CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the study

As African countries were granted political independence in the 1960’s, the craving for

economic independence through rapid industrialization has been the economic policies of

majority of them. The respective governments saw industrial development as a means for the

continent to gain self-reliance and reduce their dependence on industrialized economies (Aliya

and Odoh 2016). Industrialization has assumed super importance for accelerating economic

development in both the developed and the developing nations. It reduces unemployment and

poverty and is considered a pathway to prosperity. Industrialization is about the introduction and

expansion of industries in a particular place, region or country (Obioma and Ozughalu 2005).

Industrialization has been on the agenda of successive governments in Nigeria since

independence in 1960. However, the country has gradually moved from an agriculture based

economy to a crude oil dependent one. The discovery of oil in commercial quantity and its

subsequent exploration in the late 60’s and early 70’s led to a shift in focus from agriculture to

oil which then became the main export product and foreign exchange earner for the country. The

discovery of oil led to difficulties in the industrial development of the country. These difficulties

were attributed to a weak institutions and raw material base, inadequate technical manpower,

poor policy implementation, poor entrepreneurship, political instability, corruption and poor

technical know -how (Aliya and Odoh 2016).

It is indicative that Nigeria adopted import substitution industries (ISI) as far back as 1960 and

this remains its policy thrust until 1985. Following the introduction of Structural Adjustment

Programme (SAP) in 1986 there was a changed in policy thrust from earlier government led

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industrialization strategy to private led industrialization approach with government providing a

level playing ground for the private investors. Over these periods, the country has been able to

achieved a commendable improvement in the service sector, contributing about 36.2% of the

total GDP, while the rate of industrialization remain unsustainable going by the contribution of

core industrial sub-sector (Manufacturing sub-sector) to GDP. Although, the Sector share of

GDP rose from 3.2% in 1960 to 8.4% in 1967, an indication that the sub-sector is responding to

policy thrust of government. Disappointedly, the performance could not be sustained as its fell to

6.2% in 1998, 3.79% in 2005. In a whole, over 50years of policies implementation aimed at

achieving a level of industrial development commensurate to that of its pairs (the Asian Tigers),

the sector could only account for 9.95% of the country’s total GDP as at 2014 (Charles et. Al.,

2010; Umo, 2012: World Bank, 2015). The benefits of industrialization in employment

generation, poverty reduction, improved living standard, improved economic growth and

development, balance of payment stability, self-reliance, stimulation of other sectors of the

economy, and development of skilled manpower have been well established in the literature

(Audi & Mohammed, 2014; Nyor & Chinge, 2014; Mba, 2015).

Several empirical evidences have supported existence of the link between efficient legal system

(institutions) and industrialization to firm productivity and on investment (Weder, 1998,

Guadagno, Linhui, 2014) an x-ray of the country institutional indicators revealed that, although

the country has enjoyed a relatively stable political system over the last 18years, the quality of its

institutions specifically the rule of law and effectiveness of its judiciary has been poor compare

to its pairs. The argument is, industrialization particularly in emerging economy, require huge

investment that can ensure faster accumulation of qualitative factor of production and adoption

of market oriented policies such as trade liberalization and privatization. As a result, many

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economics activities relating to investment in productive sector hitherto carried out within an

economy or under public sector coordination (as in the case of Nigeria) have to be transferred to

the market, calling for increasing need of a well-functioning legal and judicial system. This is

because presence of trust and cooperation among network of industrial investor will be

encouraged by well-functioning legal systems that protect and enforce rights and contract.

In this vein, Nigeria judicial system represents a good case at hand, depicting inefficient

judiciary characterized with delay in court judgments as evidence by Usikaro v. Also, the

relationship between effectiveness of judiciary (institutions) on industrialization may be

asymmetric in nature rather than symmetry, making the relationship to be non-linear. For

instance, an improvement in the effectiveness of legal system is expected to improve

effectiveness of the judiciary and build investment confidence and trust in a system resulting into

a positive impact on industrialization objective. Again, a decline in the effectiveness of the legal

system will also be positively related to level of industrialization by reducing the quality of

judicial system and investors’ confidence or trust. Therefore, the negative impact of poorly legal

and judicial system (weak institutions) put together, on investment of human and physical capital

will be negatively significant on a real sector like industrial sector that required specialized type

of investment. Most importantly, the more specialized the nature of the investment, the more

damaging the impact of an inefficient legal and judicial system (weak institutions) on the level of

industrialization (Williamson, 1985; Pinheiro, 1996).

1.2 Statement of the problems.

Among the many challenges facing the global community is how to achieve sustainable

development. Economic growth is fundamental for sustainable development. Most countries

regard industrialization as a positive development capable of generating rapid wealth,

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revitalizing run-down areas, and conferring influence in world affairs. Despite having plentiful

natural largest domestic market in Africa, and an abundant and cheap labour force, Nigeria’s

industrial performance has been highly disappointing in the last decade. Between 1990 and value

added and manufactured exports have declined, and the dangerously dependent on petroleum as

the only means to obtain foreign exchange.

Industrialization with its gains which ranges from increased employment opportunities,

abundance of goods and services more favorable balance of trade , better income etc. to improve

standard of living is not fully utilized in the Nigerian economy and as such, economic growth

and development suffers a huge set back. Although the government has developed different

policies and programs in the past that are aimed at boosting industries in the country, most of

these policies though magnificent on paper have failed woefully in the area of implementation

while some of them did not see the light of the day, others were abandoned halfway and funds

meant for the programs were misappropriated. Furthermore, industrialization is an important

factor used in converting all resources to mankind’s use and benefit. Economists observed that

the development and utilization of industrial sector is important in a nation’s economic growth.

However, as a result, Nigeria is losing its competitive manufacturing edge and is becoming

increasingly marginalized in the international industrial scene. Nigeria faces severe flaws in its

production and export structures, which have been the outcome of inappropriate policies, macro-

economic instabilities, a distorting business environment, weak industrial capabilities and lack

of transparent governance (Noko, 2016), which all generated as a result of weak institutions.

Against this background, the study intends to evaluate the empirical relationship and causal

patterns between institutions and industrialization in Nigeria.

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1.3 Research questions.

The following are the possible questions of this study;

1. What is the relationship between institutions and industrialization in Nigeria?

2. Is there a causal relationship between institutions and industrialization?

1.4 Research objectives.

The main objective of the study is to investigate the impact of institutions on industrialization in

Nigeria. Specific objectives are:

 To evaluate the long run and short run relationship between the institutions and

industrialization in Nigeria.

 To determine the causality between the institutions and industrialization

1.5 Research hypothesis

H0: there is no significant impact of institutions on industrialization in Nigeria.

H1: there is significant impact of institutions on industrialization in Nigeria.

1.6 Justification of the study

This study is potentially useful as an export evaluation that is relevant for policy purpose of

macroeconomic policy. The study will emphasize on the expansion of the relation between the

variables selected in the normal period. It is also help policy makers to understand the

implication of the macroeconomic decision in the changes of the unstable to stable equilibrium.

This research will extend the time frame of the empirical investigation from 1995 to 2017 and

the trend fluctuation of the variables and their impact on the Nigerian economy. This is because

most of the related literature so far stopped mostly at 2011 and 2014 so it is important to extend

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the time lag. The review literature mostly used corruption perception index while, the study also

use corruption rank as the proxy of institutions due to different time frame and sources data.

1.7 Significant of the study

This study aims at investigating the impact of institution on industrialization in Nigeria economic

growth at large and hence, its impact cannot be over-emphasized. The study will be of great

importance to policy makers, government and its agencies, private individuals and firms at large.

The study will be also of great importance to student s of economics and other researchers who

may have interest in industrial sector or industrialization and its impact on Nigeria economy.

Finally, the findings of this study would add to the stock of econometric literature of Nigeria.

1.8 Scope and limitations

The geographical scope of this work will be centered on the Nigerian economy with particular

emphasis on the industrialization to the period from 1995-2017, which is the period of twenty

two years. This study focus on how institutional sector affect the industrialization in Nigerian

economy. The industrialization as used in this context refers to the sectors of the economy that

involves deliberate and sustained application and combination of suitable technology,

management techniques and other resources to move the economy from the traditional low level

of production to a more automated and efficient system of mass production of goods and

services. The researcher encountered a number of constraints in the course of this work to

include; data sourcing or data inconsistence due to poor nature of information management in

Nigeria. Other constraints are; time factor, financial constraints and host of other constraints that

prevent the researcher to present a better work than this.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Definition of Concepts

2.1.1 Institution

Institutions is any structures or mechanisms of social order and cooperation governing the

behavior of a set of individuals within a given community — may it be human or a specific

animal one. Institutions are identified with a social purpose, transcending individuals and

intentions by mediating the rules that govern cooperative living behavior. The term "institutions"

is commonly applied to customs and behavior patterns important to a society, as well as to

particular formal organizations of government and public services. As structures and

mechanisms of social order among certain species, institutions are one of the principal objects of

study in the social sciences, such as political science, anthropology, economics, and sociology.

Institutions are also a central concern for law, the formal mechanisms for political rule-making

and enforcement. Douglass north’s (1920) definition ‘Institutions are the rules of the game in a

society, or, more formally, are the humanly devised constraints that shape human interaction.’

Therefore, the term “institutions” varies from more restricted to more elaborated meanings along

several dimensions. One dimension is the degree of formalization of institutions. The term

“institutions” refers to the action of introducing an institution, to the identity of the actor

(Instituteur) that introduced the institutions, and to the thing which has been introduced.

Institutions can be introduced by religious and secular authorities, as well as groups and

communities, as in canonical institutions, institutions of inheritance, and social institutions. It is

common to speak of “habits,” “customs,” or “conventions.” A “habit” is any repeated action

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whose repetitive nature comes to be recognized by a self-conscious actor, and thus, internally

represented. A “custom” is a habit that is shared by members of a collectivity, and hence social.

Thus, institutions include the totality of social forms and social structures and may be established

by law or custom,(Ellin, 2010).

2.1.2 Forms of Institutions

STRONG INSTITUTIONS: In contrast to achieve state, a strong state is a nation whose

government or institutions are able, or willing, to provide a significant set of essential public

services, including just and legitimate government, physical security, food and health, and

minimal economic development.

WEAK INSTITUTIONS: In contrast to a failed state, a weak state is a nation whose government

or institutions are unable, or unwilling, to provide a significant set of essential public services,

including just and legitimate government, physical security, food and health, and minimal

economic development.(Wikipedia 2016).

2.1.3 Types of Institutions

Consequently, three types of institutions are especially important:

Social institutions, such as kinship, marriage, family and inheritance; constitutions, which are

the written or unwritten law governing the exercise of public power and the procedures for

making laws themselves, and regimes, which refers to the process of giving something the

character of an institutions. Social institutions govern relationships amongst individuals within

societies and hence establish a social order. Constitutions regulate the relationships amongst

citizens, political representatives and the state and hence create a political order. Regimes are

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often found in the international arena where, being beyond the reach of the sovereignty of

nation states, international agreements are used to create international regimes or international

orders, and international organizations with the legitimacy and normative weight of an

institutions are active in the implementation of the agreed upon normative order or international

norms.

Financial institutions and institutional investors hold money in trust for large numbers of

individuals and should (again, in theory) be held accountable to their investors. Individuals that

have internalized such instruction in a reliable way and staff such institutions are known as

“professionals.” In each of these trust relationships, there is a potential for betrayal of trust,

which has been the focus of much social scientific analysis of institutions and professions.

Financial institutions, institutional investors and the governmental framework for monetary

transactions form markets.

Political institutions and constitutions form politics and public policies. Social institutions

socialize individuals; psychological stages, pedagogy and social relations form the psyche. The

study of these institutional effects is known as “institutionalism.” As institutions are viewed as

arbitrary, institutionalism is by nature a relativistic approach: institutions that may have been

introduced as arbitrary results of contingent events may have unintended consequences for

human nature, societies, politics and markets. Consequently, “institutionalists” view

developments in these spheres as artifacts of institutions and, hence, neither natural nor

necessarily desirable (Ellin, 2005).

2.1.2 Industrialization

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Industrialization has been conceptualized as the process of transforming raw materials, with the

aid of human resources and capital goods into (a) consumer goods, (b) new capital goods which

allows more consumer goods, including foods to be produced with the same human resources

and (c) social overhead capital, which together with human resources provides new services to

both individuals and businesses. Industrialization takes place whenever production is carried out

on the basis of machines and fabricated tools. The industrial sector is known to be the strength of

the value-added processed in many economies. Governments especially in developing countries,

see industrialization as a weapon for increasing national output to minimize dependence on

developed countries and minimize fluctuation in foreign exchange earnings (Ayodele and

Falokun 2003).

2.1.3 History of industrialization in Nigeria

The influence of institutions on industrial development and economic policies in Nigeria is

overwhelmingly evident in the various economic plans since 1960. The first National

Development Plan (1962-1968) was influenced by the competition among the various regional

governments to develop their regions in terms of infrastructure and education. The industrial

policies of the 70’s were influenced by the aftermath of the civil war (1967-1970). The main

objectives were reconciliation, rehabilitation and reconstruction. It therefore came as no surprise

when there was heavy spending on heavy industrial projects sited in various parts of the country

for political rather than economic reasons (Daibi 2014). By independence the discovery and

exploitation of crude oil otherwise known as black gold changed the dynamics of the Nigerian

economy. The economic history of Nigeria is not complete without its history of oil production.

Oil has become the main stay of the economy and unlike the Arab countries of the gulf it has

been a curse to most Nigerians instead of a blessing.

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From independence Nigerian regional governments passionately pursued import substitution

industrialization as a response to the low industrial capacity left behind by the British. They

actively pursued industrialization in their respective regions even without having any form of

industrialization policy on ground. In the first three years of independence, value added in

manufacturing grew by an average of 11.4% per annum (Uzochukwu, 2008). Between 1962 and

1980, rapid growth of manufacturing sector and diversification of industrial activity were the

major objectives of various economic growth and industrial development policies adopted by

successive governments. Despite the civil war between 1967 and January 1970 the 1960’s is

generally regarded as the golden years of industrialization in Nigeria; the major reason being the

stiff competition among the various regions controlled by the different political parties. Each

region’s aspiration to be superior to the other in terms of economic transformation and

industrialization was the index by which such transformation was measured. The preferred

method by all however, was import substitution industrialization.

The 70’s was a unique decade in Nigeria’s history both institutionally and economically. It was

the first decade of undiluted military rule, the period of the first oil boom which placed massive

resources in the hands of the military rulers and the period of the indigenization policy that

crippled major industries till date. It was a decade with heavy direct government intervention in

manufacturing, when government exercise near complete monopoly in some sub-sectors of

industry (Uzochukwu, 2008).The main features of the decade are the oil boom and government’s

reaction to it, the indigenization policies and government investments on the establishment and

location of industries most of which were politically rather than economically motivated.

The oil boom in the 70’s provided most of the revenue for government spending. The prices of

oil in the international market had quadrupled and there was high optimism about the new

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revenue source of the unitary style federal government. The size of government increased so

much that by 1980 the public sector accounted for about 70% of employment and 50% GDP.

This expansion resulted from provision of services and infrastructure and the payment of wages

and salaries. The government adopted a spendthrift attitude that came with the optimism of ever

increasing oil revenue. Despite high government investment, the economy nosedived and has not

recovered to where it was in the 60’s.

Furthermore, the following policies were made directly or indirectly to industrialize the economy

such as; The Structural Adjustment Programme 1990-1998. SAP agenda favored a ‘no industrial

policy’ and liberal trade regime. Most policies were made to favor donor agencies and were of

no benefit to the average Nigerian. These are the main objectives of SAP ranges from

strengthening of programmes being carried out by the National Directorate of Employment;

resolving the lapses and inefficiencies in the operations of monetary and credit instruments, low

level of capacity utilization of industries (especially the refineries) and the issue of rising

unemployment figures in the country; and dealing with unemployment issue, (Anyanwu, 1992).

With the return to Democratic rule in May 1999, the civilian administration adopted a four year

national plan called “national economic direction’ (1999-2003). Its primary objective was to

pursue a strong, virile, broad based economy with adequate capacity to absorb the effects of

external shocks although its objectives and approach was not really different from that of the

Structural Adjustment Programme (SAP).

The National Economic Empowerment Development Strategy (NEEDS) was launched in 2003

to elapse in 2007. It was a plan that expected the states and local governments to also have their

own variations in all parts of the federation. It focused on creation of employment, generation of

wealth, reduction of poverty and re-orientation of values. This was the first time indices like

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societal values and national character was acknowledged in the various attempts to industrialize

the country. It supported privatization of public enterprises and private sector led economic

growth. It cut down on imports while trying to improve small scale enterprises in the country.

The Seven Point Agenda was launched in 2007 and it included focus on the following areas of

the economy; Transportation, Power and energy, Food security, National security, Niger Delta

and Energy security, Education and human capital development, Land tenure reforms and home

ownership, Wealth creation. This economic plan was successful to a certain extent by achieving

peace in the Niger Delta thereby ramping massive oil productions which kept the economy

afloat. The plan was replaced by the Transformation Agenda which still favored private sector

led industrialization with massive input into basic infrastructure especially in Transportation,

Agriculture, Health and some inroads into education with the establishment of Nine Federal

Universities across the six geopolitical zones of the country.

The economic plan that followed in 2016 the “change agenda” leaned heavily toward public

oriented service and public sector led industrialization. The economic agenda had a lot of

welfares intentions which critics believe will not be sustainable in the country’s economic

framework. The economy entered into a recession late 2016 into 2017 and a new economic plan

has been formulated to bring the country out of recession. The Economic Recovery and Growth

Plan (ERGP) are meant to last for three years 2017-2020. Its main objectives include ramping up

oil production, privatization of public enterprises, private sector led industrial growth,

diversification of the economy and promotion of local content in industries to create a vibrant

manufacturing and export based industry.

2.2 Theoretical Literature Review

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New schools of thought have emerged in academic circles. Institutional theory is a label that over

simplifies the fact that such schools are not exactly alike: they do not share the same agenda.

The subsequent part presents four of such streams: Institutional economics, sociological

institutionalism and new institutionalism. Each develops a more or less specific set of theoretical

as well as empirically grounded interpretations. Each also covers major facets of what

institutionalization processes are; Political, Economical and behavioral.

2.2.1 New Institutionalism

Douglass North’s Theory of Institutions (1920–2015) New Institutional Economics (NIE) – have

focused their attention on the role of institutions. While their view centers mainly on issues

relating to developed market economies, some of them have devoted their attention to the study

of the role of institutions in economic growth. In his critical overview and assessment of North’s

work on institutions and economic change, focusing on aspects of his work that are of interest to

law and development. It examines North’s approach to institutions through his historical work

focusing on his concept of credible commitment and his interpretation of the effect of the

Glorious Revolution on property rights, focusing especially on the role he assigns to property

rights in bringing about the Industrial Revolution. In North’s institution theory, beliefs and

ideologies persist. Because beliefs (norms and culture) are based on the cumulative experience

of society passed down through culture and formed through repeated interactions of many people

through norms of behavior, beliefs do not change quickly and it is extremely difficult to for

social actors to manipulate beliefs in current time. As a result, beliefs are always a function of

what happened in the past and can impede change in the present for good or ill. It is the

persistence of beliefs and institutions from the past (culture) that explain why changes in the

present often produce results that impede rather than promoting growth and development.

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Institutional change persistently plays a large role in economic performance, which regularly

emphasizes that the function of an institution is to provide stability and predictability to human

behavior. The objective of this theory is to clarify whether law according to North is a

protagonist in the process of institutional change or is merely a by-product of changes taking

place elsewhere in society. (Julio 2016).

North’s model of the ideal institutional framework is derived from his extensive research in

economic history. Under this framework, property rights are protected, contracts are enforced

and political authorities do not interfere with the choices made by economic entrepreneurs. This

framework enables markets to operate efficiently over time. The time dimension is crucial since

as an economic historian, North was aware that, in order properly to evaluate institutions, it is

essential to take into account their durability over time. An efficient institutional framework

readily adapts to changing circumstances. Such a framework provides economic and political

entrepreneurs with incentives that encourage decentralized decision- making, enabling society to

maximize opportunities for resolving social problems and promoting successful economic

change through industrialization. Adaptively efficient institutions are thus a necessary condition

for achieving successful economic change. Yet, the disparity between levels of economic growth

between rich Western countries and poor countries in the rest of the world suggests that very few

countries have managed to achieve efficient institutional frameworks. Why is this so? North’s

theory of institutions attempts to answer this question and offers a conceptual framework to

explain economic growth and institutional development. North’s celebrated definition of

institutions provided him with the starting point to develop his theory. He defined them as

follows: ‘Institutions are the rules of the game in a society, or, more formally, are the humanly

devised constraints that shape human interaction.’ Institutions are established to reduce the

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obstacles arising from imperfect and asymmetrical information. The obstacles that institutions

are meant to overcome are described as transaction costs. North distinguished two kinds of

constraints: formal and informal. Together, these constraints comprise what he called the rules of

the game. In this section I argue that, despite many positive and interesting features, North’s

theory is ambiguous and even contradictory owing to three related features: the pervasive and

dominating influence of the principles of neoclassical economic theory, his exclusive focus on an

end-point model based on successful Western economies, and his reluctance to account for the

role of organizations in the process of change. Although North acknowledged that neoclassical

economics has serious short-comings. His own theory did not significantly depart from its

principles and is thus susceptible to the same short-comings. North’s focus on Western

economies as the end model for all states led him to regard any institutional framework that do

not meet the ideal standard as deviant cases and therefore not meriting close investigation. His

reluctance to offer a clear explanation about the role played by organizations in past and present

institutional frameworks enabled him to leave social conflict out of his analysis and to ignore the

complex nature of contemporary organizational structures. It then examines the origins of the so-

called rules of the game, explains the distinction between formal and informal institutions and

discusses his views on institutional change. It concludes by considering his attempt to explain the

link between economic and political processes and the implications of the distinction between

institutions and organizations.

2.2.2 Institutional Economics

The Institutionalists believe that the institutions of an economy, that is the forms of production,

ownership, work processes, and ideologies which combine to create an economy and society, are

the proper subjects for economic analysis. Since, furthermore, such institutions are subject to

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evolutionary change, the process of studying economics should also properly be evolutionary.

We shall consider but two, the American economist Clarence Ayres and the Swedish Nobel Prize

winner in economics, Gunnar Myrdal.

Gunnar Myrdal’s (1898–1987), In his view of state, a crucial difference between the advanced

nations and the poor nations was to be found in the strong state in the former and the weak (or

soft) state in the latter. With a strong state, the advanced nations could develop a coherent

national policy which could address the question of the manner in which the benefits of

economic growth might be spread through the economy. This was due to the fact that, to some

degree, the state has some power to influence and direct the growth process. On the other hand,

in the poor nations the state lacks effective policies to either ensure that there is a movement

toward national economic integration or to address the impact of backwash effects. Myrdal noted

that one of the major weaknesses of the state in the less-developed nation is that it is an

institution of and for the top social strata. He did not believe it likely that redistribution of wealth

and income could be achieved via income and wealth taxes. The rich would only evade these,

since they effectively controlled the taxing authorities through their political power. The elites

thus did not fear state power. On this point, Myrdal noted that in Singapore, economic

development proceeded to a certain degree, because it was “one of the few States in the

underdeveloped world which actively fought against corruption”.

Myrdal’s institutionalism utilized an institutional approach, but in a manner largely distinct from

Ayres. He believed that one could not understand the sources of economic underdevelopment nor

address the problems of underdevelopment as long as analysis was restricted to the intellectual

constructs of orthodox economics, such as the theory of comparative advantage. The institutional

approach meant enlarging the study to include what in a summary way I referred to as “attitudes

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and institutions”. They were found to be largely responsible for those countries’

underdevelopment and would have to be changed in order to speed up development. Only radical

institutional reforms would allow for development. Some examples of such changes needed

might be land reform, a campaign against corruption, and displacement of the elite from the

commanding heights of state policy. In short, the causes of underdevelopment and the cure for

poverty were to be found in the study of and changes in the “attitudes and institutions” of the

less-developed nations.

Ayresian view of development Clarence Ayres (1891–1972) was one of the leading proponents

of an American school of institutional economics, centered from the 1930s to the 1960s at the

University of Texas, Austin. Ayres was dismissive of much of mainstream economics, and his

references to development economics occur within a much broader framework. The central role

of education In Ayres’s view, the way to diminish the negative effects of ceremonialism on

technological progress was via expanded education, which he defined as the diffusion of

knowledge and skills. Of course, organized educational institutions can be hostile to “educating”

and be a determined element in society’s efforts to inculcate and perpetuate the prevailing

ceremonial structures. Indeed, this is often the case with educational institutions in poorer

nations, even through the university level. Still, Ayres felt strongly that expand educational

opportunities for larger numbers, or what we will later call human capital accumulation, was the

surest means for any society to promote economic and social progress: “the most important

factor in the economic life of any people is the educational level … of the community, A

technically sophisticated community can and will equip itself with the instrumentalities of an

industrial economy. There is no instance of any such community having failed to do so”.

Economic development in the Ayresian perspective is thus indistinguishable from technological

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progress, and without continuing technological change economic development falters.

Technological change is the result of scientific discovery, experiment, and innovation. while

Ayres had no major influence on mainstream thinking, his views on the importance of

technology, the significance of education and other human capital creation, and the need for

creating an appropriate institutional structure that is supportive of sustainable economic and

human progress is one that is quite compatible with the viewpoint of the endogenous growth

theories. In the Ayresian view, thus requires a revamping of those institutions, and the behavioral

patterns that accompany them, which continue to be detrimental to the creation of an indigenous.

2.2.3 Sociological Institutionalism

The sociological and anthropological tradition views institutions as cultural products that

substitute for instinct and thus confer an evolutionary advantage onto human societies with

particular institutions

Adam Smith’s(1776) claim that man‟ has a natural‟ tendency to “truck barter and exchange,”

economic institutionalists emphasize the cultural, social and even normative basis for exchange

as well as the ways in which social and cultural motivations and practices—such as the striving

for social honors—shape and even distort economic behaviour. Some examples include Torsten

Veblen’s “conspicuous consumption” of the leisure class, or John R. Commons‟ analysis of the

impact of historical experience and government policies on the organization of industrial

relations” as well as of course Max Weber’s the classic analysis of the Protestant Ethic and the

Spirit of Capitalism.

Selznick’s (1948, 1949) study of the Tennessee Valley Authority was a pioneering step in the

sociological institutionalism perspectives. He argues that Public agencies as organizations are

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considered as institutional actors in as far as their field units appropriate and promote values and

interests that are embedded in the local communities in which they operate, and not just as

machines implementing goals and values defined by a principal. A first lesson is that

incongruities may exist between the declared ends and those that the agency actually achieves or

seeks to achieve. It pursues self-support and self- maintenance goals, as well as productive ends.

A second lesson is that institutionalization involves processes through which the members of an

agency acquire values that go beyond the technical requirements of organizational tasks. No

organization is completely free of values. He also argues that the Organizational change may

also happen swiftly and affect all the parts of the organization simultaneously. It is associated

with interactions between exogenous dynamics – or institutional contexts – and endogenous

interests, values and power dependencies. Pressures for change are precipitated under two

conditions. Inside, group dissatisfaction with accommodation of interests within the existing

template for organizing are coupled with values. Outside public agencies, exogenous dynamics

exist, pushing for an alternative template. The sociological perspective defines institutional

broadly. Beside formal rules and procedures, it includes symbols, moral models, and cognitive

schemes. Institutions provide frames of meaning which guide human action and therefore are

similar to cultural systems. Institutionalization is a cognitive process that models the sense

people give to events or acts.

2.3 Empirical Literature Review

Empirically the relationship or impact of institutions on industrialization in Nigeria has been

observed by different researchers.

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Ibrahim R.Lanre. (2015), investigate the under-industrialization, corruption and financial sector

development. The study employs Auto-Regressive Distributed Lag (ADRL), ADF unit root test,

Granger causality test and Ordinary Least Square methods on time series (secondary) data,

covering 1984 to 2014. Findings of the study reveal that both financial system development and

corruption exert negative influence on the industrial sector contribution to GDP in Nigeria.

While the two independent variables are corruption perception index (CPI) AND interest

(INT).the study concludes that financial sector development and corruption inhibit

industrialization process in Nigeria. To surmount the challenges, the continual implementation

TSA is seen as pertinent coupled with selective investment in the industrial sector to ensure the

growth potentials in that industry is fully exploited and achieved.

Muftau and Abdullah, (2017) in their findings on the influence of effective legal and judicial

system and possible presence asymmetric of this influence on the level of industrialization for

Nigeria, using both the conventional and non-linear autoregressive distributed lag (NARDL)

techniques. The bound test for both the linear ARDL and the NARDL indicates evidence of long

run association among the series. The estimated ARDL model indicates insignificant positive

effects of legal and judicial system on industrialization in the long run while in the short run

there exists significant negative impact of rules of law on industrialization.

The result further revealed that in the long run technology diffusion, exchange rate and trade

liberalization exert declining impact on the dependent variables, with a temporal negative impact

in the short run. It was further observed that infrastructures spur industrialization significantly in

the short run while in the long run the impact is significant. The result of the NARDL model also

mimics the behavior of the legal and judicial system as revealed by the ARDL long run results.

Testing for the presence of asymmetric in the relationship between the effective rules of law and

21
judicial system, result of the asymmetric co-integration provides strong evidence for the

existence of long run and short run co-integration. The negative impact of weak institutions with

higher magnitude compare to the positive impact on industrialization further confirmed presence

of asymmetries in their relationship. Following this study, it is therefore concluded that, the

policies aimed at devaluation, liberalizing trade and attracting foreign direct investment will

remain ineffective in the absence of an efficient legal and judicial system and improved

infrastructures.

Ayaydin, (2014) examines the role of corruption and banking sector development on stock

market development using time series (a panel data of 42) emerging economies for the period

1996 to 2011. Findings of the study reveal that there exists a negative relation between level of

corruption and financial system improvement.

Hillman and Krausz (2004), suggest that financial intermediation is related to corruption in

several ways. This study employed annual time series data for the period 1984-2014 accessed

from World Development Indicators (WDI), Nigeria Bureau of Statistic (NBS) as well as CBN

Statistical Bulletin to examine the dynamic interaction and presence of a long-run relationship

among the empirical variables, using granger causality and ordinary least square method.

Furthermore, corruption perception index was equally negative but significant implying that

corruption hinders industrial sector growth in Nigeria.

Didier,(2014). Investigate the quality of institutions on manufacturing sector. he provide a panel

evidence indicating that there is positive correlation between the quality of institutions, as

measured by the level of democracy and the share of manufacture sector in total GDP, the

relationship that remain even after controlling for several other factors. The result of the

22
instrumental variables techniques further provides evidence towards a positive effect of

institutional change on industrialization.

Ali. (2017), It is finding in his study of the impact of technological innovation and governance

institution quality on sustainable growth. The study aims to highlight the important of

technological innovation and governance institution on sustainable growth from 1985 to 2015.

The dynamic relationship among gross domestic product, capital, employment, electricity

consumption, technological innovation, and governance institution quality and the interaction of

technological innovation and governance institution quality are examined. The augmented

production function F-bound dynamic ordinary least square, granger causality is utilized. The

results confirm dynamic relationship among the above variables. In long run, unidirectional

causality runs from governance institution quality and technological innovation, governance

institution quality toward financial development. However, in short run there is bidirectional

causality between financial development and economic growth. The interaction between

technological innovation and governance institution quality has a significant positive impact on

economy in long run. Also, capital, employment, electricity consumption have a positive

significant impact on economic growth in long run.

Nicolaas G. et al. (2008). He investigates the link between institutions, technical changes and

macroeconomic volatility. The study evaluates the role of technical changes as a mediating

channel through which the effect of institutions trickle down to affect the growth volatility.

Using different samples, estimation procedure and indicators of institutions and technical

change, the result show that the technical changes is an important stabilizing force of growth

volatility and that at least part of stabilizing force of technical changes originates from the strong

institutions. The study employ cross-country OLS regression model and two-stage least square

23
(2SLS) regression model. The results show that the institutional quality has a highly significant

explanatory variable of growth volatility.

Weder. (1998), also investigates the relationship between investment climate (an institutional

factor) and industrial productivity on 21 Sub-Saharan African countries. Using qualitative

information based on annual ratings of the following indicators: quality of bureaucracy, the rule

of law, policy surprises, and the extent of availability of information on new rules, predictability

of judiciary enforcement and security of property rights among others. The study concludes that

such factors as predictability of judiciary enforcement, theft and crime, security of property

rights and uncertainty of corruption are significant constraints to industrial productivity.

Osondu et al (2014) examine the impact of institutional reforms on financial sector development

in Nigeria using data that span the periods of 1996 to 2011. The study finds that measures of

institutional reform effect strongly on financial sector development in Nigeria, implying the need

for institutional reforms that can promote viable regulatory system for the enhancement of

contract enforcement; property right protection, corruption control; and to avoid any form of

politically motivated violence in Nigeria. A more precise effect of corruption is noticeable in the

reduction of domestic investment and savings which excites capital flight and eventually

weakens national banking system.

Undo N.Ekpo, (2014) their study investigate the Nigeria industrial policies and industrial sector

performance. In a quest for industrialization in Nigeria, different industrial policies have been

implemented. This study explores the industrial policies and the performance of industrial sector.

The findings of the study show that the policies, identified as ISI, EPI and FPII, have not helped

Nigeria to attain the required level of industrialization that can produce dynamic change in the

24
economic structure of the country and the performance of industrial sector especially

manufacturing had been below expectation. The policies have a common feature of foreign

inputs reliance which makes their successful implementation in Nigeria very costly. Based on the

above, the prospects for Nigeria’s industrialization are discussed.

Deborah brautigam (1997), Found it in her study that the institutions and industrial development

in eastern Nigeria. She suggests that insights from institutional economics can be used to help

explain the case of dynamic industrialization in an unpromising economic environment. This

paper suggests that local industrialists in one part of Nigeria have substituted for the absence of a

developmental state by themselves filling in the gaps left by market failures, particularly of

information, and of public goods.

Eboh, and Ogwuru (2013). In their study they examine the Nigeria industrial policy and

industrial sector performance. They examined the role of industrial productivity in sustainable

economic growth using the method of ordinary least square and tested for long-run relationship

of variables. The study found absence of long run relationship between outputs of major

industrial variables with the dependent variable (real gross domestic product). The output of

most industrial sectors did not impact significantly on the real gross domestic product.

Ekpo,(2014). Found out that the industrial policies such as import substitution strategy (ISI),

export promotion strategy (EPS) and foreign private led industrial strategy (FPLIS) have not

played significant role in industrial performance of Nigeria. Besides, the industrial sector output,

especially the manufacturing sector performance is very low. He observed that the policies were

featured dominantly by foreign input reliance which retards required successful execution.

Nakabayashi,(2011). Investigate the impact of legal system on the stage of industrialization and

urbanization. Used long-terms prefecture-level panel data to examine the relationship between

25
the role of legal system as its affect contract enforcement covering the early stage of

industrialization and urbanization. The study revealed that inefficient rule of law hindered

industrial growth in the urban areas where as in the rural areas where alternative dispute

resolution mechanisms exists legal system tends to positively influence industrialization. Tracing

the influence of institutional quality and industrialization on financial development using China

and India data, the result of the variance decomposition approach executed through bound testing

techniques with structural break revealed that in the short run, there exist unidirectional Granger

causality emanating from urbanization and industrialization to institutional quality. The outcome

of variance decomposition test further confirms that innovative shocks occurring in institutional

quality and government size contribute insignificantly to urbanization (industrialization).

Emeka,(2013). Investigate the study of the corruption and implication for industrial development

in Nigeria. Corruption is the bane of Nigeria’s socio-economic development. His work

specifically examines critically how corruption and other associated factors led to the failure of

two state-owned public institutions (automobile and steel industries) that would have launched

the country into an industrial nation to reckon with, not only in Africa but also in the entire

world. He therefore, concludes that unless there is a concerted effort by the state and all other

stakeholders to fight against corruption in the system, the hope and aspiration of industrial

development in Nigeria will remain a mirage. Also he asserted that, all those who through

corrupt practices ran government companies and parastatals down should be brought to book to

demonstrate government’s seriousness in confronting corruption in Nigeria. By doing so, Nigeria

will not automatically take-off technologically and industrially, however, it may be nearing the

take-off stage.

26
Modinat and Yinusa, (2017). Examine the Political economy of Nigeria’s industrialization.

Examine the relationship between political leadership, politicking, achieving industrialization

and the benefits that can be achieved from a relatively peaceful and progressive political climate.

Comparative analysis of Turkey and Singapore with Nigeria was carried out for the purpose of

synchronizing their industrialization experiences and political climate with that of Nigeria so that

we can learn some lessons from them. Furthermore, the issue of political stability cannot be

relegated to the background. Following by the study concludes that, there is need to change our

ideology from self-centeredness to the development of our nation.

Aliyu Z.Isiksil, (2016). In their study title impact of industrialization in Nigeria, The objective

of this study is to analyze the relationship between GDP, agriculture (AR), industry (ID) and

services sector (SV) in Nigeria. The Johansen co-integration testing approach demonstrates a

significant long-run relationship between these three variables. The results reveal that

agriculture, industry and services have a significant positive relationship with GDP. The

Causality results demonstrate a bidirectional causal relationship between GDP, AR, ID and SV.

It is suggested therefore that it is important to develop the agricultural sector to provide the

needed support to the industrial and services sectors. Such a strategy can be expected to

encourage the development and economic growth of a developing country.

27
 CHAPTER THREE

METHODOLOGY

3.0 Introduction

This chapter presents the methodology used in the study. The empirical find adopted, model

specification, method of estimation are all presented in this chapter.

3.1 Empirical Framework

To examine the relationship between the effects or impact of institution on industrialization in

Nigeria, this study employed industrialization as the dependent variable and corruption, interest

rate and exchange rate as the independent variables as the cited by earlier work of Ibrahim

R.Lanre, (2015), in chapter 2. 2.3

IND = f (CPI, INT, FDI)………………………………………………… (1)

3.2 Model Specification

Recall from equation (1) that the right hand side variables combine linearly to determine the

level of industrialization in the economy and therefore, model is shown in form of functional

relationship as;

I =f (g+r + E)(2)

Where:

I = Industrialization

g = government Institution

28
r = Interest Rate

E = Exchange Rate

Therefore equation (2) is express as an econometric model as:

I t =β 0 + β 1 gt + β 2 r t + β 3 Et + μi ……………………………………… (3)

Where
β0 and
μi represent the deterministic drift parameter and error term respectively.

While the
β i represents the parameter of each explanatory variables.

3.3 Method of estimation

The study employs annual time series for the period of 1995-2017 and Auto-Regressive

Distributed Lag (ADRL), Augmented Dickey fuller (ADF) of unit root test in order to tests the

stationary and non-stationary of the data, Bound test to show the existence of long run relation of

the variables, Granger causality test investigate the various form of causality between the

variables. The causality can be unidirectional or bi-directional. As earlier work of Muftau and

Abdullah, (2017) and Ibrahim R.Lanre, (2015) in chapter 2.3.

Therefore, we will take natural logarithm of the variable in order to deflate the relative sizes and

also allow variable to distinct parameter in the model as:

log I t =β 0 +α 1 log gt +ρ2 logr t +γ log E+μi ……………………..… (4)

The next is to formalize and develop the autoregressive from equation (4) by expressing each

variable is linear function of its own lag and of other variables.

29
 k
¿ I t=β 0 + ∑ ( β1 i ∆∈ I t−i + β 2i ∆∈ gt −i+ β3 i ∆∈r t −i+ β 4 i ∆∈ Et −i ) +¿ (5 a) ¿
i=1

k
Ing t=α 0 + ∑ (α 1i ∆∈ I t−i +α 2 i ∆∈g t−i +α 3 i ∆∈r t−i +α 4 i ∆∈ Et −i)+(5 b)
i=1

k
Inr t =ρ0 + ∑ (ρ1 i ∆∈ I t−i + ρ2 i ∆∈g t−i + ρ3 i ∆∈r t −i+ ρ4 i ∆∈ Et −i)(5 c )
i =1

k
InE t=γ 0 + ∑ ( γ 1 i ∆∈ I t−i +γ 2 i ∆∈g t−i +γ 3 i ∆∈r t−i + γ 4 i ∆∈ E t−i ) +¿(5 d)¿
i=1

Where InI is the logarithm of Industrialization, Ing is the logarithm of government institutions,

Inr is the logarithm of interest rate, InE is the logarithm of exchange rate and subscript t

represents the time frame of the study.

Therefore, equation (5a-d) is formalized on the basis of the a priori expectation of the model that

there could be long-run relationship between the variables such that the coefficient of the error

correction mechanism (𝜆) 𝑤ℎ𝑖𝑐ℎ 𝑖𝑠 𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒 𝑏𝑦:

( log I t−i−δo−log gt −i+ log E t−i + log r t −i )

is negative∧ststistically significant for all value of λ

3.4 Preliminary Test

3.4.1 Unit Root Tests:

In order to ascertain the stationary of the series, we therefore result to using of the Augmented

Dickey Fuller which is presented below. The ADF enable us to avoid the problem of spurious

regression that is associated with the non-stationary time series model and it was introduced by

30
statistician David Dickey and Wayne Fuller (1979). The ADF statistics test is conducted using

the equation below;

∆ Y t=a+φ Y t −1+ ∑ ∆ Y t−1 + μt (6)

Where ∆ Y t is the first difference of the series Y, n is the lag order, t is the time. ∆ is the drift.

The ADF test describes stationary in two ways:

• ADF test statistics value must be greater than the critical value at 5% in absolute term

value.

• The probability value, which is P-value, must be less than 5%.

4.4.1 ARDL Bound Test Co-integration:

The first step in the ARDL bounds testing approach is to estimate equation (5) in order to test for

the existence of a long-run relationship among the variables by conducting an F-test for the joint

significance of the coefficients of the lagged levels of the variables, i.e. H 0=δ 1=δ 2=δ 3=δ 4=0 .

Against the alternative H 0=δ 1 ≠ δ 2 ≠ δ 3 ≠ δ 4 ≠ 0 we denote the test which normalizes on I by

F I = ( I |g , E , r ) . Two asymptotic critical values bounds provide a test for co-integration when the

independent variables are I(d) (where0 ≤ d ≤ 1): a lower value assuming the regressors are I(0),

and an upper value assuming purely I(1) regressors. If the F-statistic is above the upper critical

value, the null hypothesis of no long-run relationship can be rejected irrespective of the orders of

integration for the time series. Conversely, if the test statistic falls below the lower critical value

the null hypothesis cannot be rejected. Finally, if the statistic falls between the lower and upper

critical values, the result is inconclusive.

3.5 Post Test

31
3.5.1 Granger Causality Test:

Granger (1969) developed the test procedure to test the causal linkage between institution and

industrialization. The Granger Causality test investigates the various form of causality

relationships between the variables, the causality can be unidirectional or bi-directional. In our

case we expect both types of causality, which is to say that either institution can cause

industrialization or vice versa. The null hypothesis suggested by Granger Causality test is the one

series does not Granger cause the other series. The alternative case would the one series Granger

causes other series.

k k
¿=a+ ∑ α 1 + gt −i+ ∑ βi +¿ t−i + μt (7)
t =1 t =1

k k
g=b+ ∑ γ i + gt −i + ∑ θ i ¿ t−i + μt (8)
t=1 t =1

3.6 Sources of Data

Time series data for the period of twenty one years 1995 to 2017, in order to measure the impact

of institution on industrialization in Nigeria corruption perception rank (CPR) is used as proxy of

institutions and industrialization proxy by share of industrial value added. The source of data that

will be used for the analysis in this study is secondary in nature. This is the type of data that have

already been collected and processed by government and its agencies and other private

32
organization. The choice for secondary data for this study is formed by the fact that such data

cannot be obtained through primary source because of the fact that they have to be collected over

a long period of time. Hence collecting such data by individuals will be economically difficult in

finance and time. Secondary method of data collection shall be used for this study.

Data shall be sourced from Central Bank of Nigeria (CBN) Annual Report and Statistical

Bulletin and World Bank database.

3.7 A priori Expectation

A priory expectation refers to the signs and size of the parameters in an economic relationship

which is determined by economic theory. Thus, based on the principle of economic theory, the

following are the expected signs of the coefficients to be estimated;

Figure 3.1 A priori expectations

Variables Coefficients Expected sign

Institution I >0 (+)

Exchange Rate E>0 (+)

Interest Rate R<0 (-)

33
Government institutions and Exchange rate through the multiplier effect has a direct and positive

effect on industrialization, reverse in the case of weak institutions. This is because as a result of

increase in exchange rate, the naira value viz-a-viz other currencies will be depreciated or

devalued. Devaluation could exert upward pressure on the general price level through its

increased cost of production in the short-run as well as the increase in the productivity. Interest

rate has a negative relationship with industrialization. This is because as interest rate rise, bond

price will fall and the liquidity preference will rise. Thus, more money would be available for

transactional and precautionary motive and speculative motive (attributed to investment) will

fall, and thus, leads to a fall in income level and this means productivity will also fall.

CHAPETER FOUR

Result Presentation and Discussion

4.1 Introduction

This chapter comprises of trend analysis of the variables, descriptive statistics, unit root tests of

the variables in the model determine their order of integration, bound test co-integration. As well

34
as the ARDL model estimation of log run coefficient and short run results and analysis are the

mains point of this chapter.

4.2. Trend Analysis of the Variable

The plot of the trend in each variables is presented below in their log form and the behavior of

the trend indicates that on the industrialization, government institution and exchange rate are

trending upward while interest rate oscillate or to move in an opposite direction which is

presented in the following table.

From the figure 4.2 below, industrialization from the year 1995 was 27.5% and trend upward to

27.9% in the year 1996, before falling to 27.8% & 27.5% in 1997 & 1998 respectively.

Industrialization rose to 28.5% in the year 2000 and fall to28.3% in 2001, however, it was rose

again to 29.9% as well as falling to 28.9% in the year 2009. From 2009 to 2013 it was rose from

28.9% to 30.6% in a higher growth rate. The industrialization was sustained upward trending up

to 2014, 2015, 2016 and 2017 at 30.7, 30.8, 30.8 and 30.9% respectively. There was an

oscillatory like movement of upward and downward in the trend of the industrialization.

Government institution in 1995 was 3.99% and decreased to 3.95% in 1996. From 1996 to 1998

it rose from 3.95% to 4.58% and it was stable in the two period 1999-2000 at 4.50% in the year

2000 government institution increased in the upward trending from 4.50% and this continued in

the subsequent years: 2001, 2002, 2003 and 2004 at 4.62, 4.88, 4.97 and 5.02% respectively then

fall to 4.96% in 2005. There was a movement upward and downward from 2006 at 4.99% up to

4.96%, 4.97% in the year 2010, 2012 respectively in a low growth rate, and also it was stable

from 2013 to 2016 at 4.91% and then declined to 4.90% in2017.

Figure 4.1 Trend of the variables

35
Starting from 1995 to1998 the values exchange rate was stable at 3.09% and it was rose to 4.53%

at higher growth rate in 1999 and rose to 4.71, 4.86 and 4.88% in 2001, 2003 and 2005 in a low

growth rate and rapidly dropped continuously in 2006, 2007 and 2008 at 4.86, 4.83 and 4.78%

respectively. Exchange rate experience continues increase from 2009 to 2014 at 5.00% to 5.07%.

Therefore, the exchange rate was experience steady and upward trending from 2015 to 2017 at

5.26% to 5.40%.

Interest rate was 3.02% in 1995 and was decreased sharply to 2.99%in 1996 and 2.88% in 1997,

and it was slightly increased to 2.90% in 1998. The interest rate began to experience upward

trending at 3.01, 3.06, 3.15 and 3.21% in the year 1999, 2000, 2001 and 2002 respectively at low

growth rate. Between the period of 2004, 2006 and 2008 it was declined sporadically to 2.95,

2.83 and 2.74%, it keep on moving downward to 2.91% in2009, 2.87% in 2010 and 2.77% in

2011. Therefore, it became stable in the year 2012 & 2013 at 2.83% and dropped to 2.81% in

36
2014 and also keeps on trending upward at 2.83, 2.83 and 2.84% in 2015, 2016 and 2017

respectively at lower growth rate. Furthermore, interest rate has an oscillatory or wake like

movement of upward and downward in the trend.

4.2.1 Descriptive Statistics

The descriptive statistics comprises descriptive analysis which contain measures of central

tendency which mean, median, mode as well as standard deviation and other statistical

characteristic as presented below.

Figure 4.2 Descriptive Statistics

LNI LNG LNE LNR

Mean 29.36947 4.753751 4.622201 2.911718

Median 29.68279 4.899108 4.861516 2.879198

Maximum 30.86940 5.023881 5.403255 3.209633

Minimum 27.51402 3.951244 3.085573 2.739549

Std. Dev. 1.185288 0.305171 0.749397 0.121923

37
Skewness -0.232550 -1.550918 -1.424979 0.890222

Kurtosis 1.577320 4.407143 3.503922 3.015068

Jarque-Bera 2.146989 11.11804 8.027193 3.038115

Probability 0.341812 0.003853 0.018068 0.218918

Sum 675.4979 109.3363 106.3106 66.96951

Sum Sq. Dev. 30.90796 2.048844 12.35509 0.327037

Observations 23 23 23 23

Source: Author’s compilation using Eviews v.9

Mean is the average value of the series which is calculated by dividing the total value of the

series by the number of the observation. Similarly, mean is the representatives of the entire value

and representatives of LNI is 29.36947. While the mean of LNG, LNE and LNR are 4.753751,

4.622201 and 2.911718 respectively.

Median is the middle value of the series when the value are arrange in an ascending order. The

median for LNI, LNG, LNE and LNR are 29.68279, 4.899108, 4.861516 and 2.879198

respectively from above table.

Maximum and minimum are the maximum and minimum value of the series. The maximum and

minimum values for LNI, LNG, LNE and LNR are 30.86940 & 27.51402, 5.023881 & 3.951244,

5.403255 & 3.085573 and 3.209633 & 2.739549 respectively.

38
 Standard deviation is a measure of spread or dispersion in the series. From the above table

standard deviation for LNI, LNG, LNE and LNR are 1.185288, 0.305171, 0.749397 and

2.739549 respectively.

Skewness is a measure of asymmetry of the distribution of the series around its mean. The

skewness of a normal distribution is zero and there is positive skewness which implies that the

distribution has long right tail as well as negative which has a long left tail. It shows the

movement away from mean, when it skewed to the left or right it is biased to the left or right.

From the above table we observe that only LNR have positively skewed and it have long right

tail whereas LNI, LNG and LNE have negatively skewed and therefore they have long left tail.

Therefore, Kurtosis measures the peakedness or flatness of the distribution of the series. The

kurtosis of the distribution is 3. If it exceeds 3, the distribution is peaked (leptokurtic) relative to

the normal. If it less than 3. the distribution is flat (platykurtic) relative to the normal. From the

above table, the kurtosis value for LNI is less than 3, which shows that the distribution is flat and

for LNG, LNE, LNR exceeds 3. shows that the distribution is peaked relative to normal as

represented by kurtosis values respectively.

4.3 Econometric Analysis

4.3.1 Unit Root Test

The test want to examine the property of the variables, it is use to check for the presence of a unit

root that is no stationary of the variables. The test is carried out using the Augmented Dickey

Fuller (ADF) test. This is first test carried out in the co-integration analysis and is known as the

39
pre co-integration test. The ADF test is carried out using Eviews software package and results

from the test are tabulated below.

Figure 4.3 Unit root test

Variables ADF

Level First diff comment

Lni -1.879926(0.6306) -4.390045(0.0117) I(1)

Lng -0.945660(0.9284) -3.991743(0.0279) I(1)

LnE -1.924496(0.6080) -4.448031(0.0104) I(1)

Lnr -3.915944(0.0321) -3.830040(0.0352) I(0)

Indicates significance at 5%.p-value is presented in the bracket

Source: Researcher computations using E-views v. 9. 2015

The results of the unit root test are reflected in the figure 4.3 above, the results consistently used

test statistics indicate that for ADF test industrialization (I), government institution (g) and

exchange rate (E) variables are non stationary at level, but stationary at first difference.

However, interest rate (r) shows a mixed situation, it is found to be stationary both at level as

well as first difference.

4.4 Co-integration Test

Since the results of unit root test is a mixture of I(0) and I(1) variables. ARDL bound test is

implemented to the test for co-integration. The co-integration test is assumed to be having

unrestricted intercept.

Figure 4.4 ARDL Bound Test for co-integration

40
Null Hypothesis: No long-run relationships exist

Test Statistic Value K

F-statistic 3.948757 1

Critical Value Bounds

Significance I0 Bound I1 Bound

10% 3.02 3.51

5% 3.62 4.16
1% 4.94 5.58

Source: compiled by Author, 2018

Results in Figure 4.4 suggest that there exists a long run relationship between industrialization,

government institution, exchange rate and interest rate. The F-statistic (3.94) is little bit higher

than upper bound of the critical value at the 10 percent and lower than at 5, 1 percent

respectively. Therefore, we are to reject null hypothesis (H0) and accept the alternative

hypothesis (H1) which provides that government institution, exchange rate and interest rate have

a long run relationship with industrialization.

4.5 Short run Analysis

Interpretation of the results

The estimated short run coefficient are presented below in table 4.6a for short run co-integration

estimates for ARDL indicates that all estimated coefficient are statistically significant the

41
Figure 4.5a Short run ARDL model result

Dependent Variable: LOGI

Short run coefficient

Variable Coefficient Std. Error t-Statistic Prob.

D(LNG) -0.538964 0.244167 -2.207361 0.0422

D(LNE) 0.394741 0.108496 3.638300 0.0022
D(LNR) -2.601432 0.452921 -5.743673 0.0000
CointEq(-1) -0.390668 0.069454 -5.624819 0.0000

From figure 4.5a Change in government institution is negatively related to industrialization in the

short run and it is statistically significant at 5% level. This implies that the industrialization is not

encouraged by the weak government institutions. Consequently, a unit increase in the weak

institutions would lead to 0.54% decrease in the level of industrialization in the short run.

Therefore weak institutions would negatively affect the level of development specifically in the

industrial sector, and a strong institution is good in the industrial development.

An exchange rate change is positively related to the industrialization and is statistically

significant. Thus, an increase in exchange rate by one percent will increase industrialization by

about 0.40% in the short run. This result is not surprising given that when there is an increase in

the amount of naira to be give up in exchange for the dollar, it will tend to discourage import and

encourage domestic production as well as the increase in the level of industrialization in the short

run.

42
The interest rate is inversely related to industrialization and statistically significant. In short run,

a 1% rise in the interest rate is associated with a marginal 2.60% decrease in the level of

industrialization in the short run. Thus, if the interest rate is increase the more discouragement to

the investors which would automatically reduce the level of industrialization for employing the

modern technology as the means of development.

As expected, the coefficient of the error correction mechanism (ECM) is negative and is

statistically significant at 1% level. It indicates that a deviation in industrialization from the

equilibrium is corrected by as much as 39% yearly. In addition, the coefficient of the ECM

provides proof of the existence of the long run co-integration between industrialization and

variable employed in the model.

4.6 Long run analysis

Figure 4.5b long run ARDL model result

Dependent Variable: LOGI

Variable Coefficient Std. Error t-Statistic Prob.

LNG -1.228575 1.061338 -1.157573 0.2640

43
 LNE 1.603954 0.434070 3.695153 0.0020
LNR -5.003742 1.287412 -3.886669 0.0013
C 42.658206 6.045390 7.056320 0.0000

Diagnostic statistics

R2 0.978014; DW stat 2.045670

2
Adjusted R 0.971144;

F-statistic 142.3503(0.000000)

Source: Author’s computation 2018

The long run estimates as presented in the figure 4.5b above, indicate that the change in weak

government institutions is inversely related to industrialization and statistically insignificant, any

one unit change in weak institution would results to 1.23% reduction in the level of

industrialization in Nigerian economy. It is noted that most of the looted funds could

have been very useful for investment in the industrial sector and hence,

stimulating the process of industrializing the Nigerian economy. The relationship

between the quality of institutions and industrialization indicate that inefficiency of institutional

system has not been helpful in achieving industrial development in the long run in Nigeria.

Exchange rate change is positively related to the industrialization and is statistically significant.

Thus, an increase in exchange rate by one percent will increase industrialization by about 1.60%

in the long run. In the long run this result is not surprising given that when there is an increase in

the amount of naira to be give up in exchange for the dollar, it will tend to discourage import and

44
encourage domestic production as well as the stimulating the process of industrializing Nigerian

economy.

The change in interest rate is inversely related to industrialization and statistically significant. In

short run, a 1% rise in the interest rate is associated with a marginal 5.003% decrease in the level

of industrialization process. Thus, if the interest rate is increase the more restrict the investors for

having room of borrowing which would automatically reduce the level of industrialization for

employing the modern technology as the means of developing Nigerian economy in the long run.

Furthermore, noted that the probability value of any coefficient to be significant at 1%=0.001,

5%=0.005, and 10%=0.10. DW: Durbin Watson statistic test for serial correlation.

The DW measures for the presence of autocorrelation in the model. However,

it is noticed that the model is free from autocorrelation since the DW

statistics value is 2.045670 which implies the model is reliable in explaining the

relationship government institutions, exchange rate, interest rate and

industrialization in Nigeria. The coefficient of determination (R 2) is 0.978014.

The result shows that about 98% of variation in industrialization is caused by

variations in the explanatory variables. The goodness of fit of the ARDL estimate is

adequate that is Adjusted R2 is about 97% in the variation in industrialization is due to change in

the regressors.

The F-value calculated is 142.3503 with probability value 0.000000 and this

shows that the whole model is statistically different from zero. From the

results of Durbin-Watson test, the null hypothesis of no serial autocorrelation

is accepted. It needs to be stated however the BG test is more appropriate to

45
test for the presence or otherwise of autocorrelation where the lagged

dependent variable is a regressor, as is the case with the estimated model.

4.7 Granger Causality Test

The Granger Causality test is performed to indicate the causal association

which occurs between each of the independent variable and the dependent
variables in the equation.
Figure 4.6 Granger causality

Null Hypothesis: Obs F-Statistic Prob.

LNG does not Granger Cause LNI 21 9.33387 0.0021

LNI does not Granger Cause LNG 0.33854 0.7178

Figure 4.5 above represents the result of the Granger causality test

conducted to determine the direction of causality between government

institutions and industrialization in Nigeria. The P-value of the joint effect of

government institutions on industrialization is 0.7178. Consequently, we fail

to reject the null hypothesis that industrialization does not Granger cause in

Nigerian economy. Further examination of the direction of relationship

between the two variable reveals government institutions also does not

Granger cause industrial development as explicated by the probability value

of 0.0021. Two factors can be identified for this direction of relationship.

46
 CHAPTER FIVE

Summary, Conclusion and Recommendation

5.1 Summary of Findings

This research work seeks to assess the impact of institutions on industrialization in Nigeria. The

dependent variable is log of industrialization (I) used as proxy for industrial value added at

current. The major explanatory variable is government institutions (g) which has used as the

proxy for Nigerian corruption rank. Other explanatory variables are exchange rate (E) and

interest rate (r).

The ARDL short run co-integration form shows existence of negative and statistically significant

relationship between government institutions, interest rate and industrialization but exchange rate

have positive relationship with industrialization and statistically significant. Therefore, in line

with a priori expectation, the result shows a long run co-integration negative and insignificant

relationship between the independent variables that is government institution, and significantly

related with interest rate and industrialization. The expectation of exchange rate shows that the

significant positive relationship with industrialization in the long run.

5.2 Conclusion

This study examines the impact of government institutions on industrialization in Nigeria and

sought out to find a significant short run relationship between the government institutions and

industrialization and long run insignificant relationship between the government institution and

industrialization. The study was evaluates by a proper introduction of the subject, an extensive

47
review of relative empirical and theoretical literature and empirically addressing relevant

hypothesis.

Nigerian corruption rank was the proxy with government institutions which is the independent

variable and industrial value added at current was proxy with industrialization and was

represented as the contribution to the industrializing Nigerian economy which happens to be the

dependent variable of the research.

The ARDL Bound test for co-integration was used to test for the occurrences of a long run

relationship between the variables and it was found that there a co-integration relationship the

variables. Furthermore, null hypothesis of long run relations is rejected and we accepted the

alternative hypothesis that there is relationship between the government institution and

industrialization in Nigeria. The short run and long run relationship was investigated using

autoregressive distributed lag model for co-integration.

The study concluded that the impact of government institutions has been significant over the year

and it is insignificant in the long run over the years. The impact of institutions on the

industrialization in Nigeria means that the weak institutions will discourage the level of

performances of industries as well as the strong institutions encourage in the process of

industrializing Nigerian economy and thereby increasing the level of economic growth and

development.

48
5.3 Recommendations

Focusing on the finding of the study, the following recommendations are made to increase the

positive impact of government institution on the process of industrializing Nigerian economy.

o Government should review and reforms the previous industrial policies and

implementation of that policies should be made consistent enough to impact

appropriately on development of industrialization and adopt a very strict strategies that

would smooth the acceleration of employing the advance technology in order to

sustainable increase in the development of productivity in the entire country.

o Government should not concentrate solely on one source of revenue and then tries to

diversify to different industrial sectors which will lead to the increase in the process

industrializing Nigerian economy.

o Government should establish an organization and lies more emphasis on the fighting

against any weak institutions toward the contract given out to any one and confirm that

has been done and then provide the source of mobilizing the negative effects of

corruption in the society either like in schools or any programmes and how that effect

would influences well being entirely.

o Government should provides a severe punishments upon those who miss behave for

instance life in prison and employ capital punishment done by other nations like china.

o Government should establish public industries by employing modern technologies

thereby enhancing the production in both private as well as public industries which will

increase in the level of productivity and hence, lead to the industrialization in Nigeria.

49
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APPENDIX

Appendix1:

I G E R

1995 8.90E+11 54.00 21.90000 20.48000

1996 1.31E+12 52.00 21.88000 19.84000
1997 1.24E+12 81.00 21.89000 17.80000
1998 9.09E+11 98.00 21.89000 18.18000
1999 1.21E+12 90.00 92.34000 20.29000
2000 2.39E+12 90.00 101.7000 21.27000
2001 1.93E+12 101.00 111.2300 23.44000
2002 2.11E+12 132.00 120.5800 24.77000
2003 3.12E+12 144.00 129.2200 20.71000
2004 4.80E+12 152.00 132.8900 19.18000
2005 6.34E+12 142.00 131.2700 17.95000
2006 7.78E+12 147.00 128.6500 16.90000
2007 8.40E+12 121.00 125.8100 16.94000
2008 1.01E+13 130.00 118.5500 15.48000
2009 8.48E+12 134.00 148.9000 18.36000
2010 1.36E+13 143.00 150.3000 17.59000
2011 1.75E+13 139.00 153.8600 16.02000
2012 1.92E+13 144.00 157.5000 16.79000
2013 2.03E+13 136.00 157.3100 16.72000
2014 2.16E+13 136.00 158.5500 16.55000
2015 2.29E+13 136.00 192.4400 16.85000
2016 2.42E+13 136.15 204.5633 16.87000
2017 2.55E+13 134.17 222.1283 17.07667

52
Appendix2:
LNI LNG LNE LNR

1995 27.5140202131 3.98898404656 3.08648663682 3.01944880017

1996 27.9020203911 3.95124371858 3.08557297755 2.98770010186
1997 27.843488293 4.39444915467 3.08602991153 2.8791984573
1998 27.5355366709 4.58496747867 3.08602991153 2.90032208875
1999 27.8209703909 4.49980967033 4.52547741708 3.01012815384
2000 28.5032000729 4.49980967033 4.62202730305 3.05729762921
2001 28.2891767199 4.61512051684 4.7116001296 3.15444396471
2002 28.3774846401 4.88280192259 4.79231343306 3.2096332435
2003 28.7685364776 4.96981329958 4.86151637813 3.03061667541
2004 29.2002601355 5.02388052085 4.88952171834 2.95386806946
2005 29.4779101257 4.9558270576 4.87725627082 2.88759011493
2006 29.6827947351 4.99043258678 4.85709553873 2.82731362193
2007 29.7589697424 4.7957905456 4.83477283236 2.82967768922
2008 29.9414519643 4.86753445046 4.77533481251 2.73954886816
2009 29.7688388501 4.89783979995 5.00327493969 2.91017438519
2010 30.2413974337 4.96284463026 5.01263329676 2.86733055875
2011 30.4950487633 4.93447393313 5.03604309803 2.77383794164
2012 30.5840579197 4.96981329958 5.05942545827 2.82078347109
2013 30.6411777854 4.91265488574 5.05821838083 2.81660560766
2014 30.703298314 4.91265488574 5.06607000098 2.80638610182
2015 30.7617845467 4.91265488574 5.25978441683 2.8243506568
2016 30.8170383238 4.91375721912 5.32087762599 2.82553689656
2017 30.8693983161 4.8991076526 5.40325529293 2.83771300928

53
Appendix3: trend

54
Appendix4:
Date: 07/13/18
Time: 22:40
Sample: 1995 2017

LNI LNG LNE LNR

Mean 29.36947 4.753751 4.622201 2.911718

Median 29.68279 4.899108 4.861516 2.879198
Maximum 30.86940 5.023881 5.403255 3.209633
Minimum 27.51402 3.951244 3.085573 2.739549
Std. Dev. 1.185288 0.305171 0.749397 0.121923
Skewness -0.232550 -1.550918 -1.424979 0.890222
Kurtosis 1.577320 4.407143 3.503922 3.015068

Jarque-Bera 2.146989 11.11804 8.027193 3.038115

Probability 0.341812 0.003853 0.018068 0.218918

Sum 675.4979 109.3363 106.3106 66.96951

Sum Sq. Dev. 30.90796 2.048844 12.35509 0.327037

Observations 23 23 23 23

55
Appendix5:

Null Hypothesis: I has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=4)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -1.879926 0.6306

Test critical
values: 1% level -4.440739
5% level -3.632896
10% level -3.254671

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: D(I) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=4)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -4.390045 0.0117

Test critical
values: 1% level -4.467895
5% level -3.644963
10% level -3.261452

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: G has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 3 (Automatic - based on SIC, maxlag=4)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -0.945660 0.9284

Test critical
values: 1% level -4.532598
5% level -3.673616
10% level -3.277364

56
*MacKinnon (1996) one-sided p-values.

Null Hypothesis: D(G) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 2 (Automatic - based on SIC, maxlag=4)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.991743 0.0279

Test critical
values: 1% level -4.532598
5% level -3.673616
10% level -3.277364

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: E has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=4)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -1.924496 0.6080

Test critical
values: 1% level -4.440739
5% level -3.632896
10% level -3.254671

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: D(E) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=4)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -4.448031 0.0104

Test critical
values: 1% level -4.467895
5% level -3.644963
10% level -3.261452

*MacKinnon (1996) one-sided p-values.

57
Null Hypothesis: R has a unit root
Exogenous: Constant, Linear Trend
Lag Length: 3 (Automatic - based on SIC, maxlag=4)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.915944 0.0321

Test critical
values: 1% level -4.532598
5% level -3.673616
10% level -3.277364

*MacKinnon (1996) one-sided p-values.

Null Hypothesis: D(R) has a unit root

Exogenous: Constant, Linear Trend
Lag Length: 0 (Automatic - based on SIC, maxlag=4)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.830040 0.0352

Test critical
values: 1% level -4.467895
5% level -3.644963
10% level -3.261452

*MacKinnon (1996) one-sided p-values.

58
Appendix6: ARDL Bound Test for Co-integration

Test Statistic Value

F-statistic 3.948757

Significance I0 Bound
10% 3.02
5% 3.62
2.5% 4.18
1% 4.94

Test Equation:

Variable Coefficient t-Statistic Prob.

-
D(LNG) -0.384417 0.953473 0.3545
LNE 0.534433 2.590850 0.0197
-
LNR -1.667232 2.231209 0.0403
C 14.21358 2.882405 0.0108
-
LNG(-1) -0.409358 1.130187 0.2751
-
LNI(-1) -0.333197 3.276179 0.0048

R-squared 0.489782 0.152517

Adjusted R-
squared 0.330339 0.236718
S.E. of -
regression 0.193713 0.217874
Sum squared
resid 0.600398 0.079683
-
Log likelihood 8.396613 0.147778

F-statistic 3.071829 2.045670

Prob(F-
statistic) 0.039351

59
Appendix7:
ARDL Estimation

Dependent Variable: LNI

Method: ARDL
Date: 07/21/18 Time: 14:48
Sample (adjusted): 1996 2017
Included observations: 22 after adjustments
Maximum dependent lags: 2 (Automatic selection)
Model selection method: Akaike info criterion (AIC)
Dynamic regressors (2 lags, automatic): LNG
Fixed regressors: LNE LNR C
Number of models evalulated: 6
Selected Model: ARDL(1, 1)
\Note: final equation sample is larger than selection sample

Coefficien
Variable t Std. Error t-Statistic Prob.*

LNI(-1) 0.666803 0.101703 6.556382 0.0000

LNG -0.384417 0.403176 -0.953473 0.3545
LNG(-1) -0.024940 0.498505 -0.050030 0.9607
LNE 0.534433 0.206277 2.590850 0.0197
LNR -1.667232 0.747232 -2.231209 0.0403
C 14.21358 4.931154 2.882405 0.0108

Mean dependent 29.4538

R-squared 0.978014 var 1
Adjusted R- 1.14035
squared 0.971144 S.D. dependent var 9
-
0.21787
S.E. of regression 0.193713 Akaike info criterion 4
0.07968
Sum squared resid 0.600398 Schwarz criterion 3
-
Hannan-Quinn 0.14777
Log likelihood 8.396613 criter. 8
2.04567
F-statistic 142.3503 Durbin-Watson stat 0

60
Prob(F-statistic) 0.000000

*Note: p-values and any subsequent tests do not account for

model
selection.

Appendix8:

ARDL Short run and Long run Co-integration

ARDL Cointegrating And Long Run Form

Dependent Variable: LNI
Selected Model: ARDL(1, 1)
Date: 07/21/18 Time: 14:51
Sample: 1995 2017
Included observations: 22

Cointegrating Form

Coefficien
Variable t Std. Error t-Statistic Prob.

D(LNG) -0.538964 0.244167 -2.207361 0.0422

D(LNE) 0.394741 0.108496 3.638300 0.0022
D(LNR) -2.601432 0.452921 -5.743673 0.0000
CointEq(-1) -0.390668 0.069454 -5.624819 0.0000

Cointeq = LNI - (-1.2286*LNG + 1.6040*LNE -5.0037*LNR +

42.6582 )

Long Run Coefficients

Coefficien
Variable t Std. Error t-Statistic Prob.

LNG -1.228575 1.061338 -1.157573 0.2640

LNE 1.603954 0.434070 3.695153 0.0020
LNR -5.003742 1.287412 -3.886669 0.0013
42.65820
C 6 6.045390 7.056320 0.0000

61
Appendix9: Pair wise Granger Causality Test

Pairwise Granger Causality Tests

Date: 07/18/18 Time: 17:10
Sample: 1995 2017
Lags: 2

F-
Null Hypothesis: Obs Statistic Prob.

LNG does not Granger Cause LNI 21 9.33387 0.0021

LNI does not Granger Cause LNG 0.33854 0.7178

LNE does not Granger Cause LNI 21 7.30119 0.0056

LNI does not Granger Cause LNE 1.62940 0.2269

LNR does not Granger Cause LNI 21 1.41158 0.2725

LNI does not Granger Cause LNR 1.52176 0.2483

LNE does not Granger Cause LNG 21 6.75305 0.0075

LNG does not Granger Cause LNE 2.66519 0.1002

LNR does not Granger Cause LNG 21 1.27071 0.3075

LNG does not Granger Cause LNR 0.94530 0.4092

LNR does not Granger Cause LNE 21 0.77588 0.4769

LNE does not Granger Cause LNR 0.72376 0.5001

62