MACROECONOMICS DETERMINANTS OF FIRMS PERFORMANCE IN NIGERIA

CHAPTER ONE

INTRODUCTION

BACKGROUND OF THE STUDY

The path to economic recovery and growth may require increasing productive inputs such as land, labour, capital and technology and or increasing their productivity through with a bumpy roads to stability in the face of the global economic meltdown (Alao, 2010), but the changes in the macroeconomic policy have become increasingly significant within the productivity sector as manufacturing has become more capitalized and more dependent on international markets, as a result of this, the sector is being more vulnerable to variations in interest rates, exchange rates, the size of gross domestic product, foreign direct investment etc. Investigations and explorations by scholars have been showing that higher productivity is a sure means of boosting economic growth and raising standards of living in any country. Formulating and implementing effective productivity schemes have helped to pull many economies out of global recession and set them on the course of growth. This would imply a quantum leap in output of goods and services. Increasing productivity should be the focus because many other countries that have found themselves in the same predicaments have resolved them through productivity enhancement schemes. For instance, Japan from the end of the World War II and the United States of America from the 1970s have made high productivity as the centre point of their economic planning and the results have been resounding (Anyanwu, 2009; Alao, 2010). In Nigeria, the manufacturing sector is favoured based on the fact that it is a general notion that the main instruments of rapid growth, structural changes and self-sufficiency lies in the manufacturing sector, thus resources have been channelled into the preferred sectors through heavy public sector investment predicated on import substitution strategy of level protection for private investment (Anyanwu, 2009). Industrialization in Nigeria seems to be at the cross roads given that for these pursuits of the strategy would lead to a more inefficient resources usage, intensified foreign exchange constraints, high cost and balance of payment difficulties This is paradoxical given that the industrial sector is theoretically at least expected to have the capacity to innovate and thus exude the dynamism that affect the other sector of the economy. Due to the ongoing process of economic reforms along with the liberalization measures, Nigerian economy has been facing challenges in terms of both external shocks and internal issues. The external shocks include a phenomenal increase in the foreign capital outflows, exchange rate volatility, oil shocks and contagion effects. Internal structural issues have been in terms of slow pace of legal and lack of social security system, industrial restructuring, Non-Performing Assets in the manufacturing sector, etc., which have been causing hindrance to the reform process. Macroeconomic uncertainty has given rise to several risks impinging on firms, mutual funds, financial firms and non-financial firms. Macroeconomic risks in terms of exchange rate, inflation, interest rate and liquidity risks would translate into the financial performance of the entities, companies and financial institutions. For instance, manufacturing sector fragility can be attributed to the credit risk or the risk of loss resulting from counter party default. Also, the role of institutional framework, interest rate policy and other macroeconomic variables in the development of Nigerian manufacturing sub-sector have not been fully addressed and the impact has not equally been fully felt. Manufacturing sub-sector in Nigeria has been experiencing a stunted growth and its contribution to gross domestic product has remained low. For instance, the manufacturing sector declined from about 70.1% in 1980 to just 44.3 percent in 2009 (CBN, 2009). However it is observed that all the strategies put in place by Nigerian successive governments to reinvigorate and strengthen the Nigerian manufacturing sector has not only led to isolated growth but also generated a relatively small modern sector employment with its attendant capital intensive methods. The capital intensive structure of these industries is anchored on the labour savings obtained by replacing the technology of their parent firms in metropolitan nations substituting plants. The potentials and opportunities for SMEs in Nigeria to rebound and play the crucial role of engine of growth, development and industrialization, wealth creation, poverty reduction and employment creation are enormous (Momoh, 2012). The sub-sector continued to experience challenges with accessing credit from the manufacturing sector, which in turn affected the importation of raw materials. In addition, the delay in the passage of the 2009 Appropriation Act by the National Assembly affected the business and investment plans of manufacturers. Others were the epileptic supply of electricity and the increased pump price of diesel used mainly in the private provision of electricity (CBN, 2009). This poor manufacturing performance has been attributed to high production cost as a result of high cost of foreign exchange, high interest rate, poor demand, incessant poor description, insufficient raw materials supply, inadequate working capital and frequent machine break downs. All these occurrences coupled with inadequate finance snow-balled into low capacity utilization. What is more, even though Nigeria has consistently designed industry as the engine of growth of the economy, the government has tended to regard industry only in the short–term economic consideration with industries paying little or no attention to environmental and health issues. Furthermore, the continuing harassment of companies by some state and local governments over unauthorized multiple levies and charges in spite of the law, creates a significant disincentive for business and consequently frequent disruption of production occurs. Inadequate and inefficient infrastructural facilities which tend to escalate cost of operation as Nigeria manufacturers are forced to resort to private provision of utilities such as road, water, electricity etc.

1.2 STATEMENT OF PROBLEM:

The modern business manager operates in a more dynamic environment. The changes in the environment have been rapid and largely unpredictable, macroeconomic variables have been complex in every sphere and impact on the practice of businesses in every aspect of the world economy without any bias to developed, emerging, developing, or underdeveloped economy all forms of business enterprise are faced with peculiarity and behavioural pattern within its operating environments. The most significant influence in organisational policy and strategy is the environment that operates outside the organization (Carant 1999). Financial factors such as hyperinflation/deflation, high-interest rates and increasing exchange rates are some of the factors in the current business environment that are affecting the performance of manufacturing firms. Furthermore, in Nigeria, the level of growth in manufacturing sector has been affected negatively because of high lending rates, which invariably is responsible for high cost of production (Adibiyi, 2001 &Rasheed, 2010). It has been argued that the persistent poor performance of the manufacturing sector in Nigeria is mainly due to massive importation of finished goods, inadequate financial support and other variables which has resulted in the reduction in capital utilization and output of the manufacturing sector of the economy (Tomola, Adebisi & Olawale, 2012). Thus, the manufacturing sector is a key variable in an economy and they motivate conversion of raw materials into finished goods. Charles (2012), posited that the manufacturing industries create employment which helps to boost agriculture and diversifying the economy in the course of helping the nation to increase its foreign exchange earnings. Nigeria economy is characterized by fluctuating macro-economic indicators with continuous drop in oil prices at the international market and government intension to diversify the economy and promoting the local content agenda, the current negative performance index of manufacturing sector in relation to the contribution to GDP and the potential the sector has for the economy in terms of employment, government revenue, foreign earrings and potential contribution to GDP, any effort toward this direction should be considered an effort in the right direction. Also, empirical evidence is lacking or limited with little documentation showing how macroeconomic variables impact on the performance of manufacturing sector in Nigeria. Therefore the thrust of this study is to examine macroeconomic determinants and performance of firms in Nigeria.

1.3 AIMS OF THE STUDY

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

1. To examine the how the interest rate affects firms in Nigeria.

2. To examine how macroeconomic determinants affects the performance of firms in Nigeria.

3. To examine how exchange rate influences performance of firms in Nigeria.

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

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

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

1.4 RESEARCH QUESTIONS

1. How does interest rate affects firm’s performance in Nigeria?

2. How does macroeconomic determinant affects firm’s performance in Nigeria?

3. How does exchange rate influences performance of firms in Nigeria?

4. How does Foreign Direct Investment (FDI) influences firm’s performance in Nigeria?

5. What is the relationship between money supply and the performance of firms in Nigeria?

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

1.5 RESEARCH HYPOTHESES

H0: There is no significant relationship between macroeconomic determinants and firms performance in Nigeria.

1.6 SIGNIFICANCE OF THE STUDY

The study findings will provide pertinent information on how macroeconomic factors affect the performance of firms in Nigeria. The study findings will be of interest to the government of Nigeria, shareholders, and 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 behaviour 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.

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.