THE IMPACT OF SELECTED MACRO-ECONOMIC VARIABLES ON THE PROFIT PERFORMANCE OF MANUFACTURING COMPANIES IN NIGERIA

THE IMPACT OF SELECTED MACRO-ECONOMIC VARIABLES ON THE PROFIT PERFORMANCE OF MANUFACTURING COMPANIES IN NIGERIA

BACKGROUND OF THE STUDY

The association between macroeconomic factors and organiza ional performance has piqued the interest of researchers studying this phenomenon. Key macroeconomic variables such as the currency rate, interest rate, inflation, and gross domestic product are usually assumed to have an impact on an organization's performance. These are external factors that influence how things work on a daily basis.

Macroeconomic factors have a great impact on manufacturing sector of Nigerian Economy and it affects the performance of a firms. Macroeconomic factors exist outside the company and not under the control of management; they include social, environmental, political conditions, suppliers, competitors, government regulations and policies (Adidu & Olanye, 2006) as cited in (Egbunike & Okerekeoti, 2018). Key economic factors include the Consumer Price Index (CPI), unemployment, gross domestic product (GDP), stock market index, inflation rate, exchange rate, corporate tax rate and interest rates and these factors (i.e. macro) can pose a positive or negative threat to the development and performance of manufacturing firms (Egbunike & Okerekeoti, 2018).

This was evidenced from the crises in Latin America, East Asia, Russia and the global financial crisis in 2007 (Issah &Antwi, 2017). And presently, the recession witnessed in Nigeria, which business analysts opined that led to the delisting of some companies, has brought to limelight the implications of macroeconomic factors on corporate performance (Zeitun et al., 2007).

For instance, the monetary policy of a country affects all sectors through the cost of debt and the availability of money/credit, which could affect a firm’s ability to access external sources of fund. Fiscal policies affect a firm’s after tax net cash flow, its cost of capital, and potentially the demand for its products, and survival (Zeitun et al., 2007) as cited in (Egbunike & Okerekeoti, 2018). Also, increases in the nominal interest rate and inflation rate intensify the aggregate rates of failure or default. In most developing countries, for instance Nigeria, macroeconomic factors, such as hyperinflation and increasing exchange rates, are some of the factors affecting the performance of manufacturing firms (Owolabi, 2017).

The vital role of manufacturing sector in the economic growth and development cannot be overemphasized. It is the engine growth of the economy (Libanio, 2006) as cited in (Essays, 2013). According to Adegbemi (2018), the Verdoorn's (1949) and Kaldor's (1975) laws however attest to the primal significance of the manufacturing sector to the economy of the developing countries. This position has been confirmed by Onakoya (2014), Szirmai (2009), Amakom (2012), and Arnold, Javorcik & Mattoo (2011) as cited in Adegbemi (2018). The basic inference is that increased labour productivity in manufacturing sector leads to rise in the growth of manufacturing output because of the effect of increased economies of larger production and technical progress.

Manufacturing sector refers to those industries which are involved in the manufacturing and Processing of items and indulge or give free rein in either the creation of new commodities or in value addition (Adebayo, 2011) as cited in (Nwanne, 2015). According to Dickson (2010), manufacturing sector accounts for a significant share of the industrial sector in development countries. The final product can either serve as finished goods for sale to customers or as intermediate goods used in the production process.

Thus, manufacturing industries are the key variables in an economy and motivates conversion of raw materials into finished goods. In the work of Charles (2012) as cited in (Nwanne, 2015), it is posited that the manufacturing industries create employment which helps to boost agriculture and diversify the economy on the process of helping the nation to increase its foreign exchange earnings.

Waiyaki (2017) defines performance as a constant process of improving individual performance by aligning actual performance with the desired organizational goal. In general, one of the most essential factors of an organization's success or failure is its performance.

The financial performance of a company is a quantitative term that measures how efficiently it assesses its resources to generate profit (Omollo, Muturi and Wanjare, 2018). As a result, financial performance can be described as how well a company's financial goals are being met or have been met. It assesses a company's long-term financial viability. Because it is so important to shareholders (in the form of returns on their investment), managers (in the form of compensation), creditors (firms' ability to repay), and the government, a firm's financial performance has a significant impact

not only on its sources of financing, growth, and survival, but also on the larger economy (tax purposes).

The capacity of a company's financial performance to get both internal and external financing, as well as its ability to develop and survive, can have a substantial impact on its survival.

According to (Rafiq, 2018) most recently, the Central Bank of Nigeria (CBN) announced plans to facilitate the issuance of single-digit interest rate loans to firms operating in the agriculture and manufacturing sectors. Port reforms and other ease of doing business initiatives by the government are also helping to make the manufacture of goods easier in the country; relatively, at least. Owing to reforms, Nigeria’s ease of doing business ranking moved to 145th place in 2017 from 169th in 2016.

According to the National Bureau of Statistics, GDP from Manufacturing in Nigeria decreased to 1608461.83 NGN Million in the first quarter of 2019 from 1686416.37 NGN Million in the fourth quarter of 2018. GDP From Manufacturing in Nigeria averaged 1413401.85 NGN Million from 2010 until 2019, reaching an all time high of 1718985.30 NGN Million in the third quarter of 2014 and a record low of 875408.17 NGN Million in the first quarter of 2010.

The recent economic recession also affected the manufacturing sector. Indeed, there was 8.7% reduction in industrial production in the fourth quarter of 2016 over the same quarter in 2015. The average production growth was 1.35 % from 2007 until 2016 with a peak of 20.10% in the first quarter of 2011 and the lowest record of -10.10% in the quarter 1 of 2016.

Presently, the manufacturing sector is experiencing collapse with an average capacity utilization hovering around 40 percent. According to Kolawale, & Yinka (2019) a survey carried out by the Manufacturers Association of Nigeria (MAN) covering manufacturing activities in the first quarter of 2019, has revealed that the sector was stressed further, even as the confidence level of operators was low, though with high expectation of improvement down the year.

According to Adegbemi (2018), similar fluctuating trends hold for the growth rates of the macroeconomic factors. There is a manifest challenge of the managing the constituents- macroeconomic factors (inflation rate, interest rate, unemployment rate, exchange rate) and the resultant Gross Domestic Product. The rate of interest rate for example, rose from in Q3 & Q4 from 12% to 15% coupled with an epileptic foreign exchange policy. This resulted from the avowed policy of the Nigerian fiscal authority to ‘spend our way’ out of economic recession by expansionary government expenditure. This further led to up trended inflationary throughout 2016 as evident increase consumer prices from 12.8% in March 2016 through 13.7 % in April and 17.6 % in September. Indeed the core inflation rate in Nigeria increased by 17.85% in January of 2017 over the correspondent period in 2016. As at August 2016, about 4.58 million were unemployed. In ratio terms, the figure rose from 12.1% in quarter 1, through 13.3% in quarter 2 and 14% in quarter 3. As at November 2016, the ratio stood at 17.8% foreign direct investments and portfolio investments dropped by -23.75% and -9.49% respectively. Industrial output which stood at -10.1 in the first quarter of 2016 rose to 0.1% in the second quarter only to crash to - 3.6% and -8.7% in the third and fourth quarters of 2016 respectively (Nigeria Industrial Production, 2007 to 2017.

​​​​​​​STATEMENT OF THE PROBLEM

Financing, investment, and operational decisions are just a few examples of operational and strategic decisions that are regularly influenced by the macroeconomic environment Owolabi (2017). Internal and external factors impact a company's profitability; the internal aspect focuses on the company's ability to increase productivity and reduce expenses, whilst external factors include the exchange rate, GDP, the stat s of the economy, unemployment rate, government regulation, and so on. However, macroeconomic i dices such as the interest rate, gross domestic product, inflation rate, regulatory policies, and the like have a substantial impact on firm financial performance, which is comprehensible.) As a result, the purpose of this study is to provide macroeconomic variables that impact profit or performance to manufacturing healthcare enterprises, thereby alleviating the problem of caused by macroeconomic variable instability.

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