INVESTIGATING DOMESTIC INVESTMENT AND ITS IMPACT ON NIGERIA ECONOMIC GROWTH
- Project Research
- 1-5 Chapters
- Quantitative
- Regression
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- NGN 3000
Background to the Study
Economic experts are of the opinion that sufficient investment is necessary for development and economic growth in a country, and they provide the piece of advise that every economy has to amass a high level of cash for investors to borrow. Because of this, borrowing money from other countries is not an appropriate strategy for growth and development (Ainabor, et.al, 2014). This is due to the fact that borrowing money from other countries not only has a negative effect on the balance of payment because these loans will be serviced in the future with the use of the country's domestic resources, but it also carries a foreign exchange risk such as a devaluation of the country's currency, which is one of the specific conditions that must be met in order to borrow money from the International Monetary Fund (IMF) (Ainabor, et.al, 2014). Therefore, domestic investment through the formation of capital is not only of the utmost importance; it also serves as a prerequisite for the geometric acceleration of growth and development in any economy. This is because it generates domestic resources that can be used to fund the investment effort of the economy.
The fundamental purpose of this economic growth is to generate economic and social overhead capitals (or costs), which ultimately results in an increase in national output and income through the creation of employment opportunities and a reduction in the vicious cycle of poverty on both the supply side and the demand side. Growth in the economy is an absolute need, and it determines whether or not a country's population can keep pace with the economic trends of the 21st century relative to other countries' economies (Ainabor, et.al, 2014). The problem (or problems) that have been identified as being accountable for the state of the developing economies is the outcome of low levels of capital formation (or base) (Jhingan, 2006; Ainabor, et. al., 2014). The developing nations of the world do not face opportunity costs and do not have the mentality of reducing their current levels of consumption or investment in order to increase their national production and revenue in the future (Ainabor, et. al., 2014). Gross capital creation is what leads to technical advancement, which in turn helps achieve economies of large scale production (or economies of scale or operation) and promotes specialization, in terms of providing machinery, tools, and equipment for a growing labor force. As a result, the collected capital makes it possible to purchase additional factories together with machinery, equipment, and any and all other forms of productive capital goods. In addition to the building of capital or megaprojects and the utilization of the gross capital formation into educational sectors, health sectors, and other sectors, etc (Jhingan, 2006).
The process of investing in a nation's social and economic infrastructures is an example of capital creation, which is similar to a rise in the nation's physical capital stock. The term "gross private domestic investment" and "gross public domestic investment" are both terms that may be used to describe "gross fixed capital creation." The government and/or publicly owned companies can be counted against the total amount of gross public investment. The expression "gross domestic investment" refers to the sum of "gross fixed capital creation" and "net changes in the level of inventories" (Jhingan, 2006). It is possible that the construction of capital in a country will lead to the production of both physical commodities (such as plants, tools, and machinery, etc.) and intangible goods (such as a high quality education and health system, as well as a long-standing scientific tradition and research).
A significant number of economies are dependent on investments as a means of resolving a variety of economic issues, crises, and challenges. Less developed nations in Africa, such as Nigeria, are in the process of developing a variety of economic policies that will both attract and retain private investment. This is owing to the fact that investments in particular areas of the economy may quickly alter the myriad economic issues that our country is now facing as a whole. As a result, the government of Nigeria makes a significant effort, whenever there is a window of opportunity, to entice investments into several areas of the economy. The reason behind this is not hard to fathom at all. Real investment in the economy is an acceptable way of increasing capital formation in the economy has been known to increase productivity and output generally. Investment, both private and public, comes with a lot of benefits, such as job creation, an increase in per capita income, a reduction in the level of poverty, an increase in standard of living, an increase in GDP, and other benefits. Both the public and private sectors are able to engage in this kind of investment; however, the role of the government is mostly limited to that of an investor in autonomous investments, which serve as the primary motivators of more investment in the economy. The private sector's investments had dropped by a significant amount, while the expenditures made by the public sector were not producing value in the areas where it was intended to do so. A straightforward examination of the statistics on capital formation provided by the Central Bank of Nigeria reveals that nominal investment in capital formation is declining and has already decreased in real terms. This trend is mirrored by the decline in real terms of the investment. Housing, healthcare, and education are examples of investments that fall under the "social" or "soft" category. Other types of investments, such as those in infrastructure (transportation, power, and water), fall under the "hard" category. There are also investments that are purely economic and are carried out by the private sector for the purpose of private capital accumulation. Increasing one's wealth may be accomplished via the use of financial investment; however, actual investment should be given a higher priority in order to boost economic output and expansion.
Each government that has come before this one has, over the course of time, come to recognize the significance of investments. Instead of taking concrete steps to implement policies that have been formulated and establishing a culture of continuous domestic investments, the government is gradually transferring this function by encouraging a hybrid way of investment with the use of Private Public Partnership (PPP) in the country. This is being done in place of taking concrete steps to implement policies that have been formulated and establishing a culture of continuous domestic investments.
In the literature of applied economics, particularly in the more developed market countries, there has been a significant amount of discussion over the characteristics of domestic private investment (DPI) as well as its consistency. To emphasize the preponderance of studies on this topic, Uremadu (2006), Adegbite and Owualla (2007) argue that even though foreign direct investment (FDI) is beneficial to host countries by accelerating the process of economic growth and development, the multiplier effect of FDI is greater. This is to emphasize the preponderance of studies that have been conducted on this topic. In other words, developing countries should place a much greater emphasis on attracting home investment as opposed to direct investment from outside (FDI).
The country of Nigeria's low per capita income contributes to the lack of investment in the country. Since the marginal or average tendency to save is low as a consequence of this, and the marginal or average propensity to consume is so great as a result of this, economic progress is not achieved as a result. If Nigeria is going to achieve economic development, then there needs to be an increase in domestic saving from 4 percent of national income to somewhere around 12 percent of national income, an expansion of the market, investments in capital equipment, a decrease in the population rate, a correction of the imbalance of payments, a decline in foreign debts, control of inflationary pressure, and other similar things. These stated points are only possible if there is a rapid rate of capital formation in the country, which means that a smaller proportion of the community's current income or output is dedicated partly to consumption and/or the other part is saved and/or invested in capital or industrial equipment. The only other circumstance under which these points are possible is if there is a rapid rate of capital formation in the country.
In recent years, the proportion of money spent on domestic investments and public investments has shrunk drastically. This is the result of disequilibria caused by changes in macroeconomic variables, such as the rate of inflation, fluctuations in the exchange rate, problems with the balance of payments, a high ratio of external debt, an increase in population, and other factors. When there was a huge reduction in the price of crude oil in OPEC just recently, it made the situation much worse. This has had an inverse link with countries like Nigeria that rely on agriculture or crude oil (a mono-economy) for their livelihood. In other words, Nigeria's growth rate has fallen from 7 percent to 4.2 percent during the past year. According to Ainabor et al, (2014), this has resulted in the devaluation of currencies and/or other stringent fiscal and monetary policies, such as a reduction in taxes and a deliberate attempt to make a mismatching of the unit of domestic currency and another currency (most especially the American dollar as the commonest currency for exchange as it is used for the purchase of goods and services).
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