MACROECONOMIC VARIABLES AND THE PERFORMANCE OF MANUFACTURING FIRMS

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Performance of a firm or an industry is very important as it shows the results achieved over a time period. Firm performance is dependent upon micro economic variables and macro-economic variables. Micro-economic variables are the internal firm specific variables. Management is able to control these variables. Macro-economic variables are the external variable which the management is not able to control. We have put our attention on the micro economic variables which can be handled by the management. From the prior studies we see that lot of research have been conducted on the micro economic variables but combined effect of micro variables have not been seen. The Nigerian manufacturing sector is a very important sector of the Nigerian economy. According to the Annual Report and Account of the companies 2014, this sector consists of mainly the earliest companies in Nigeria, some dating back to 1800s. The manufacturing firms have been contributing greatly to the development of the Nigerian economy since 1800s and have been the forerunner in manufacturing, marketing, automobile, logistics, real estate, agriculture, electrical and so on. In the development literature, industrialization has been accepted as the major driving force of the modern economy. In most modern economies, industrial sector serves as the vehicle for the production of goods and services, the generation of employment and the enhancement of incomes. Hence, Kayode (1989) described industry and in particular the manufacturing sub-sector, as the heart of the economy. In the light of the above, Nigeria has employed several strategies which were aimed at enhancing the productivity of the sector in order to bring about economic growth and development. For instance, the country adopted the import substitution industrialization strategy during the First National Development Plan (1962-1968) which aimed at reducing the volume of imports of finished goods and encouraging foreign exchange savings by producing locally, some of the imported consumer goods (CBN, 2003). The country consolidated her import substitution industrialization strategy during Second National Development Plan period (1970-74) which actually fell within oil boom era. At this time, manufacturing activities were so organized to depend on imported inputs because of the weak technological base of the economy. However, as a result of the collapse of the world oil market in the early 1980s, there was a severe reduction in the earnings from oil exports. Consequently, the import-dependent industrial structure that had emerged became unsustainable owing to the paucity of earnings from oil exports which could not adequately pay for the huge import bills. Various policy measures were adopted to ameliorate the above situation, such as the stabilization measures of 1982, the restrictive monetary policy and stringent exchange control measures of 1984, all proved abortive. This led to the introduction of the Structural Adjustment Programme (SAP) in 1986 (CBN, 2003). One of the main reasons for the introduction of SAP was to reduce the high dependence of the economy on crude oil as the major foreign earner, by promoting non -oil exports, particularly manufactured goods. But the contribution of the manufacturing sub -sector to GDP has declined steadily, due to a number of factors. As a result, government introduced many other economic policies. Despite these efforts of the government, the performance of the manufacturing sectors is still not clear.   

1.2 STATEMENT OF PROBLEM:

The manufacturing firms are affected by various macroeconomic variables such as interest rate, inflation, unemployment, Foreign Direct Investment (FDI), exchange rate fluctuations and money supply. Firms and individuals need to be well informed about the available options to enable them plan for their future through mitigating risks and losses that might occur in their normal operations. The industry has currently received huge attention from different players in the market as the technological and economical changes pose greater risks that must be guide against. Therefore this study will aim at establishing the relationship between Macro-economic Variables and performance of manufacturing firms. Exchange rate adversely affects output of the manufacturing sector. This is because Nigerian manufacturing is highly dependent on import of inputs and capital goods. These are paid for in foreign exchange whose rate of exchange is unstable. Thus, this apparent fluctuation is bound to adversely affect activities in the sector that is dependent on external sources for its productive inputs.

1.3 AIMS OF THE STUDY

The major purpose of this study is to examine macroeconomic variables and the performance of manufacturing firms. Other general objectives of the study are:

1. To examine the how the interest rate affects manufacturing firms.

2. To examine how macroeconomic variable affects the performance of manufacturing firms.

3. To examine how exchange rate influences performance of manufacturing firms.

4. To examine how Foreign Direct Investment (FDI) influences manufacturing firms performance.

5. To examine the relationship between money supply and the performance of manufacturing firms.

6. To suggest ways in which manufacturing firms can perform without the effect of macroeconomic variables.

1.4 RESEARCH QUESTIONS

1. How does interest rate affect manufacturing firms?

2. How does a macroeconomic variable affect the performance of manufacturing firms?

3. How does exchange rate influence the performance of manufacturing firms?

4. How does Foreign Direct Investment (FDI) influence manufacturing firm’s performance?

5. What are the relationship between money supply and the performance of manufacturing firms?

6. What are the ways in which manufacturing firms can perform without the effect of macroeconomic variables?

1.5 RESEARCH HYPOTHESIS

H0: There is no significant relationship between macroeconomic variables and manufacturing firms.

H1: There is a significant relationship between macroeconomic variables and manufacturing firms.

1.6 SIGNIFICANCE OF THE STUDY

The study findings will provide pertinent information on how macroeconomic factors affect the performance of manufacturing firms. The study findings will be of interest to the government of Nigeria, shareholders, and manufacturing firms, as well as scholars and academicians. The study will benefit scholars and academicians who would wish to undertake further studies and increase the body of knowledge on the effect of macroeconomic variables and performance of manufacturing firms. It will increase knowledge on the relationship between macroeconomic variables and performance of manufacturing industry. It will also suggest areas where gap in literature exist and where further research studies are required so that scholars in the field of finance and economics can do further studies in them. Manufacturing companies will be more informed on the macroeconomic variables that affect their performance thus allowing them to develop measures and ways to mitigate the risks that may come as a result. The government will understand the forces of economic growth mainly in the manufacturing industry and try to develop a mixture of policies that will be suitable for curing such variables like unemployment, inflation, interest rate and exchange rate fluctuations. Corporate bodies will benefit from the study by getting information on how macro-economic variables affect the industry thus they will provide data and information on better strategies that can be used to deal with macro-economic variables, improve efficiency and growth in the industry.

1.7    SCOPE OF THE STUDY 

The study is based on macroeconomic variables and the performance of manufacturing firms.

1.8 LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.8 DEFINITION OF TERMS

Macroeconomics:  Macroeconomics is the branch of economics that studies the behavior and performance of an economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth rate, gross domestic product and inflation.

Variables: A characteristic, number, or quantity that increases or decreases over time, or takes different values in different situations. There are two basic types (1) Independent variable: that can take different values and can cause corresponding changes in other variables, and (2) Dependent variable: that can take different values only in response to an independent variable.

Performance:  The accomplishment of a given task measured against preset known standards of accuracy, completeness, cost, and speed. In a contract, performance is deemed to be the fulfilment of an obligation, in a manner that releases the performer from all liabilities under the contract.

Firm: A firm is an organization which sells or produces something or which provides a service which people pay for.