the software package used.

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 capital flow by using

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

A. Industrial output was not statistically significant in terms of

its influence on the economy of Nigeria.

B. The sign observed is positive but not strong to be significant.



5.2 Policy Recommendation.

Based on the research findings, the following recommendations were

made:

1. Policy directed to increase industrial output should be

implemented such as increase in sustainable subsidies,

government expenditure with combined reduction in taxation.

This would increase or have a positive impact on the

economy.

2. Investment should be encouraged through tax incentives. This

would lead to more industries that would lead to more

industrial output. As this industrial output increases, it would

lead to economics of scale.

3. Savings should be encouraged through high interest rate and

income adjustments. This would provide fund for investment

which has the tendency to increase industrial output. Thus

industrial output would begin to have impact on economic

growth through exportation of the output.

4. Though inflation is a necessary evil, but it should be curbed a

little (not harsh monetary policies) and not much high level

(rate) of taxation. A moderate level of inflation is necessary

for improving economic growth through import of capital



equipment which will lead to incentives of industrial sector

and also contribute to enhanced output. This will have a

multiplier effect on economic growth.

5.3 Conclusion

On an attempt to explore the impact of industrial output on economic

growth in Nigeria, variables like inflation, net foreign capital flow,

saving and industrial output were used in the model.

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.

Inflation had a negative relationship with GDP. Net Foreign Capital

Flow (NFCF) had a positive relationship with GDP while savings had a

positive relationship and also a significant impact on economic growth.

This paves way for serious policy recommendation so as to redirect

industrial output on a right positive to impacting more on economic

growth.



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the impact of industrial output on the economy of nigeria (1980-2010)

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