Private Investment Behaviour and Trade Policy Practice in Nigeria

Dipo T. Busari Phillip C. Omoke

Working Papers from African Economic Research Consortium

Abstract: This study presents an empirical assessment of the impact of trade policy practice and its credibility on private investment using firm level data of 67 Nigerian firms over the period 1980a-2003. The study draws a distinction between sample variability and uncertainty and constructs measures of the volatility of innovations to key trade and macroeconomic variables. It then examines their association with private corporate investment by adding these constructed measures to an empirical investment equation that is estimated using panel data econometric method. The results underscore the robustness of the links among private investment, trade policy and macroeconomic uncertainty. Many of the trade and volatility measures considered in the paper show strong negative association with private investment. Furthermore, the study observed that trade policy practice in Nigeria has deterred investment by making the cost of importing high, which particularly affects firms with high import intensity. Three main channels are identified through which trade policy practice hinders corporate investment in Nigeria. First is through restrictions on international capital movement. The second is through the impact of rapid and variable devaluation of the exchange rate, which has led to a more attractive speculative market and lowed the competitiveness of domestic firms, and finally through import restrictions in terms of tariff and cost of importing. In addition, the negative impact of real exchange rate uncertainty on investment is significantly larger in firms that are import intensive. The study argues, among other things, that there is the need to liberalize international capital movement in Nigeria and drastically reduce the cost of importing capital goods

Date: 2008-04-01
Note: African Economic Research Consortium
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