THE DETERMINANTS OF INVESTMENT IN THE NIGERIAN ECONOMY
1.1. Background of Study
Investment expenditure in economic analysis is both a component of aggregate demand and an injection into the circular flow of national income. It is a crucial variable on the supply side of the economy as it is the means by which changes in the real capital stock are brought about, thereby adding to country’s productive capacity. Investment is spending devoted to increasing or maintaining the stock of capital. The stock of capital consists of the factories, machines, offices, and other durable products used in the process of production. The capital stock also includes residential housing as well as inventories. Gross domestic investment, therefore, represents total additions to a country’s capital stock. If the capital stock grows larger overtime, the increase in capital stock per period of time is known as net investment. Gross domestic investment, therefore, is made up replacement investment or depreciation and net investment. Gross domestic investment can also be classified into public and private. While private investment refers to expenditure in acquisition of machinery and equipment to increase the firm’s output, public investment comprises social and economic infrastructure. The need to investigate the determinants of gross domestic
investment stems from two main reasons. First, investment is more volatile than any other components of aggregate demand. Such volatility therefore affects the level of output and employment in the economy (P.A Olomola 2002). Second, investment has been regarded as the key to economic growth. Recent empirical studies conducted in Africa, Asia and Latin America have established beyond a doubt, the critical linkage between investment and the rate of growth (M.I. Obadan 2001). In the light of the foregoing, this study investigates the main determinants of gross domestic investment in Nigeria, and the determinants of investment to be looked at include interest rate, inflation, exchange rate, financial savings, and external debt. All this determinants have the impact on the Investment of the nations and this research work is going to find the relationship between all these determinants and investment. These determinant have their apriori specification (what it’s suppose to be) and they are as follows: Inflation is supposed to have a negative relationship with investment. Interest rate is supposed to have a negative relationship with investment. External debt is supposed to have a negative relationship with investment. Exchange rate and investment would have a positive relationship between them, so also would be the relationship between savings and
investment It is believed that this study will provide necessary insights into the behaviour of gross domestic investment and the necessary steps in rekindling it in the Nigerian economy. Some empirical work has been carried out on this research and one says empirical determinants of private investment in developing countries he identified macroeconomic and institutional factors, such as financial repression, foreign exchange shortages, lack of infrastructure, economic instability, aggregate demand, public investment, relative factor prices and credit availability as important variables that explains private investment (Rama 1980). Khatkhate (1988) adopted non-parametric methodology in his study on the relationship between interest rates and other macroeconomic variables, including savings and investments. He grouped 64 countries (including Nigeria) into three, based on the level of their real interest rates. He then computed economic ratios, among which were gross savings-income and investment-income, for the countries. Applying the Mann-Whitney test, he found that the impact of real interest rate was not significant for the three groups.