1
MMADU BENJAMIN ANABORI
PG/M.SC/06/07/40883
IMPACTS OF TRADE OPENNESS AND TECHNOLOGY TRANSFER
ON ECONOMIC GROWTH AND TOTAL FACTOR
PRODUCTIVITY IN NIGERIA
Economics
A PROJECT REPORT SUBMITTED TO THE DEPARTMENT OF
ECONOMICS, UNIVERSITY OF NIGERIA, NSUKKA
Webmaster
2011
UNIVERSITY OF NIGERIA
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IMPACTS OF TRADE OPENNESS AND TECHNOLOGY
TRANSFER ON ECONOMIC GROWTH AND TOTAL FACTOR
PRODUCTIVITY IN NIGERIA
BY
MMADU BENJAMIN ANABORI
PG/M.SC/06/07/40883
DEPARTMENT OF ECONOMICS,
UNIVERSITY OF NIGERIA,
NSUKKA
January, 2011
3
IMPACTS OF TRADE OPENNESS AND TECHNOLOGY
TRANSFER ON ECONOMIC GROWTH AND TOTAL FACTOR
PRODUCTIVITY IN NIGERIA
BY
MMADU BENJAMIN ANABORI
DEPARTMENT OF ECONOIMICS
A PROJECT REPORT SUBMITTED TO THE DEPARTMENT
OF ECONOMICS, UNIVERSITY OF NIGERIA, NSUKKA, IN
PARTIAL FULFILMENT OF TIIE REQUIREMENTS FOR THE
AWARD OF THE DEGREE OF MASTER OF SCIENCE IN
ECONOMICS.
SUPERVISOR: Mr. O. E. ONYEKWU
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DEDICATION This study is dedicated to the blessed memory of my late father Chief Oyabevwe
Mmadu for everything he stood for and making me who I am today, may his soul
and the souls of all the departed rest in perpetual peace. Amen.
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ACKNOWLEDGEMENTS
I wish to express my profound gratitude and apparent happiness to my
supervisor, Mr. O. E. Onyukwu for the approval of this catchy topic and accepting
the responsibility of supervising this work. I am indebted to him in three reasons.
Firstly as my lecturer, I have been privileged to benefit from his inspiring
lectures, Secondly as my project supervisor; he has shown deep and devoted
concern to this research by making invaluable suggestions and painstaking
guidance through reading the manuscript at all stages, improving the organisation,
style and clarity and thirdly, his cordial approach to my problems and explaining
some of the complex aspect of this research work, gave me the confidence and
courage to complete it in spite of odds.
My gratitude goes to the academic staffs of the department of Economics for
their to the work during the proposal of this research. I thank profusely all the non-
academic staff of the department for their friendliness and assistance in one way or
the other.
To my mother- Mmadu Agenes, My Brothers Abraham Mmadu, Solomon
Mmadu , Anderson Mmadu, Bar Rufus Mmadu,and Gaventa Mmadu. My best
Friend and earthly companion Mrs. A.Onajite Mmadu, my dear sisters Mrs.
E.Eforow Erhie. Mrs V.E.Ogbebor, and Mrs B.E Igbokwe. I owe everything for
their encouragement throughout this programme. I acknowledge the effort of my
friends Innocent (SPG), Osevwe Lawrence, Mr. Emmanuel Ndakara, Mr. F.O
Okoloh and colleagues; Mr. George Okorie , Mr. .Uka Orji.
Finally, I am grateful to God Almighty for giving me the grace in completing
this Project.
Department of Economics, University of Nigeria, Nsukka. March, 2010. Mmadu Benjamin Anabori
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TABLE OF CONTENTS TITLE PAGE i APPROVAL PAGE ii DEDICATION iii ACKNOWLEDGEMENT iv TABLE OF CONTENTS v ABSTRACT vi C HAPTER ONE – INTRODUCTION 1 1.1 Background of Study 1 1.2 Problem Statement 3 1.3 Research Objectives 5 1.4 Hypotheses 5 1.5 Significance of the Study 5 1.6 Scope of the study 6 CHAPTER TWO – Nigerian Economy 7 Performance of the Economy 9 CHAPTER THREE – LITERATURE REVIEW 12 3.1 Introduction 12 3.2 Theoretical Literature 12 3.3 Empirical Literature 19 CHAPTER FOUR – METHODOLOGY 23 4.1 Introduction 23 4.2 Measure of Inequalities 23 4.3 Model Definition 28 4.4 Techniques of Evaluation 30 4.5 Model Derivations 31 4.6 Sources of Data 33 CHAPTER FIVE - ANALYSIS OF RESULTS 34 5.1 Introduction 34 5.2 Analyses of Results 34 CHAPTER SIX - SUMMARY RECONMMENDATION AND CONCLUSION
54 6.1 Summary 54 6.2 Recommendations 55 6.3 Conclusion 56 REFERENCES APPENDIX
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ABSTRACT
Foreign direct investment (FDI) is often seen as an important catalyst for economic growth in the developing countries. It affects the economic growth by stimulating domestic investment, increasing human capital formation and by facilitating the technology transfer in the host countries. The main purpose of the study is to investigate the impact of FDI on economic growth in Pakistan, for the period 1990-2006. The relationship between FDI and economic growth will be analyzed by using the production function based on the endogenous growth theory, other variables that affect economic growth such as Trade, domestic capital, labour and human capital will also be used. The expected results of the study are a positive and statistically significant relation between the real per-capita GDP and FDI. Policy recommendations could be suggested in the light of the results obtained, regarding the impact of trade in Nigeria The debate about how growth can be generated and sustained in Africa, particularly in sub Saharan Africa has pitched scholars and even policy analysts against one another. Of interest is the debate over the relative roles of foreign aid and international trade in re-starting growth and placing it on a sustained path. A question that is frequently asked is does Africa need aid or trade? The empirical literature is far from being conclusive on the relative impact of aid and trade in fostering growth in sub Saharan Africa. Based on the endogenous growth model, this study seeks to examine the impact of trade and trade related activities vis-à-vis the impact of aid on economic growth. Using a feasible generalized least squares technique on an unbalanced panel of 47 sub Saharan countries from 1970 to 2007, and a set of trade and trade related variable on the one hand and a set of aid variables on the other, while controlling for other important environmental factors, the study observes that nthe relationship between trade and growth is positive and more robust than the relationship between aid and growth in sub Saharan Africa. However, when the study controls for the impact of commodity price boom, the relationship between growth and trade became less robust. The study observes that the robust relationship between trade and growth is more price-induced than volume-induced, suggesting that favorable international terms-of-trade has been a major driving force behind the trade-growth relationship. The study concludes by making findings-specific recommendations on how aid can work better in sub Saharan Africa and on how trade can be wealth-creating and growth-inducing.
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CHAPTER ONE
INTRODUCTION
1.1 Background to the study.
Globalization is the dynamic process of liberalization, openness, and
international integration across a wide range of market, from labour to goods and
from services to capital and technology. The first stage of globalization is the
development of new technologies in Transportation and Telecommunication, and
the second stage is the liberalization of the exchange of goods, services and capital
through the creation of GATT, WTO, OECD and the IMF. Governments view
globalization as a threat to national sovereignty, due to the growing influence of
financial markets and multinational corporations. Bhagwati (2004) a proponent of
free trade and globalization opposes the liberalization of short-term capital flows.
Krugman and Eichengreen (1999) defend both trade and financial globalization,
but favour the selective and temporary controls of shot-term capital inflows to
avoid financial crisis. Joseph Stiglitz (2003) in principle, is not against
globalization, but strongly opposes with the way the IMF, the World Bank, the
WTO and other international organizations are implementing their policies in
developing countries. As it is with most policy makers, majority of economists
support globalization because of its benefits in terms of productivity gains,
technology transfer, introduction of new products, managerial skills, R&D
activities, and openness of the domestic economy to the global market. These
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benefits suggest that trade openness; an ingredient for globalization can play an
important role in modernizing national economy by promoting faster economic
growth. Nigeria’s economic growth is characterized by sharp fluctuation and
heavy reliance on crude oil revenue even though the oil sector contributes less than
43 % of GDP, these difficulty for the nation to attain sustainable economic growth.
Economic growth in Nigeria is still low in a context of slow industrialization and
inadequate technological progress. Low and fluctuating economic growth coupled
with an income distribution biased against the poor result in increasing poverty and
worsening human development.
1.1.2 The structure of the Nigerian Economy
The Nigerian economy shares most of the characteristics associated with a
developing economy, with the primary sector dominating both production and
exports. Agriculture dominates the production and employment structure,
accounting for about 41 percent of GDP and nearly 70 percent of total employment
in 2001, while comparative figures for the industrial and services sectors as a
percentage of GDP over the same period are 20 percent and 39 percent
respectively. The manufacturing sector contributed only 6 percent of GDP in 2001.
Table 1.1 shows that agriculture and public administration are the major driving
forces for the economy. Both grew at 4.6 and 4.5 percent respectively between
1982 and 2001, while the two industrial sub-sectors of manufacturing and
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construction grew at less than 1 percent, thereby constituting a drag on overall
GDP growth. In terms of fiscal structure, oil dominates the economy. In fact, in the
last three decades, the contours of Nigerian economic growth have totally
depended on developments in the oil sector. The reason for this is very clear. Oil
accounted for 81.6 percent of total federally collected revenue in 1980. This rose to
83.9 percent in 1990 before declining to 76.5 percent in 2001. The declining share
of oil in government revenue is due mainly to the growing importance of value
added tax. In addition, oil serves as the main source of foreign exchange for the
Nigerian economy. Its share of foreign earnings rose by 8 percentage points from
90.9 percent in 1980 to 98.7 percent in 2001. The high degree of openness of the
economy implies that impulses in the global oil market are easily transmitted into
the domestic economy.
Like most African countries, Nigeria depends on primary exports, and the small
share of manufactured goods in total exports limits the capacity to import. Oil
earnings provide the foreign exchange needed to finance the huge appetite of the
economy, especially the manufacturing sector, for the import of capital and
intermediate goods. Thus, developments in the global oil market have a direct
impact on domestic industrial performance and the conduct of domestic economic
activities. Moreover, since the Nigerian government is the repository of oil
revenue, fluctuations in oil revenue often result in major contractions in public
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investments and, by extension, aggregate domestic investment (Olofin, Adenikinju
and Iwayemi, 2002).
An assessment of Nigeria trade policy since the1960s reflects a trend, which
has been known to characterize uncertain and unpredictable trade regime the world
over. Trade policy since the 1960s has witness extreme policy swings from high
protectionism in the first few decades after independence to its current more liberal
stance (Adenikinju 2005; 113). Tariffs at various times have been used to raise
fiscal revenue, limit imports to safeguard foreign exchange or even protect the
domestic industries from competition. Also, various form of non-tariff barriers
such as quotas, prohibitions and licensing schemes have on various occasions been
extensively used to limit imports of particular items. The overall pattern portrays
the long -held belief that trade policy can be used to influence the trade regime in
directions that promote economic growth. Attempts were made to use trade policy
to stabilized export revenue, and scale down the country’s reliance on the oil sector
(olaniyi 2005; 5). Trade policies is directed at discouraging dumping; supporting
import substitution; stemming adverse movements in the balance of payments;
conserving foreign exchange; and generating revenue (Bankole and Bankole;
2004).
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Table 1.1: The Changing Structure of GDP in Nigeria 1960-2002.
GDP by Industry of Origin
1960 1970 1980 1985 1990 1998 2001 % Growth 1982-01
Agriculture 62.9 48.8 22.2 35.1 39.0 36.6 41.1 4.6
Oil and Mining 1.2 10.1 26.8 16.5 13.2 15.6 11.0 1.7
Manufacturing 4.8 7.2 5.4 10.7 8.1 7.5 6.0 0.9
Construction 4.8 5.1 8.5 1.8 1.9 2.2 2.3 0.1
Electricity, Gas and Water
0.4 0.7 0.5 0.7 0.6 0.7 0.6 2.8
Transport and Communication
4.9 2.8 4.1 4.8 3.4 4.0 3.1 1.2
Trade and Finance
12.4 12.8 25.0 19.8 21.4 25.2 21.5 2.3
Public Admin and Defence
3.3 6.5 4.5 6.1 8.4 11.4 10.9 4.5
Others 5.3 6.0 3.0 4.5 4.0 1.6 2.9 3.2
GDP at Factor Cost
100.0 100.0 100.0 100.0 100.0 100.0 100.0 3.0
Sources: (1) Federal Office of Statistical. Annual Abstract of Statistic, various years, Lagos. (2) CBN Annual Reports and Statement of Accounts, Various issues.
In terms of fiscal structure, oil dominates the economy. In fact, in the last three
decades, the contours of Nigerian economic growth have totally depended on
developments in the oil sector. The reason for this is very clear. Oil accounted for
81.6 percent of total federally collected revenue in 1980. This rose to 83.9 percent
in 1990 before declining to 76.5 percent in 2001. The declining share of oil in
government revenue is due mainly to the growing importance of value added tax.
In addition, oil serves as the main source of foreign exchange for the Nigerian
economy. Its share of foreign earnings rose by 8 percentage points from 90.9
percent in 1980 to 98.7 percent in 2001. The high degree of openness of the
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economy implies that impulses in the global oil market are easily transmitted into
the domestic economy.
Like most African countries, Nigeria depends on primary exports, and the
small share of manufactured goods in total exports limits the capacity to import.
Oil earnings provide the foreign exchange needed to finance the huge appetite of
the economy, especially the manufacturing sector, for the import of capital and
intermediate goods. Thus, developments in the global oil market have a direct
impact on domestic industrial performance and the conduct of domestic economic
activities. Moreover, since the Nigerian government is the repository of oil
revenue, fluctuations in oil revenue often result in major contractions in public
investments and, by extension, aggregate domestic investment (Olofin, Adenikinju
and Iwayemi, 2002).
During 1989, some measures were instituted to cushion the harsh effects of
the structural adjustment programme on the populace. Among these were measures
to ease transportation bottlenecks. Thus, the import duty on component parts of
commercial vehicles and tractors was slashed from 25% to 5%. Commercial
vehicles were also to be imported duty free during the second half of 1989. In
1990, a ban was placed on the exportation of primary products such as raw hides
and skins and palm kernels. This was intended to make sufficient quantities of the
commodities available for local consumption and processing, as only leather-based
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products and palm kernel oil and cake were allowed to be exported. Again, to
prevent dumping as well as protect local industries, import duties on fluorescent
tubes, R-20 batteries, starch, GLS tubes and glass shells were raised from a range
of 35–70% to 200%. Import duties were also increased for a number of products,
such as jewellery (100 to 200%), toothbrushes (35 to 70%) and wheelbarrows (15
to 50%). A comprehensive package of incentives, many of which were
incorporated into the Exports (Incentives and Miscellaneous Provision) Decree of
1986, has also been articulated to boost non-oil exports.
The standard growth model predicts that labour and capital inputs are able to
explain the bulk of economic growth patterns in a given country, there is still a gap
to be account for by the role of other explanatory factors in driving output changes.
Such factors are taking into consideration because of further theoretical
foundations as well as country-specific characteristics. Among such factors, the
recent literature on economic growth has centered on foreign direct investment
(FDI) as a possible growth-enhancing variable. However, while the role of FDI has
receive some attentions in the recent studies, less effort was made to better
understanding of how FDI and trade openness may interact to explain growth. FDI
would probably boost economic growth depending on the trade regime adopted in
a giving country. Countries with more liberal trade regime would perform better in
attracting technology and using it as a catalyst for economic growth. The average
GDP growth in the less developed countries as a group in 2004 was the highest for
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two decades. This was attributed to increase in merchandize export and record
level of capital inflow particularly in the forms of grants and foreign direct
investment (UNCTAD; 2006). A liberal trade regime would create an investment
climate that is conducive to learning and goes along with the human capital and
new technology infused by FDI. In a context of trade openness, FDI would
strongly contribute to the transfer of modern technology and innovation from
developed to developing countries, and therefore, would boost trade and foster
economic growth
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1.2 STATEMENT OF THE PROBLEM.
A critical element of the East Asian success story has been export led
growth. (Wealth creation via specialization). Latin America, south Asia until the
mid 1990s and the Middle East followed import substitution programmes until the
late 1980s. Now, here are some killers’ questions; in what areas do LDCs have
comparative advantages? Based on the Richardian model, it is in agricultural and
primary commodities and labour intensive light manufactured products (typically,
textiles, footwear, rubber and plastics, and then gradually moving up the value-
added chain to cheap electronics etc). Now let’s look at market access to the rich
countries; what do the OECD rich countries place most of their production?
Agriculture (producer subsidy equivalent of 50% in the EU, 30% in the USA.
(national price /world price),the fact is that every day the 30 OECD countries hand
out $1bn in agricultural subsidies, i.e. $350bn a year! By contrast, the USA gives
$10bn a year in foreign aid; while textile, footwear, rubber products etc are almost
all protected by quota arrangements. Hence the rich countries basically protect
labour intensive, low skill industries.
Just as in Aid policies, the rich countries are hypocrites. We tell the poor
countries to get their economic acts together and to established rule of law and
good institution, and they stop LDCc form exporting to them (developed nations)
to protect the jobs of their unskilled ( but highly unionized) workers and vocal
farmers. Thus, the real cry of the LDCs is trade not Aid. This is home truth. The
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multifiber agreement has ended, although there are numerous remaining
quantitative restrictions (not tariffs) on LDCs exports to the north. The world bank,
Oxfam etc, have all estimated that free trade would be worth 5 to 10 times more to
them than the “peanuts” we channel to them as foreign aid. There are many ways
of helping the Less developed countries; trade in goods, capital flows or labour
mobility. The Least developed countries do not face a level playing field or get a
fair break in world markets. Thus, the key question is: what kind of trade policy
should a country like Nigeria run? Should Nigeria lower her domestic protection
unilaterally?
According to the Richardian, Heckscker-Ohlin models, large difference in
technological levels and resource endowment will favour wealth creation via free
trade. The East Asia miracle was largely based on this idea. Sufficiently, high
domestic protection was put in place to get specific industries up and running (the
infant industry model) with clear sunset clauses on these tariffs.
There is consensus of literature on trade impacts on growth, however, facts
are scares on how trade could transfer technology/knowledge spillovers from the
world technology frontier to less developed country like Nigeria and thereby
affects her growth performance. While the empirical literature on trade and growth
is diverse, it does not seem to support uneven growth results. The initial
comprehensive study by Levine and Renelt (1992) found no direct effect of trade
policy on growth, but their positive correlation between trade and investment
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suggested that the effect of trade openness could operate through enhanced
resource accumulation. Subsequent work with larger samples of 30 to 95
developing countries (Dallar 1992 and Edwards 1992, 1993) show that trade
openness improved growth performance. Even when past studies agreed that
technology transfer and trade have a positive impact on economic growth, the size
of such impact may vary across countries depending on the level of human capital,
domestic investment, infrastructure, macroeconomic stability, and trade polices.
The literatures continue to debate the role of technology and trade in economic
growth as well as the importance of economic and institutional developments in
fostering technology transfer and trade. There is limited understanding of the role
of trade openness and technology transfer in economic growth process, and this
has restricts our ability to develop policies that will promote economic growth
This study is set to uncover the linkage between trade openness and technology
transfer on economic growth and total factor productivity growth in Nigeria.
1.3 RESEARCH QUESTIONS
The question now is; if increased productivity growth increases trade growth
as in the case of some developing economies, or is it trade openness that increase
productivity as found out in the newly industrialized economies? Then what can
be said of the Nigerian economy? This question is necessary following the need to
know the policy target between the two variables. Thus, some fundamental
questions, which form the basis of this research, are:
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(i) What are the levels of total factor productivity in manufacturing industries in
Nigeria?
(ii) What is the direction of causality between productivity and export in the
manufacturing sector?
(iii) Does any long-run relationship exist between trade openness and growth in
productivity that can revive the Nigeria economy?
This study, therefore attempts to provide answers to the questions posed above.
Specifically, the study provides the nexus of relationships between trade openness
technology transfer and productivity growth in Nigeria.
1.4 OBJECTIVES OF THE STUDY
The broad objective of this study is to evaluate the impact of trade openness
on economic growth in Nigeria. However, the study specifically seeks to
(i) Examine the impact of trade openness on GDP growth in Nigeria
(ii) Identify the channels of trade interaction with growth in Nigeria
(iii) Examine the impact of trade openness on Total Factor Productivity in
manufacturing sector of Nigeria.
1.5 STATEMENT OF THE HYPOTHESIS
This study will be guide by the following research hypothesis:
HO1 Trade openness has no statistical significant impact on GDP growth
rate in Nigeria.
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H11 Trade Openness has statistical significant impact on GDP growth rate
in Nigeria
HO2 : there is no statistical significant relationship between trade openness
and Total Factor Productivity growth in Nigeria.
H12 : there is no statistical significant relationship between trade openness and
total factor productivity growth in Nigeria
1.6 JUSTIFICATION FOR THE STUDY
There is no consensus among researchers as to the impact of trade openness
and technology on growth. Most studies on it are not country specific. Rather they
are cross-country studies. From a methodological perspective, there is deep
skepticism against cross-country evidence on trade growth issue. Rodriguez and
Rodrick (2001) criticize the choice of openness measure and weak econometric
strategies used in these studies. Harrison (1996) shows that most of the explanatory
power of the composite openness dummy assembled in Sachs and Warner (1995)
come from the non-trade components of these measures. Bhagwati and Srinivasan
(2002) pointed out that "cross-country regressions are a poor way to approach this
question" and that "the choice of period, of the sample, and of the proxies, will
offer many degrees of freedom where one might almost get what one want if one
only tries hard enough. Pritchet (2002) also argues for detailed case studies of
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particular countries. Therefore, the study seeks to find out how it has fared in
Nigeria especially within the endogenous growth framework.. the study becomes
important given the fact that detailed work on Nigeria specific case is scarce, it will
make a good policy tools in hand of trade policy makers as to the benefits or
otherwise of our trade policies. Students of international economics will also find
the work very useful.
1.7 LIMITATIONS OF THE STUDY
As in all research efforts of this nature, time was a major constraint. This is
even more glaring in our own case, where data are not readily available and most
of the variables have to be proxyed. In addition, finance was another great
challenge as there was no money to subscribe to most of the necessary journals
with update information on key variable of the study. These problems continued to
linger on for some time before they eventually fizzled out. In view of the
implication of these problems on any research effort, consistent attempt was made
to mitigate their potentially negative impact on the quality of this study.
1.8 SCOPE AND ORGANIZATION OF THE STUDY
The study covers the period from 1970-2007, which spans 37 years. This was
chosen in view of availability of data. The period is good enough for us to find out
the long run impact of trade openness on economic growth performance in Nigeria
and the role of trade openness on total factor productivity growth in Nigeria. To
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achieve this, the study is structured into six chapters. Apart from the introduction,
which this part concludes as chapter one, chapter two is literature review. In this
part the related literature will be reviewed, theoretical framework and conceptual
issues will be discuss to establish the linkages between finance and SMEs growth
and development. Chapter three is methodology which discusses the
methodological foundation and data analysis technique. Chapter four is
presentation and analysis of data obtained from the field survey. Chapter five is
discussion of results and chapter six is summary of major findings, conclusion and
policy recommendations.
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CHAPTER TWO
2.0 LITERATURE REVIEW
The related literature has been reviewed under the following sub-headings.
1. Theoretical literature
2. Empirical literature on
• Trade openness and economic growth
• Technological Progress and endogenous growth
• Trade FDI and economic growth
• Total Factor Productivity (TFP), R&D and Growth
• Summary of literature
2.1 THEORETICAL LITERATURE
From an abstract analytical perspective, the essence of the economic approach
to trade is grounded in free market economic analysis. The original focus of pure
trade theory has been on examining the maximization of economic welfare within
an abstract general equilibrium situation with no market imperfections. It is an
established fact that various prosperous world cultures through out history have
engaged in trade. Based on this, theoretical rationalization as to why a policy of
free trade would be beneficial to nations developed over time. These theories were
developed in its academic sense; most prominent of these theories are the
Neoclassical and Endogenous growth models. The doctrine of international trade
and economic growth and the relationship between them was developed by
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classical economists like David Hume (1711-1799), Adam Smith (1723-1790),
David Ricardo (1772-1823) and J.S. Mill (1806-1873). The doctrine of
international trade posited that free trade leads to increase well-being in the
countries that engages in it. In this theoretical review, we situate trade openness
and technological transfer, within the framework of main theories of growth -
namely, neoclassical theories and Endogenous growth theories.
2.1.2 Neoclassical Model of Growth
The Basic neoclassical model of growth developed by Solow (1957) and
Swan (1956) follows the logic of the post Keynesian Model, like the Harrod-
Domer model, the ultimate aim is the search for the condition of a stable
equilibrium. But unlike the Harrod-Domer model that assumes rigidity in
production technology, the Solow-Swan model gives room for the possibility of
factor substitutability. Thus, flexibility helps to bring the economy back on a
balance track each time it is deviate from it. An exogenous technical progress that
can improve the productivity of factor input is also possible. In a conventional
neoclassical growth model, trade does not affect the equilibrium or steady stage
rate of output growth because, by assumption, growth is determine by exogenously
given technological progress.
In the basic neoclassical model, trade openness can have an effect on the
economy by increasing the overall level of technological efficiency. This
efficiency gain can only be static and be explained by the fact that the convergence
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of domestic and international process leads to reallocation of factor inputs in
favour of the most cost-effective sector. The openness effect arise from
technological improvement, an elimination of distortions caused by government
intervention or any other event that increase the production level that can be
obtained for a given sets of inputs. This characterization of the neoclassical model
as described by the effect of trade openness leads to an increase in the level of long
run per capita income but not the long-run rate of growth. The increase in the per
capita growth rate occurs only during the transition to the new and higher income
level and last until new savings and investments are just enough to sustain this
higher level of income. Other events - such as increase in the rate of national
savings or reduction in the rate of population growth -can produce the same effect
as trade openness. However, as in the case of technological efficiency
improvement, these changes do not have a long-term impact on per capita income
growth rate.
2.1.3 Endogenous Growth Theories:
The endogenous growth model emanate from the work of Romer (1986) and
Lucas (1988). The model questions the idea of exogenous technical progress.
According to both researchers, policies such as increasing the land of national
saving, reducing the rate of population growth or opening up to trade can lead to
long run and prominent increase in rate of growth of per capital income. By
enhancing technical progress, trade openness can cause long-run growth to be
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permanent. Technical progress can be accelerated through imports of intermediate
goods, an increase in transfer of technology, foreign direct investment or more
incentive to imitate and innovate. The model posits that increasing savings and
investment is not an obstacle to the incentive to accumulate capital. If openness
can exert positive impact on saving and capital accumulation, then it can bring
about long-run growth. Furthermore, positive externalities related to capital
accumulation can lead to constant or increasing yield of scale (Romer, 1986),
contrary to the assumption of decreasing capital yields that is a feature of
neoclassical models. Thus, a permanent output growth is possible. Romer (1986)
referred to the positive externalities of physical capital investment and knowledge,
while Lucas (1998) highlighted the positive externalities of human capital
accumulation. Even though externalities are a prevalent feature of closed
economies, they are assumed to be of even greater significance in open economic
especially in the case of developing countries which can benefit enormously from
technologies provided by technologically advanced countries.
Other theories posited that static model with market structures or other
distortions; restrictions on trade in goods reduced the level of real GDP, which is
equivalent to a loss in welfare. The restriction creates a wage between domestic
and foreign prices, leading to a loss in consumer’s surplus that could be greater
than the gain in producer’s surplus arising for higher domestic revenue. The net
impact on welfare is therefore negative.
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2.2 EMPIRICAL LITERATURE
2.2.1 Trade Openness and Growth
Trade openness may generate significant gains that enhance economic
transformation. With trade openness, allocations of productive resources tend
towards activities with comparatively great efficiency. Trade liberalization may
improve productive and economic well being of nations by increasing knowledge
spillovers from more advance trading partners to less develop once (Agenor 2002).
On the long run, trade openness may generate dynamic gains by way of facilitating
the acquisition of new input, less expensive or higher – quality intermediate goods
and improve technology, which enhance the overall productivity of the economy.
Thus access to a verity of foreign input at a lower cost that shifts the economy –
wide production possibilities frontier outward, thereby raising productivity (Romer
1994 and Jayme 2001). Trade openness may foster greater possibility of
exploitation of economics of scale and location effects, as efficient producer
expand their market share, which further reduces costs (Tybout, 1992; Baldwin
1992, 1997; Schiff and Winter 1995; Drabek and Laird 2001). Harrison (1996)
looked at a number of openness indicator that turnout to have a positive
‘association’ with economic growth, he support a bi-directional casualty between
openness (trade share) and economic growth. However, further research,
questioned the robustness of such relationship. For instance, Harrison and Hanson
(1999) show that the often-quoted Sachs and Warner (1995) findings do not
30
provide evidence for an openness and growth as claimed. Harrison (1996) and
Pritchett (1996) show that the various measure tend to be only weakly correlated
and are often on the wrong sign. In general, empirical studies suffer form
shortcomings, and as a result, they have not resolved the question surrounding the
correlation between trade openness and growth. Baldwin (2000) explains the
difference among researchers of the openness-growth nexus. To him, econometric
analyses based on quantitative data are limited by the scope and comparability of
available quantitative data, difference in what investigator regards as appropriate
econometric models and tests for sensitivity of the results to alternative
specification that may be based on the personal policy of authors which often result
in significant differences in the conclusion reached under such quantitative
approach.
Empirical studies of the effect of trade on growth are usually either cross-
country study using aggregate data, or within -country studies using plant- or firm-
level data. The conclusion of most cross-country studies is that countries with
lower trade barriers grow faster. Dollar (1992) find that growth in 95 developing
country over the period 1976-1985 is negative correlated to two indices of how
closed developing economy are to trade; an index of real exchange in rate
distortion and an index real exchange rate variability. Sachs and Warner (1995)
find that growth has a positive relation with openness indicator based on a number
of policies that affect international economic integration. Edward 1998) regress his
31
estimate of total factor productivity growth on a range of pre-existing indicator of
openness to trade, and find that most indictors are strangely positively correlated
with productivity growth. Greenaway et al (2002) perform a similar analysis for
GDP growth rate in developing country and find that growth is positively related
with a lag to trade liberalization. Ben-David (1993) find that trade openness
reduces income dispersion amongst the liberalizing countries. Frankel and Romer
(1999) find that country that trade more due to favuorable geography grow more
quickly after World War II, a result that was extended to the early 20th century by
Irwin and Tervio (2002). Dollar and Kraay (2001) find that more trade increases
the income of the poor. However, Rodriquez and Rodrik (2000) take issue with all
of this Studies, arguing that the measure of openness are often poor measure of
trade barrier, or are highly correlated with other causes of economic performers or
have no link to trade policy. Rodrik et al (2004) find that more favourable
geography affect income level through the quality of institution and not through
trade integration. Most country studies observed that gains from trade are driven
by a reallocation of recourses to relatively productive uses and examine whether
greater openness causes such reallocation. Extensive plant- and firm level evidence
of this reallocation have been found and is survey in Tybout (2002). Tybout use his
own research and his survey of other evidence to conclude that trade rationalizes
production by expanding the market for the most efficient plant and by improving
intra plant efficiency. Bolaky and Freund (2004) exploit the ideal that relocation is
32
likely to be feebler in heavily regulated economies and show that the positive
relationship between trade and growth is stronger when conditioning on country
regulation measures. Christian Broda and David Weinstein (2006) show the
contribution of trade (import) to US welfare. Romalis (2007) using tariff barriers of
the United State as instrument for openness of developing countries, conclude that
improved access to developed countries’ market raises developing country growth.
Ogounyele and Ayeni (2008), analyses the link between export and productivity
growth in Nigerian manufacturing sector. The empirical analysis results provide
support for a link between export growth and productivity growth. The direction of
causality runs in both directions.The association between exports and productivity
is ambiguous (Kankesu, 2002). One can argue that growth of exports brings higher
growth of productivity through an educative process. For example a higher level of
contact with foreign competitors as result of export growth can motivate rapid
technical changes and managerial know-how and reduce ‘X-inefficiency’ locally.
If this is true, then export trade growth in form of liberalization is a precondition
for improvement in productivity. Alternatively, high growth of productivity is
essential for high growth of exports. For example, highly sophisticated
management techniques may originate within local firms/industries regardless of
any government policy towards exports. Haddad, et al (1996), in Morocco,
accepted the hypothesis that export growth causes productivity growth and rejected
the causality in the opposite direction. Sjoholm (1999) for Indonesia manufacturing
33
industries, Iscan (1998) for Mexican manufacturing industries and Nishimizu and
Robinson (1994) for Japan, Turkey, Yugoslavia and South Korea concluded that
the larger the share of output that goes into exports the higher the productivity
growth.
There are arguments suggesting that increased foreign competition may be
injurious to domestic industries if it leads to a closure of factories (Van Biesbroek,
2003). Indeed, Rodrik (1991) finds that lower protection or higher import
competition reduces a firm's investment in productivity enhancing technological
upgrading. This is especially the case when the incentive to invest depends on the
firm's output or market share — yet trade liberalization reduces that market share.
Caesar, (2002) also argued that the magnitude of gains from liberalization could be
fairly low. If trade reduces the domestic market shares of unshielded domestic
producers without expanding their international sales, their incentives to invest in
improved technology will decrease as protection ceases. This effect reduces the
benefits of tariff reductions that are supposed to lower the elative prices of
imported capital goods and ease access to foreign technology for domestic firms
(Pavcnik, 2000). It is also argued that liberalization does not facilitate acquisition
of better technology by domestic plants because acquisition is dependent on the
flexibility of the domestic labour force. Muendler (2002) finds that foreign
technology adoption may be relatively unimportant. This is because the efficiency
difference between foreign and domestic inputs has only a minor impact on
34
productivity in some cases. The explanation for the minor impact lie in the fact that
foreign technology adoption takes time due to delays in learning, difficulties with
factor complementarities and differences in production arrangements. Even in the
context of economies of scale, theoretical trade literature offers conflicting
predictions about the evolution of plant productivity following a liberalization
episode, especially in cases where imperfect competition is present. Gains from
economies of scale in developing countries may also be unlikely because
increasing returns to scale are usually associated with import competing industries,
whose output is likely to contract due to intensified foreign competition (Pavcnik,
2000) There seems to be one general conclusion from the various studies on TFP
conducted across developing economies: That TFP growth has not been
encouraging. In fact, some estimates seem to suggest negative TFP growth, and
therefore has not been a source of economic growth. (Caesar, 2002:)
If there are benefits to a country's manufacturing sector that arise from trade then
these benefits should result from two sources. The first source is from greater
efficiency in production through increased competition and specialization. The
second source is from the opportunities that arise to exploit economies of scale in a
larger market. Access to a larger market should encourage larger production runs
in industries and so reduce average costs. Productivity growth seems to be directly
associated with production of tradable goods. This implies that the benefits from
foreign activities are likely to be higher in two areas; firstly, in places where the
35
domestic market is small and foreign sales are a prerequisite to fully exploit scale
economies and, secondly, where production technology lags best practice,
providing ample scope for productivity improvements through imitation and
adoption of foreign technology. Literature suggests a number of mechanisms or
channels through which trade liberalization affects manufacturing productivity
(Fernandez, 2003; Van Biesbroek, (2003); Pavcnik, (2000), and Muendler, (2002)).
These channels include:
(a) Foreign Input Push
(b) Competitive Push and Elimination of X-inefficiency.
(c) Competitive Elimination
(d) Higher Incentives for Technological Innovation
(e) Economies of Scale.
Dollar and Kraay (2004) also find evidence that greater openness to trade can
generate economies of scale and productivity gains. However, there has been an
increasing recognition in recent years of the importance of complementary policies
in enhancing the benefits of a more open trade regime. Such policies include sound
macroeconomic policies, market supporting institutions, good infrastructures,
appropriate business regulations, well functioning credit markets, and flexible
labor markets (Chang, Kaltani, and Loayza, 2005). We use the ratio of imports plus
exports to total GDP as a proxy for trade openness. However, this indicator can
introduce a bias, particularly for countries whose trade flows are dominated by
36
natural resources such as oil. To account for this bias, we also use two alternative
indicators: the degree of trade openness at the beginning of the sample period, and
the fraction of the sample period in which the country has been considered open
according to the Welch-Wacziarg (2003) index.
2.2.2 Technological Progress And Endogenous Growth
Some of the ‘new’ endogenous growth theories suggest that trade policy affects
long-run growth through its impact on technological change. In the models of this
tradition (see for example Grossman and Helpman, 1992) openness to trade
provides access to imported inputs embodying new technology, increases the size
of the market faced by the domestic producers raising the returns to innovation,
and facilitates a country’s specialization in research-intensive production
(Harrison, 1996, pp.419-420).
The endogenous growth literature, however, has been ‘diverse enough to
provide a different array of models in which trade restrictions can decrease or
increase the worldwide rate of growth’, as Yanikkaya (2003) rightly points out and
refers to the works of Romer (1990), Grossman and Helpman (1990), Rivera-Batiz
and Romer (1991a.b) and Matsuyama (1992). Increased competition could
discourage innovation by lowering expected profits. Grossman and Helpman
(1992) point out that intervention in trade could facilitate long-run growth if
protection encourages investment in research-intensive sectors. The works of
Lucas (1988), Grossman and Helpman (1991 a, b), Young (1991) and Rivera-Batiz
37
and Xie (1993) show that even if the trading partners have considerably different
technologies and endowments, economic integration may adversely affect
individual countries even if it raises the worldwide growth rate (Yanikkaya 2003,
p.59). Ocampo and Taylor (1998) point out that ‘the preferred defence of trade
liberalisation’ as found in Krueger (1997) and others, ‘invokes a general
equilibrium model with constant or decreasing returns to scale’ and the theory of
static comparative advantages; against that they remind the old infant industry
argument which formed the basis of state intervention in many countries in the
past. They further mention the works of Young (1995) and Kaldor (1978) which
‘emphasised how increasing returns and cross firm externalities can lead to
cumulative growth processes and different patterns of specialisation across
economies’ and criticized the neoclassical argument of trade intervention based on
‘convexity’ assumption.
In view of the ambiguities in the theoretical literature, a number of empirical
studies were undertaken to examine the relationship between trade liberalisation
and growth. Due to the difficulty of measuring openness, different studies have
used different measures to examine the effects of trade openness on economic
growth. Anderson and Neary (1992) have developed a ‘trade restrictiveness index’
which tries to incorporate the effects of both tariffs and non-tariffs barriers; it is
available for a small sample of countries. So many cross-country studies used trade
shares in GDP and found a positive and strong relationship with growth (as
38
reviewed in Harrison, 1996). Frankel and Romer (1999) tried to control for
endogeneity of trade with the geographical variables and found a stronger
favourable effect of trade on growth. Rodriguez and Rodrik (1999) and Irwin and
Tervio (2002) questioned their higher instrument-variable (IV) estimates of the
impact of trade shares on growth.
A number of studies have looked at the relationship between average tariff rates
and growth. Lee (1993), Harrison (1996) and Edwards (1998) found a negative
relationship between the tariff rates and growth. The studies of Edwards (1992),
Sala-i-Martin (1997) and Clemens and Williamson (2001) concluded that the
relationship is weak. Rodriguez and Rodrik (1999) tried to replicate the result of
Edwards (1998) and found that average tariff rates had a positive and significant
relationship with total factor productivity (TFP) growth for a sample of 43
countries over the period 1980-1990. Studies of Harrison (1996), Edwards (1998)
and Sala-i-Martin (1997) used black market premium (BMP) as a measure of the
severity of trade restrictions and reported a significant and negative relationship
between the BMP and growth. However, Levine and Renelt (1992) and Rodriguez
and Rodrik (1999) pointed out that the BMP is highly correlated with a number of
‘bad’ policies and outcomes such as high inflation, severe external debt problems,
ineffective law enforcements etc and so using BMP for a measure of trade
restrictions gives a misleading picture. Some authors constructed different indices
of trade orientation such as openness index by Leamer (1988), price distortion and
39
variability index by Dollar (1992) and openness index of Sach and Warner (1995)
and argued that outward-oriented countries outperformed inward-oriented
countries. These measures of trade barriers are often correlated with other sources
of poor economic performance, as Rodriguez and Rodrik (1999) rightly pointed
out.
In a recent study Yanikkaya (2003) used a large number of openness measures for
a cross-section of countries over the last three decades. His analysis found a
significant positive correlation between trade shares and growth. However, this
study observed that different measures of trade barriers are positively associated
with growth in the less developed countries. In this perspective of confusion and
contradiction, our study presented in the next two sections seeks to examine the
relationship between trade openness and economic growth not only at the cross-
country level but also at the levels of different regions and countries over time
since the 1960s.
R&D based growth models were developed by Lucas (1988), Romer (1990),
Grossman and Helpman (1991) Aglion and Howitt (1992) and others. Their work
support the view that growth depends on technological progress, which arises from
international investment in R&D sectors by profit maximizing agents .The extent
of R&D expenditures in a country, also has important bearing on trade
performance of an economy. R&D plays an important role by creating
40
technological innovations that reduces the domestic relative price of good, thus
enhancing exports.
A growing strand of the literature attributes the growth impact of technology
transfer on the characteristics of the host country. It is argued that the host
countries’ capacity to absorb technology productively is linked to their GDP per
capita. Host countries with a better endowment of human capital are supposed to
benefit more from FDI-induced technology transfers. Openness to trade is also
considered important as foreign investors are said to increasingly pursue strategies
which require unrestricted trade of intermediate goods at all stages of the
production process. Balasubramanyam et at (1996) stress that openness to trade is
essential for reaping positive growth effect of FDI. The extent to which
multinationals transfer modern technology and technical know-how to their foreign
affiliate may depend on the host countries institutional development. According to
De Mello (1997), the larger the technological gap between the home countries of
FDI, the smaller is the impact of FDI on economic growth. Borenstein et at (1998)
find FDI enhances growth only in countries with a significant qualified labour
force. Ellen and Edward (2007) extend the growth model to include firm specific
technology capital and use it to assess the gains from opening to foreign direct
investment. Ellen and Edward define a firm” technology capital as it unique know
how from investing in research and development, brands and organizational
capital, they further assert that “what distinguishes technology capital from other
41
forms of capital is the fact a firm can use it simultaneously in multiple domestic
and foreign location .the study concluded that foreign technology capital is
exploited by permitting foreign direct investment by multinationals. In both steady
state and transitional analysis the extend growth model predict large gains to being
open. Grossman and Helpman (1990) present a dynamic two-country model of
trade and growth with endogenous technological progress. According to them, a
full understanding of economic growth has to consider the accumulation of
knowledge. The model emphasizes the role of scale economies and technological
progress in the growth process as observed by Helpman and krugman (1990). The
model generates an endogenous rate of long –run growth by means of diffusing
technology and knowledge. Their results highlight some characteristics of the
relationship between trade and growth. First they found that stronger relative
demand for the final goods of the country with comparative advantage in R&D
lowers the long-run share of that country in number of middle products and slows
long run growth of the world economy. Modern endogenous open growth model
and the new trade theory also pose no clear results regarding to openness and
growth. .the effort in defining a clear relationship, between international trade and
growth are limited. As a mater of fact, it was difficult to explain that open up to
trade would stimulate growth by means its effects over TFP growth
The mechanism through which increased productivity and growth rates occur as
economies became open to international trade is not limited to the adoption of
42
more inputs that are specialized and machinery available from trading partners
Ogujiuba et al (2004). Recent models of endogenous growth have used these ideas
to study the effects that trade can have on the long run rate of growth (Rivera-batiz
and Romer 1990 Romer 1992; and Feanstra (1990).
Antoine Andrea (2006) studied the effect of openness in service on economic
growth for countries at different stages of economic development. Focusing on
telecommunication and financial service, they examined the relationship between
openness in these service and economic growth. The authors estimated a threshold
regression model to ascertain whether in openness services trade has different
impact on low-and high- income countries. The results confirm the existent of a
two-regime split with low-income economies benefiting more from greater
openness.
2.2.3 Trade, FDI and Growth
Studies based on the neoclassical approach argue that FDI affect only the level of
income and leaves the long run growth unchanged Solow (1957) and De Mellow
(1997). They argue that long run growth can only arise from of technological
progress and/ or population growth both considered endogenous. In this model,
FDI is considered to be an important source of human capital and technological
diffusion. Trade and FDI inflow have been widely recognized as very important
factors in the economic growth process. Past empirical studies, both cross countries
and country specific, on FDI inflows and trade impact vary from country to
43
country. Balasubramanyam et al (1996); Borensztein et al (1998): Kohpaiboon
(2004); Mansouri, (2005); and Karbasi et al (2005); focused their attention on FDI-
Growth nexus while Lipsey (2000) and Pahlavani, et al (2005) bear their mind on
trade – growth nexus. They both concluded that both FDI inflows and trade vary
from country to country. For some countries, FDI and trade can even negatively
affect the growth process. Growth enhancing effects of FDI would be stronger in
countries with more liberal regime. A liberal trade regime is likely to provide
appropriate environment conducive to learning that must go along with the human
capital and new technology infused by FDI. Moreover, trade openness also
provides access to a large market and, therefore, is likely to attract FDI.
Table 2: percentage Distribution of Foreign Direct Investment in
the Nigerian Manufacturing sector in 988.
Sector Industry FDI
1 Food, beverage and tobacco 0.22
2 Textiles, wearing apparel and leather 0.18
3 Wood, wood products, and furniture 0.02
4 Paper, paper products, printing and publishing 0.09
5 Chemicals, rubber and plastic products 0.20
6 Non metallic mineral products 0.07
7 Fabricated metals, iron and steel 0.07
8 Machinery and equipment 0.15
Source: Adenikinju and Chete (2000).
Mansouri (2005) suggest that FDI and trade interact to have positive effect on
growth in the host country. However, the nature of such interaction and effect on
44
growth and output performance in different countries are largely empirical
question (Nath, 2004; Gabor, 2004; Cernat and Vranceanu, 2002). FDI is an
important means of transferring modern technology and innovation from
developed to developing countries.
Recent studies on the interactive impact of trade and FDI have often used cross-
country analysis with all its well-known shortcomings as quantitative techniques.
There is therefore need for a systematic time series analysis of specific country
experiences in order to broaden our understanding of important issue. There are
several ways that FDI likely generate technology spillovers to host countries such
as training local staff, enhancing production standard for backward and forward
related industries, and enhancing the competitive pressure to local entrepreneurs.
Moreover, localization of foreign subsidiaries generates the demonstration effect
on domestic firms on technological choices, managerial practice, etc. Well,
favorable technology spillovers require good investment climate, which is,
associated with trade openness. As Saggi (2001) argued, “without adequate human
capital or investment s in research and development, FDI spillovers fails to
materialize.”
Bhagwati’s in his well known preposition called Bhagwati’s hypothesis,”
opined that with due adjustment for differences among countries for their
economic size, political attitudes towards FDI and stability, both the magnitude of
FDI flows and their efficacy in promoting economic growth will be greater over
45
the long run in countries pursuing the export promotion (EP) strategy than in
counties pursuing the import substitution (IS) strategy” Bhagawti (1978 and 1985).
Similar conclusion was reached by Asiedu (2002) and other studies that an
efficient environment that comes with more openness to trade is likely to attract
more FDI inflows for faster growth.
2.2.4 Total Factor Productivity and Growth in Nigeria
A). Determinants of Productivity in Nigeria
Several factors have conditioned productivity growth performance in
Nigeria. These factors were discussed under five broad dimensions.
(i) The Fruits of Knowledge
This relates primarily to the role of technology in development. Technology could
can? be acquired or developed using at least three channels: research and
development (R&D), technology transfer, and the adoption of new technology. We
found Nigeria’s activities in these three broad areas to be quite limited.
Unfortunately, economic reform programmes adopted in the past have given
limited attention to the issues of technology. R&D remains one of the weakest
links in Nigeria’s development process, with very low spending by private firms
and the government. While technology transfer policy in the past favoured
technology imports, the economic crisis of the 1980s has affected the continuous
reliance on this policy. Technology adopted in the Nigerian manufacturing sector
is quite old and antiquated. The impact of FDI is also restricted mainly to the oil
46
sector. The weak linkage between the oil sector and the rest of the economy
hinders any possible spillover effects from this type of FDI. It also found that the
low levels of absorptive capacity in the economy limit the country’s ability to
effectively utilize the technological assets available to her. Technology is a major
determinant of competitiveness. It is perhaps the main driver of efficiency in the
modern economy. Resource endowment alone is no longer sufficient to confer
sustained comparative advantage in a particular line of business. Developing
technological capability is very central to fashioning out a strong and competitive
economy with a vibrant industrial sector. However, given the quasi-public nature
of technology, the government has an important role to play in facilitating the pace,
depth and extent of technology development.
Technology can be acquired or developed using at least three channels:
(a1) Research and development
(a2) Technology transfer
(a3) Adoption of new technology
Nigeria’s activities in these three broad areas have been quite limited.
While the country has a Ministry of Science and Technology, and a number
of Research Institutes, there has been very limited success either in
imitating, copying or developing new technologies. Unfortunately,
economic reform programmes adopted in the past have given limited
attention to the issues of technology.
47
The low technological development of the country has also placed her at a
disadvantage in positioning herself to benefit from current
internationalization of the production, distribution and marketing of goods
and services. Evidence has shown that only industries linked to information
technology are able to take advantage of global market opportunities and
also benefit from the relocation of labour-intensive production, and the
distribution and marketing of goods and services from high-labour-cost
countries, mostly OECD countries. With inadequate infrastructure and high
transactional costs, Nigeria has not benefited from the production
relocation or trade induced by the information technology revolution.
Table 2.3: Number (Percentage) of Firms that Reported
Technical Support at Start-Up
Form of Technical Support Yes No
Has an R&D Department 22(25%) 64(68%)
Signed agreement on trade mark license 12(13%) 80(85%)
Signed agreement on technical services 23(25%) 69(73%)
Signed agreement on technical assistance 11(12%) 81(86%)
Agreements on technical management 12(13%) 80(85%)
Agreements with foreign consultants 11(12%) 81(86%)
Agreements with local consultants 26(28%) 65(69%)
Source: Ayonrinde, Adenikinju and Adenikinju (1998)
48
2.4: Percentage of Firms that Carry out any of the Following
Technical Changes.
Types of technical changes Percentage of firms
Downsizing of the production process 20.5
Adaptation to local raw materials 48.3
Energy saving 20.0
Capacity stretching 22.1
Manufacture of new tools/dies/fixtures 36.7
Development of new processes 18.8
Source: Ayonrinde, Adenikinju and Adenikinju (1998)
Ayonrinde, Adenikinju and Adenikinju (1998) provide a relatively detailed
study of technological acquisition in the Nigerian manufacturing sector.
According to their survey results, technical activities in the manufacturing
sector are quite limited. Most of the firms started out without any serious
technical support. Only 13 percent and 23 percent respectively signed
agreements on trademark license or on technical services. The few that had
technical support actually obtained this from local consultants. Only 12
percent of the respondents had agreements with foreign consultants. The
study further showed that only 22 firms (25 percent) of the respondents
have a research and development department. These 25 percent are firms in
the large-scale sector and are more or less multinationals. Most often than
not, these firms depend on their international parent bodies for any new
development in the technological frontier. In addition, much of R&D
efforts carried out by Nigerian firms are mainly upgrading of machineries
49
rather than introducing new products. About 40 percent of the respondents
claimed they had introduced new products in the past five years. The mean
investment in technical services by the firms was N8.0 million, and on
technical assistance, N9.0 million. These amounts are clearly very small.
(a1) Research and Development Efforts
Research and Development (R&D) is likely to increase productivity.
The OECD (1993, in Guellec and vanv Pottelsberghe de la Potterie 2001)
defines R&D as comprising “creative work undertaken on a systematic
basis in order to increase the stock of knowledge and the use of this stock
of knowledge to devise new applications”. R&D can contribute to
improvement in productivity by providing new technologies and
applications or by reducing the resource requirements of existing products
(Connolly et al, 2004). According to the OECD, there is an important
linkage between R&D and productivity growth. OECD (2000) reports that
“countries with large increases in the intensity of business R&D to GDP
and in the share of business R&D in total R&D, appeared to have
experienced a pick up in productivity growth in the 1990s”. For most of the
OECD countries, business R&D expenditure exceeds government
expenditure on R&D. The average of business expenditure on R&D for a
group of 19 OECD countries for the period 2002-03 was 1.22 percent of
50
GDP, compared to the government’s 0.30 percent of GDP and higher
education’s 0.37 percent of GDP (Connolly, et al, 2004). R&D also
facilitates a country’s ability to absorb technology developed elsewhere.
Griffith et al (2000) argues that “R&D stimulates growth directly through
innovation and also indirectly through technology transfers”.
However, R&D remains one of the weakest links in Nigeria’s
development process. There is very low spending by private firms on
R&D. Multinational enterprises are not willing to invest init, while
indigenous companies rarely engage init. Government-owned research
institutes such as the Federal Institute of Industrial Research, Oshodi
(FIIRO) and other research institutes have had a negligible impact because
of poor funding and the gap between research findings and the needs of the
corporate sector3. In addition, there is also a weak corporate linkage among
the firms as the level of sub-contracting is very low thereby limiting
capacity for the growth of indigenous technology. This is due to a number
of reasons including the weak capital goods sector, the inadequate technical
facilities to process raw materials of the right technical specifications and
quality, uncertainty of suppliers arising from irregular production and
supply schedules, and the relatively exorbitant prices of some local raw
materials compared with imported counterparts (Ayonrinde, Adenikinju
and Adenikinju, 1998).
51
Data on R&D in Nigeria is very scarce. The snippets of information
available, however, have shown very limited R&D activities. The number
of researchers on R&D (per million people) declined from 17.09 persons in
1985 to 15.15 persons in 1987. As Ayonrinde et al (2002) also shows, only
22 percent of the firms included in their survey have an R&D department.
Furthermore, most of the research undertaken in government institutes of
higher education is more basic than business R& D and thus takes more
time to affect productivity.
The low consideration for R&D in Nigeria is therefore one of the major
causes of the low productivity trap. Given that large firms are more
inclined to undertake R&D and because many of the large firms in Nigeria
are foreign firms that are often reluctant to conduct R&D outside their
home base, especially in the developing countries, the government must
play a more prominent role in stimulating R&D. There is a strong causality
between public R&D and private R&D, and therefore a need for joint
public-private collaboration to solve production problems. State
intervention to promote Science and Technology in general, including
R&D, is allowed under the laws of the WTO. For instance, the Chinese
government favours technology transfers and R&D functions when it
screens applications submitted by foreign companies to set up plants in the
country (Amsden, Tschang and Goto, 2001).
52
(a2) Technological Transfer
This is another means by which technology could be acquired.
Technological transfers are embodied in plant and equipment, intermediate
and final goods imports, inward FDI, such as multinational enterprises
embodied in expatriate personnel, plant and equipment, intermediate and
final goods, training provided to employees, intra-firm and inter-subsidiary
movement of staff, outward FDI (through reverse technology transfer), and
through other means such as turn-key projects, consultancy projects,
licensing and franchising (Narula, 2004). Sakurai et al (1996) note that one
of the means by which firms receive benefits from the R&D of other firms
is by purchasing technologically sophisticated inputs or capital goods for
their production process.
Indicators of technology transfer include the vintage of technology and FDI
flows. Technology adopted in most sectors of the Nigerian economy is
quite old and antiquated. The liberal trade regime in the 70s and 80s had
allowed for the importation of new machinery and equipments at a very
low tariff rate. Similarly, the over-valued exchange rate made technology
acquisition quite cheap. This was also a period when a number of
multinational enterprises flocked into the economy, though mainly to set up
assembly plants and produce import substitutes as well as take advantage
53
of the largest market in the sub-region. Capacity utilization was also at an
all-time high during the 70s.
However, the economic difficulties which started in the early 1980s
together with the economic reform programmes adopted since 1986, have
not contributed significantly to encouraging technology transfers. Several
surveys carried out in the manufacturing sector show that technology in the
sector is quite old and antiquated. Most of the firms use equipment that was
imported mainly before the onset of structural adjustment programmes
(SAP) According to the survey reported in Ayonrinde et al (1998) the mean
age of equipment used by manufacturing firms was 11 years. Many of the
firms also purchased second-hand equipments from Europe and other parts
of the world. According to Teitel et al (1994), the age of equipment
provides some indication of the modernity of the technology in use as well
as the expected productivity of a given manufacturing plant.
Foreign Direct Investment (FDI) is an important harbinger of technology.
However, Nigeria has not really been a favoured country in terms of non-
oil FDI inflows. Net FDI as a percentage of GDP rose from 1.63 percent in
1970 to 3.11 percent in 1971 but declined to 1.71 percent in 1985. By 1990
FDI was a mere 2.06 percent of GDP (see figure 2.1). However, when we
examine FDI as a stock, inward FDI stock as a percentage of GDP rose
from 3.7 percent in 1980 to 42.4 percent in 2000 and further to 49.0 percent
54
in 2002. The resurgence of FDI in recent years has gone to the oil sector,
which has very limited linkage with the economy and thus can only
contribute marginally to productivity growth in the economy in general or
in the manufacturing sector in particular. In 2000-2002 Nigeria ranked 98th
on the UNCTAD FDI potential index (UNCTAD, 2004).
(a3) Adoption of New Technologies
Even where technological assets are made available – either through
licensing or indirectly through spillovers from inward FDI, the domestic
sector may not be in a position to internalize these assets (Narula, 2004). A
country will be able to benefit from technology if it has a certain minimum
level of absorptive capacity. Dahlman and Nelson (1995) define national
absorptive capacity as the ability to learn and implement the technologies
and associated practices of already-developed countries. Narula (2004)
identifies four components of absorptive capacity. These are basic
infrastructures, which include roads, railways, telephones, electricity,
hospitals, etc; advanced infrastructure (universities, advanced-skilled
human capital, research institutes, banks and insurance firms); firms
(domestic firms with appropriate human and physical capital to internalize
technology firms), MNEs’ affiliations, and, finally, formal and informal
institutions such as intellectual property rights regimes, competition policy
55
which depicts government policies designed to promote “inter-linkage
between the different elements of assumptions capacity as well as to create
opportunities for economic actors to absorb and internalize spillovers”.
The technological assets of a country include ownership of plants,
equipment and the technical knowledge embodied in its engineers and
scientists. Firms cannot absorb outside knowledge unless they invest in
their own capacity to innovate. This in turn is a function of the firms’
innovative efforts which depend on their formal and informal R&D as well
as the training they provide to their employees and also the knowledge
infrastructure of the country. Smith (1997) defines this knowledge
infrastructure as being generic, multi-user and indivisible, and “consisting
of public research institutes, universities, organizations for standards,
intellectual property protection, etc, that is the infrastructure that enables
and promotes science and technology development. Guellec and van
Pottelsberghe de la Potterie (2000) argue that if “firms from a country want
to take full advantage of international spillovers, they have to spend on
R&D: the free rider approach clearly does not work”.
Boresnszein et al (1998) show that at country level a minimum threshold of
absorptive capacity is necessary for FDI to contribute to higher
productivity growth. Narula and Marin (2003) also show that only firms
with high absorptive capacity are likely to benefit from FDI spillovers. Xu
56
(2000) posits that a country needs to reach a minimum human capital
threshold in order to benefit from technology transfers. The absence of
sufficient levels of absorptive capacity tends to lead to the inefficient use of
technology flows.
Using the infrastructure indicators data in Tables 2.6 - 2.8 it is obvious that
the absorptive capacity of Nigeria is not only very low, but is also in a very
weak position relative to countries at the technology frontier. Looking at
the basic infrastructure, Nigeria’s electricity consumption is 0.8 percent of
the average for frontier-sharing countries. Health expenditure per capita,
which was a mere US$7, was only 0.3 percent of the average of countries
at the frontier. Similarly, Nigeria had only 9.3 percent of rail lines, 30.0
percent of paved roads, 0.7 percent of telephone mainlines per 1000 people,
83.9 percent of primary school enrolment and 26.1 percent of secondary
school enrolment of the average of countries at the world technology
frontier. In addition, with regard to advanced technology, Table 2.8 shows
that tertiary school enrolment in Nigeria was only 6.9 percent of what
obtains on the average for frontier-sharing countries. Other indicators of
absorptive capacity also show that the country was not quite in a position to
take advantage of technological advancement in other parts of the world.
Internet users (per 1000 people) rose from 0.19 in 1997 to 0.703 in 2000, a
figure still quite low by
57
(aii) The Results of Accumulation
We found that the quality of human capital in Nigeria is not only low but has
deteriorated over the years. This was worsened by the low public expenditure on
education and the brain drain phenomenon which surged in the late 80s through the
90s. The low availability and poor quality of primary inputs, labour and capital
also have an impact on the country’s productivity performance.. The fragmentation
of internal markets also affects the efficiency of the labour market. Low private
investment prevents firms from being able to replace ageing capital stock with new
capital stock that embodies new and generally more efficient technology. Domestic
producers identified the poor quality, unreliability and high cost of infrastructures
as a major hindrance to their competitiveness. We found that domestic firms
depend primarily on bank finance for working capital and investment. However,
the inefficiency of the financial sector leaves them with high capital costs. In fact,
the micro and small firms are almost completely left out of the formal credit
market.
(iii) The Deeper Level
By all indicators, Nigeria can be classified as an open economy. However, while
the country is open on the trade side, it cannot be said to be open on the financial
side. We found a weak transmission of trade openness indicators to total factor
productivity. Factors responsible for this finding include the impact of depreciation
on the naira value of imported inputs as well as the uncompetitiveness of domestic
58
firms. The weak institutional environment also played a negative role on the
business environment. The Index of Economic Freedom, published by the Heritage
Foundation, put Nigeria among countries classified as “mostly unfree”.
(iv) Factors that also Matter
Business investment and operations are best conducted in an environment of
stability with a minimum level of uncertainty. The Nigerian macroeconomic
environment is highly volatile and characterized by uncertainties and high
transaction costs. Policy reversals and policy changes are frequent. The seemingly
hostile environment altered the preferences of viii Nigeria economic agents for
short-term investments rather than longer time more risky investments. We also
found the Nigerian corporate sector, including the financial sector, to be highly
concentrated.
(v) Other Factors Affecting Productivity
Another factor identified in the report is the low competitiveness of the economy.
The various reform policies implemented in the country have focused primarily on
improving the price competitiveness. However, for the Nigerian economy to be
competitive, price competitiveness is just one of the important considerations.
Non-price competitiveness factors like timeliness, quality, marketing and
distribution skills, reliability, after-sales services, technological innovation and the
institutional structural environment are equally important. We also identified high
59
macroeconomic volatilities in the economy as also playing a role in productivity
trends. It is widely agreed that research and development (R&D) is an important
driver of innovation and productivity growth, and one of the policy options that has
received a lot of attention for R&D expenditure. Thus in year 2000, the UK
government introduced a tax credit aimed at small and medium enterprise (SMEs),
including a provision for a eligible companies to deduct 150% of qualifying R&D
from their taxable profit s and additional provision for companies not in profit if
the social returns to R&D exceed the private returns (as many authors argue).
Then, there may be a case for some form of policy interventions to increase R&D
and hence productivity growth (Grifftith and Van Reenen 2002)
The idea that innovation is an important source of productivity growth and
that monopoly profit provide the incentives for private agents to invest in the
discovery of new technologies has a long intellectual lineage dating back to the
writing of Joseph Schumpeter in the 1940s. These ideas were inbuilt in the
endogenous growth model literature, where innovation is taking as the introduction
of new product varieties or successively higher qualities of an existing product.
Nathan Rosenberg argues that three of the great technical developments in
European history –printing, gunpowder and the compass –are all instances of
successful technological transfer (Rosenberg 1982). He goes on to say that it may
be seriously argued that, historically, European receptivity to new technologies,
60
and capacity to assimilate them, whatever their origin has been, as important as
innovativeness itself.
In quantifying the important of R&D and productivity on growth, Redding and
Reenen (2004) implemented a two face R&D framework using data on 14 sectors
in 12 OECD countries since 1970. They used the framework to measure trade
potential for technology transfer as a way of quantifying the contribution of R&D
to innovation and technology transfer to an economy behind the technological
frontier and an economy the already posses the state of art technology. The study
concludes that R&D drives productivity growth through both innovation and by
facilitating the transfer of technology from the world technological frontier to
nations lagging behind in technology.
William Easterly and Ross Levine (1997) document five stylize facts about
growth and argue that they imply a bigger role for total factor productivity (TPF)
and technology than for physical and human capital, Jasso, Rosenzweig, and Smith
(2000) compare earnings of US immigrants for local purchasing power, the
average immigrant earns 2.2 times as much as in the United States as in their
country of origin. Easterly and Levine attribute about 25 percent of the gap to
physical capital per worker that leaves about 50 percent accounted for by TFP.
TPF differences could reflect disembodied technology, human capital externalities,
access to specialized or high-quality capital or intermediate goods, the degree of
61
competition, or measurement error. As important as TFP is for country differences,
it seems less important for the overall upward trend in GDP per capital. Averaging
across 98 countries, Klenow and Rodranez-clare (1997) attributed 70 percent to
physical and human capital.
Factors can diverge or converge, and so can TFP. Episode of divergence and
convergence demand critical studies to determine the role of physical capital, TFP
.for the five Asian miracle economies young (1995, 2000) point to factor
accumulation.
2.3 SUMMARY OF LITERATURE
There are variables that can affect productivity, in addition to R&D. Perhaps
human capital, human capital to affect productivity growth through either
innovation or technology transfer. We found that countries which have invested
more in schooling tend to absorb new technology more quickly than countries
endowed with less education. This is consistent with findings of other more
aggregate studies.
Trade could stimulate faster innovation or learning through a number of routes.
Imports from the technological leader will provide new knowledge that is present
in the most technologically advanced new machines. Greater openness through
lower tariffs could increase product market competition and force firms to adopt
best practice in order to survive. Alternatively, trade with the less developed
nations may push developed countries into defensive innovation.
62
We found some evidence that trade matters in addition to technology. Countries
that were more open (especially to the technological leader) caught up faster. There
appeared to be little role for trade in stimulating innovations however, trade
seemed a way to adopt best practice rather than stimulate firms to come up with
new ideas under the sun. For genuinely new products to be developed, higher R&D
was the preferred method.
63
CHAPTER THREE
3.0 Introduction
To ensure proper collection and analyses of data in this study, the researcher
resolved to collect secondary data. This aim at making sure that all the
relevant materials or information required for the study were acquired and
utilized. Therefore, this chapter is designed to articulate various research
methodologies, and the statistical techniques used for the analyses of the
data. This chapter basically explains the basic research methods employed to
undertake this study using appropriate statistical techniques of OLS and
proper econometrics test for time series data..
3.1 Research Methodology.
The nature and scope of a study determine the type of analysis that should be
use. Broadly speaking, time series econometric approach will be use in this study.
We apply cointergration analysis, because it does not only search for a linear
combination of non stationary time series that is itself stationary, but also makes
an attempt (using an error correction term) to investigate the dynamic behavior of
the process of adjustment from short run disequilibria to long run equilibrium.
64
3.2 Model Specification
The starting point to empirically study growth determinants in a given country
is the well-known growth model.
Y = f (A, L, K) ………………………..(1)
Where Y is real GDP; A is the Total Factor Productivity, and L and K stand for
size of population (pi) and domestic investment (K) respectively
It is important to note that A captures TFP of growth in output not accounted
for by increases in factor inputs (Pi and K). Following the new endogenous
growth theory, A in endogenously determined by economic factors. Giving that
available data on FD, do not fully capture an addition to domestic investment by
foreign firms (lipsey 2001; kahpaiboon, 2004); it is not possible to separate local
and foreign component of domestic investment. However, given the logic that the
method of FDI estimates has been consistent over the period, impact of FDI on
economic growth may operate through TFP (A). Based on Bhagwati’s
hypothesis, it is equally reasonable to assume that the impact of FDI on A depend
on the trade policy regime. In turn, a proxy variable for the openness of trade
policy regime (TR) is included in the model.
Hence, one can write
A = g (FDI, FDI*TR). ……………………………(2)
Substituting (2) in (1), we obtain;
Yt = F (FDIt, FDIt*TRt, PIt, Kt) ………………………(3)
65
To account for the isolated impact of trade openness on economic growth we
introduced TR as an explanatory variable, to yield
Yt = G ( FDIt, TRt, FDIt*TRt, PIt, Kt ) …………………(4)
The stock of Human Capita l in a host country is critical in absorbing foreign
knowledge and an important determinant of whether potential spillovers will be
realized .so, to account for the impact of technology transfer via openness on
growth; we use the interactive effect of FDI and Human capital (TTRAN) as a
proxy for technology transfer and include it in the model to obtain
Yt = G (FDIt, TRt, FDIt*TRt, PI, Kt, TTRANt) ……………. (5)
Where TTRAN =FDIt*HCt. and HC is the stock of Human capital
Also to take account of the characteristics of the host country economy (Nigeria),
we include industrial policy variables, MG, the percentage of manufacturing
output to total output.
Yt = G (FDIt, TRt, FDIt*TRt, PIt, Kt, TTRANt, MG, ) …… (6)
Given that FDI, technology spillovers, effect and trade efficiency in
promoting growth depends on an efficient investment environment in the host
country, there is need to include the interactive effect of FDI and industrial
policies MG. MGFDI
Yt = G ( FDIt, TRt, FDIt*TRt, PIt, Kt, TTRANt, MGt, MGFDIt) ,,,,,,,,, (7)
66
Assuming a linear relationship between our regressand and regresses, our
econometric equation is as specified below.
Yt =ao+ a1.fdit + a2.trt + a3.fdit*trt+ a4ttrant + a5.gcft + b1.log pit + b2.logmgt +
b3.logmgfdi+ b4.l + Ut………………………………………………… (8)
Where, TRAN, as a proxy for technology transfer is FDI interaction with stock
of human capital.
• Y is measured as GDP in constant prices that are deflated by GDP deflator.
• FDI is the value in naira of gross foreign domestic investment flows;
• TR is measured as the ratio to GDP of the sum of export and import
values; or as the ratio of export to gross output in the manufacturing sector.
• FDI trade interaction is measured as the product of FDI and TR (that is
FDI *TR);
• HC, is the stock of human capital;
• K is the domestic capital investment, K, is approximated through the ratio (
gcf) of GDP of gross capital formation. (This proxy for capital stock has
been used in many previous studies. see for instance, Barro 1999;
Balasubramanyam et al, 1996; kahopaiboon, 2004);
• PI, is the size of population
• MG is the percentage of manufacturing output to total output.
• MGFDI is the interactive impact of FDI and host country industrial
policies (MG*FDI )
67
To empirically analyze the impact of technology transfer, FDI and trade
openness on growth .we focus on equation (7), estimated over the period 1975-
2006 for which we have data.
3.3. (1). Test of Stationary
The unit root test shall be use to test for the stationarity of the time series data.
Furthermore, the taut statistics will also be employed
3.3.(2) .Testing For Co integration
Several tests have been proposed in related literature. This study shall employ DF,
ADF and Durbin –Watson statistics.
3.4 Technique for evaluation.
The a priori expectation of Y, FDI, TR, FDI*TR,PI, TTRAN, and gcf is all-
positive while it could be negative for MG and MGFDI and always negative with
IR.
3.5 Method of Estimation of Parameter.
Ordinary Least Square (OLS) method will be applied in estimating the model.
Estimate and test rely on modern time series analysis (stationarity test cointergration
test, error-correction model, short and long run causality test etc.) using econometric
–view package.
3.6 Source of data.
68
Data for this study will be obtain from the World Development Indicators (WDI)
database and the PENN World Table. The world development database, published
by the World Bank and international Monetary Fund, includes variables such as
GDP, per capital income. GDP growth rate, FDI, trade in goods and services,
domestic investment, human capital, market openness, inflation rate, tax income and
government consumption.
69
CHAPTER FOUR
PRESENTATION OF EMPIRICAL RESULTS AND ANALYSIS
4.1 UNIT ROOT TESTS
Prior to the estimation of equation (7), the characteristics of the data have to be
examined. The main reason is to determine whether the data is stationary i.e.
whether it has unit roots and also the order of integration. Augmented Dickey –
Fuller (ADF) is used. The result of the stationarity test with intercept term is shown
in table X unit Root Test Result using ADF procedure.
Table 4.1. Unit Root Test Results using ADF Procedure
Variable ADF At Level ADF At 1 1st Difference Order of integration Y -0.1065 -4.3035* 1 (1)
FDI -2.2306 -5.6880* 1 (1) K (gcf) -1.3043 -4.6608* 1 (1) TR -0.10372 -3.9453** 1 (1)
TR x FDI -3.1914** -3.9265** 1 (1) HC -2.0427* -3.7975** 1 (1) HC x FDI -2.5908* -2.4241* 1 (1)
MG -2.6042* -3.8387** 1 (1) MG x FDI -0.0227* -0.0018 1 (1) Chemical -2.8662 -3.0867 1 (1)
* Significant at 1% ** significant at 5% *** significant at 10%
Source: Author’s computation
Note Critical value First Difference
1%=3.6422 1% = -3.6353
5%= -2.9499 5% = -2.9499
10% = -2.6133 10% = -2.6148
70
The results indicate that TR x FDI and HC are stationary at level while Y, FDI, K,
TR x FDI, HC x FDI, Mg, MG x FDI and chemical FDI need to be difference once
to attain stationarity.
4.2 Test for Co-integration
Since the main interest is in the long-run relationship postulate by the Bhagnatis
hypothesis, the long-term relationship among the variable were examined using
Johansen (1991) co-integration framework. The result of the co-integration test are
reported in table X. The co-integration tests results indicates the existence of one
co-integration equation at 5% significance level.
Table X: Johansen co-integration tests Results
Eigen value Likelihood Ratio 5 percent critical value Co-integration
0.568607 69.796119 68.52 No 0.463783 42.05191 47.21 Yes 0.293873 21.48576 29.68 Yes
0.244343 10.00308 15.41 Yes 0.022695 0.757560 3.76 Yes Note: Series: Y, FDI, K, L, TP*FDI *(**) denotes rejection of the hypothesis at 5% (1%) significance level L.R. test indicates 1 co integrating equation(s) at 5% significance level
The existence of at least one co-integrating relationship between a set of variables
implies that an error-correction model (ECM) exist. The significance of the ECM
is an indication of a long-run equilibrium relationship between the dependent and
factors affecting it.
71
Regression Results
Dependent variables D (Y, I)
Variables Coefficient Std. Error t. statistics Prob D (FDI,) 1) -0.49254 0.009908 -4.971155* 0.0001 D (FDI (-1), 1) -0.020624 0.010214 -2.019145** 0.0558
D (FDI (-2), 1) -0.002204 0.0117880 -0.185548 0.8545 D (Cfg, 1) -0.001202 0.007971 0.150838 0.8815 D (Cfg, (-1), 1) -0.007113 0.006869 -1.035539 0.3117
D (Cfg, (-2), 1) 0.001424 0.007022 0.208810 0.8411 HC 0.328661 0.109384 3.004647* 0.0065 TR 3.6616 3.271100 1.119122** 0.2725
TRFDI 0.113157 0.024643 4.591934** 0.0001 DHCFDI -8.7606011 1.080313 0.812115* 0.4261 MG 0.037599 0.026053 1.443 0.1637
MGFDI -0.0087782 0.022184 0.022711* 0.0017 ECM (-1) -0.272062 0.088672 -3.068203* 0.0056 C -3.64950 1.201730 -3.034749* 0.0061
Adjusted R – squared 0.569423 Schwarz Criterion -0.734507 Durbin – Watson Stat. 1.862833 F – statistics 5.555156* x, xx, means 1%, 5% level of significance. The Regression results are presented in Table 4. Broadly, the results obtained from
the equation estimated show that the model is well behaved. All the coefficients
except the coefficient attached to K (Cfg) and Mg are significant at the
conventional level. In terms of the good fit of the model the value of the coefficient
of determination (adjusted R2) is stationary, implying that changes in out put
growth are well explained by the explanatory variable included in the model. Also
the results indicate no serial auto correlation problems as shown in the value of
Durbin Watson Statistics.
72
The result revealed that labour force does not only have position effect on
economic growth in Nigeria but such impact is strong and statistically significant.
This finding underscore the importance of Human Capital in the Nigerian
economy. However, the same cannot be said of the variable, capital stock. The
coefficient attached to capital stock is not statistically significant. This may be
attributed, in part to the fact that the rate of capital formation has not improved
significantly since the attainment of political independence in 1960.
Generally, Nigerian economy could be regarded as “Capital – poor”. Some of the
reason responsible for the low rate of capital formation include low income, lack of
capital equipment, economic and technological backwardness among others. The
error correction variable (ECM (-1) is statistically significant at 1 percent level. It
is observed that about 3.0682 of the short-term disequilibrium in the real gross
domestic product is corrected every year; i.e. 3.0682 of the discrepancy value of
gross domestic product is corrected every year.
On our variable of interest, it should be noted that the coefficient attached to the
estimate TP * FDI is significantly different from zero with the theoretically
expected (positive) sign. The fact that the coefficient attached from zero provides
strong evidence to support the Bhagwati hypothesis. This is an indication that the
growth impact of FDI on the Nigerian economy appears to have significantly
enhanced as the country’s trade policy regime shifted the import substructure
emphasis and move towards greater export promotion. The Regression result
73
reveals that FDI and Trade have a positive impact on economic growth after
controlling for human capital (HC), domestic and initial income (Mg). the
estimated coefficient of FDI is positive and statistically significant while the
estimated coefficient for trade is not statistically significant. Since the coefficient
of FDI is larger than the coefficient of trade, it indicates the differential impact of
FDI in the host country’s economic growth. The coefficient for human capital is
positive, implying that human capital contributes positively to economic growth.
The coefficients for domestic investments and initial income are not statistically
significant. Including interactions between FDI and trade, FDI and human capital,
FDI and Mg not only improves the overall performance of the estimation but also
allow us to capture their interaction effects on economic growth and total factor
productivity (TFD) see table 4. This positive relationship implies that FDI
stimulates or Crowdson domestic investment. This finding is consistent with
Borensztein, Gregorio, and Lee. Even though Trade Openness by itself, is not
statistically, significant, trade interacts positively with FDI on domestic
investment. The correlation between FDI and growth rate could arise from an
endogenous determination of FDI. That is, FDI itself, may be influenced by
innovations in the stochastre process governing growth rates (Borensztein,
Gregorio, and Lee). For example, market reforms in host countries could increase
both GDP growth rates and the inflow of FDI simultaneously. In this case, the
74
presence of correlation between FDI and the country-specific error term would
bras the estimated coefficients.
75
CHAPTER FIVE
5.0 SUMMARY OF FINDINGS, CONCLUSION AND POLICY
RECOMMENDATIONS
5.1 SUMMARY OF FINDINGS
The study has been preoccupied with the effect of trade liberalization on the total
factor productivity performance of the Nigerian manufacturing sector. This was
accomplished in two stages. First, the TFP indicator was estimated at the firm level
using the fixed effect model. Second, the TFP indicators so generated were
regressed against trade liberalization and market structure variables.
Two important findings from this research of concern to policy makers deserve
amplification. The first is the relatively low productivity in the Nigerian
manufacturing sector. This could be attributed to a plethora of factors, including a
weak technological base and low level of capacity utilization. The second major
finding from this study is that there are significant pay-offs from the policy of trade
liberalization. The current policy of trade liberalization, which emphasizes lower
tariffs and increasing openness of the economy, was found to be growth enhancing.
Quite interesting is the role of foreign direct investment in productivity growth at
both firm and sectoral levels: there is a spillover effect generated by foreigners in
the economy. Thus, the implementation of policies that encourage or restrict
foreign ownership can be expected to have direct effects on industry performance,
quite apart from the indirect effects that result from modification of the behaviour
76
of locally owned firms or changes in the size and distribution of firms. The effort
of the government to encourage foreign participation in the economy is therefore a
step in the right direction. In 1995, the government abolished the Nigerian
Enterprises Promotion Decree of 1989, which restricted foreign participation in
certain areas of the economy, and replaced it with the Nigerian Investment
Promotion Commission Decree 16 of 1995. An important finding of the study is
that in general the sectors that are less dependent on the external sector for raw
materials recorded higher total factor productivity. These sectors generally have
higher capacity utilization, suggesting a positive relationship between capacity
utilization and productivity performance. The sectors with low capacity utilization,
such as fabricated metals, machinery and equipment, recorded lower productivity
performance. The study also shows that sectors with high export performance also
perform well in total factor productivity. This substantiates the notion that firms
selling in the export market have to be very efficient in order to compete
internationally. Thus the efforts of the government to promote manufactured
exports in Nigeria seem well placed. However, the government needs to exercise
some caution with the pace of import liberalization. One of the findings of the
study is that import policy can have a negative impact on productivity. While this
may be a short-run phenomenon, it could also imply that the pace of import
liberalization proceeded too fast for domestic firms to cope with it.
77
5.2 CONCLUSION,
In conclusion, the lowering of average tariff rates, opening of the economy to
foreign investment and promotion of manufactured exports impinges positively on
total factor productivity in the Nigerian manufacturing sector. Active policy
intervention is needed to relieve the multifarious constraints against meaningful
entrepreneurial endeavours. The most compelling among these is the deplorable
state of basic infrastructure. Alleviating infrastructure bottlenecks is absolutely
critical to the performance of the Nigerian manufacturing sector. The findings
strongly support the Bhagwatis hypothesis that an export promotion trade regime is
more conducive compare to an import substitution regime in generating favourable
effect of FDI for the host countries. The study strongly supports trade liberalization
and investment regimes. The challenge facing Nigeria government however, is to
exercise caution in the design of policy measures to enhance liberal regime and
trade.
5.3 RECOMMENDATIONS
� The study concludes by giving the following recommendations.
First, the right enabling employment or an appropriate investment profile
must be created human capital need to be developed through education
policies and government funding of skills acquisition centers for training
manpower. FDI alone will not transform to growth if there are human capital
78
to complement it. This would help to improve the investment potential of
the country.
� Secondly, there is pressing need for Nigeria to design policy measures that
promote adequate provision of good infrastructure, transparent laws, reliable
legal systems, more road should be constructed to link the hinter land with
their natural resources, more health care should be built and clean water be
provided for the people.
� Third policy measures which must encourage and attract long term FDI must
be put in place. This must be done in order to supplement the low domestic
savings and facilitate the transfer of technology and know-how.
� Lastly, in the manner of Obadan (2003) one is apt to conclude that although
trend toward more liberalized economy has opened a wide potential for
greater growth and presents unparallel opportunities for Developing
countries, including Nigeria, to raise their living standards, the support of the
industrialized countries is required in order to keep the pace of Nigeria’s
(Africans) integration into the world economy. The industrial countries need
to remove tariffs and non-tariffs barriers on imports of goods in which these
countries have greatest comparative advantages, for example, textiles and
other manufactured products, agricultural products leather products etc.
For Nigeria to benefit from growth-enhancing effects of foreign direct investment,
it should continue to liberalize its trade transactions. For Nigeria to benefit from
79
technology transfer and spillover effects, FDI should be encouraged but it should
be accompanied with trade openness in an environment of trade restrictions, FDI
inflows cannot be a catalyst for long run growth. The positive interactive impact of
FDI and trade openness on economic growth would probably hold in other
countries of ECOWAS region.
80
REFERENCES
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