An Empirical Examination of the Determinants of Private Investment in Nigeria.

Mercy Ada Anyiwe ,Rotimi Joshua

doi:10.7176/jesd/10-2-11

Abstract

The study investigates the determinants of private investment in Nigeria, employing the Autoregressive Distributed Lag framework on data from 1980 to 2016. In all, the study provides evidence that real gross domestic product, public investment, real interest rate, real exchange rate, credit to private sector and external debt both in a short run and long run significantly affect the level of private investment, except for inflation which was insignificant. Our study revealed that real gross domestic product play an increasingly important role in supporting the nation’s growth in private investment. The study recommends that government should give more priorities to expenditures that compliment (crowd in) private investment: such as capital expenditure. Also since previous exchange rate policies are most likely to spur and speedup the growth and development of the domestic industries and also it has the likelihood to increase investment in this sector. Therefore, necessary adjustments need to be effected for the proper positioning of present exchange rate policies to encourage the investors and investment in the domestic economy. Keywords: Private investment, Real Gross Domestic Product, Real Interest Rate, Real Exchange Rate, Credit to Private Sector DOI : 10.7176/JESD/10-2-11

Highlights

Economic growth is the result of a combination of several factors among which is increase in investment (O’Connell and Ndulu, 2000; Veganzones, 2000)
In the model private investment was a function of Real gross domestic product, public investment, inflation, real interest rate, exchange rate, credit to private sector and external debt
Our study revealed that real gross domestic product play an increasingly important role in supporting the nation’s growth in private investment

Summary

Introduction

Economic growth is the result of a combination of several factors among which is increase in investment (O’Connell and Ndulu, 2000; Veganzones, 2000). 3.1.2 Neoclassical Approach Model Jorgenson (1971) and others have develop the neoclassical approach, which is a version of the flexible accelerator model In this approach, the desired or optimal capital stock is proportional to output and the user cost of capital ( depends on the price of capital goods, the real rate of interest, the rate of depreciation and the tax structure). The neoclassical determinants of private investment include Tobin’s q, real interest rate, user cost of capital and public investment ratio. Under the neoclassical investment model, real interest rate is treated as a key component of the user cost of capital and affects private investment negatively. A currency devaluation increases the real cost of purchasing imported capital goods, thereby reducing the profitability of the private sector and possibly causing investment to decline. Prior to the ARDL estimation, we carry out unit root test on all the variables employing the Augmented Dickey Fuller (ADF) test to account for the stationarity of the variables and establish the order of integration

Unit Root Test

Estimated Dynamic Short run Coefficients

Findings

Policy Recommendations