Page 1 of 13
Journal for Studies in Management and Planning
Available at http://internationaljournalofresearch.org/index.php/JSMaP
e-ISSN: 2395-0463
Volume 01 Issue 03
April 2015
Available online: http://internationaljournalofresearch.org/ P a g e | 418
Determinant of investment in Nigeria: An
Econometrics analysis
Charles Agwu
PHD student, Department of Economics, School of Business and Economics, Atlantic
International University, USA
Abstract:
One of the macro-economic objectives of a
country is to achieve full employment and
domestic investment serves as an instrument in
achieving it. Also the important of investment to
an economy cannot be overemphasized. This
research paper examines the “determinant of
investment in Nigeria: an econometrics
analysis” with the following objectives; to
determine the impact of interest rate volatility on
investment decision in Nigeria, to investigate,
ascertain and unravel other determinants of
investment decision in Nigeria, to investigate the
trend profile of investment in Nigeria and to
examine different theory of investment. In order
to achieve the stated objectives an econometrics
model was used Autoregressive Distributed lag
model (ARDL) in estimating the long-run and
short-run coefficients of variables. in the long- run, it shows that past income level, capital
investment, government size and interest rate
are the major determinants of domestic
investment in Nigeria and these variables have a
positive effective on private investment in
Nigeria. Exchange rate and inflation have an
insignificant affect on private investment in
Nigeria and the researcher recommends the
need to ensure policy consistence and reduce the
level of interest rate so as to attract and improve
the level of investment in the country.
Keywords: Autoregressive Distributed lag
model (ARDL), domestic investment,
Nigeria
1.0 Introduction:
The important of investment to the
life of an economy cannot be
overemphasized and this is because
investment serves as instrument for
achieving full employment, economic
growth and foreign exchange earnings
through export. Investment is a change in
capital stock and this implies that
investment is a flow
Understanding the factors that
influences Investment in Nigeria is of
important and this is because, investment
plays a very important role in an economy.
Many countries rely on investment to solve
their economic problem such as poverty,
unemployment etc (Mohammed et al. 2004).
The stimulation of sustained economy
growth requires a balance investment in
physical and financial assets human and
social capital as well as natural and
environmental capitals.
Nigeria has been classified as low
saving and even lower investment economy
(Ajakaiye, 2002). One of the principal
Page 2 of 13
Journal for Studies in Management and Planning
Available at http://internationaljournalofresearch.org/index.php/JSMaP
e-ISSN: 2395-0463
Volume 01 Issue 03
April 2015
Available online: http://internationaljournalofresearch.org/ P a g e | 419
objectives of the present administration of
“Goodluck Jonathan” is to create an enable
environment that will encourage domestic
and foreign investment. The policy
framework is to improve the existing
infrastructures which are important to
massive investment in the country. These
infrastructures are power, expansion of
existing roads, granting tax incentives,
reducing lending rate, security etc.
These factors determine the level of
investment in an economy and among these
factors, some scholars are of the view that
the major determinant of investment is
interest rate and Interest rate is defined as
the price paid for the use of money. It is the
opportunity cost of borrowing money from a
lender to finance investment project. It can
also be seen as the return being paid to the
provider of financial resources. Interest rates
are normally expressed as a percentage rate.
The volatile nature of interest is determined
by many factors, which include taxes, risk of
investment, inflationary expectations,
liquidity preference, market imperfections in
an economy etc.
Banks are given the primary
responsibility of financial intermediation in
order to make fund available for economic
agents. Banks as financial intermediaries
move funds from the surplus sector/units of
the economy to deficit sector/units by
accepting deposits and channeling them into
lending activities. The extent to which this
could be done depend upon the rate of
interest and level of development of
financial sector as well as the saving habit of
the people in the country.
Hence, the availability of investible
funds is therefore regarded as a necessary
starting part for all investment in the
economy which will eventually translate to
economic growth and development
(Uremadu, 2006).
1.1 statement of problem:
The financial systems of most
developing countries (e.g. Nigeria) have
come under stress due to financial crisis and
economic shocks of 2008. This financial
repression, largely manifested through
indiscriminate distortions of financial prices
including interest rates, has tended to reduce
the real rate of growth and the real size of
financial system, more importantly, financial
repression has (retarded) delay development
process as envisage by Shaw (1973).
This led to insufficient availability of
investible funds, which is regarded as a
necessary starting point for all investment in
the country. This decline in investment as a
result financial crisis of 2008 has been
especially sharp in the highly indebted
countries, and has been accompanied by a
slowdown in growth in all LDCs. Both
public and private investment rate have
fallen, although the latter more drastically
than the former. If this trend is maintained, it
will lead to a slowdown in medium term
growth possibilities in these economies and
will reduce the level of long-term per capital
consumption and income, endangering the
sustainability of the adjustment effort.
The observed reduction in
investment in Nigeria seems to be the result
Page 3 of 13
Journal for Studies in Management and Planning
Available at http://internationaljournalofresearch.org/index.php/JSMaP
e-ISSN: 2395-0463
Volume 01 Issue 03
April 2015
Available online: http://internationaljournalofresearch.org/ P a g e | 420
of several factors which are instable
macroeconomic policies, higher interest rate,
security issues, lack of enable infrastructure
etc. but there have been a continuous effort
by the present administration to improve the
level of investment in the country and
policies implemented by present
administration of ‘Goodluck Jonathan’ to
improve investment in Nigeria are;
deregulation of the power sector, granting of
tax incentives, improve infrastructure etc.
upon all these incentives to attract
investment, one cannot but ask why is the
level of unemployment in the country
increasing on a yearly basis, why is rate
interest still high etc. all these problems will
be address in this research paper.
1.2 Objectives of study:
The objective of this research paper
is to examine the determinant of investment
in Nigeria: an econometrics analysis. Other
objectives in which this research paper will
address are;
i) Determine the impact of interest rate
volatility on investment decision in
Nigeria.
ii) To investigate, ascertain and unravel
other determinants of investment
decision in Nigeria.
iii) To investigate the trend profile of
investment in Nigeria.
iv) To analyze different theories of
investment.
1.3 Significance of the Study:
This work is mainly for academic
purpose. However, it will be of great
importance to researchers who would want
to embark on research on determinant of
investment. Also the research paper will be
useful for those in authority and this is
because it will serves as the basis of
examining current economic situations in
terms of knowing why current investment
policies have failed and this will serves as
the basis for modifying future policies for
attracting investment.
2.0 Literature Review:
Investment in Nigeria can be
classified into private, public and foreign
investment. Private investments are equity
ownership of individuals in the country and
public investments are investment by
government and public enterprises on social
and economic infrastructure, real estate and
tangible assets (Bakare, 2011).
Foreign investments are investment
that comes to a country from other countries
in form of shares, securities, bonds etc. on
policy formulation and implementation, the
major issue is on how to use available
resources to achieve economic growth and
development. In Nigeria, a large part of the
resources is owned by private individuals,
acting independently and contributing to the
growth of the country. It is important for
government to implement policies that will
encourage these individuals so as to increase
the level of investment in the country. This
could be through analyzing how private
investment in the country is decided through
the variables that systematically affect it
(Moshi and Kilindo, 1999).
Moshi (1999) studied
government policy and private investment in
Tanzania. The study showed that public
