The Impact of Imports on Total Factor Productivity in Nigeria

ABSTRACT 

Despite the gains from capital and labour productivity, there is still a problem of low total factor productivity (TFP) in Nigeria. This study, therefore, examined the impact of imports on total factor productivity as an alternative to the conventional sources of productivity gains for the country. The study covered the period 1980-2011. Building on the theoretical Cobb-Douglas production function, we developed and estimated an empirical model which incorporated Foreign Direct Investment (FDI) and from this, we extracted the total factor productivity which was then subjected to further analysis. We studied the relationship between total factor productivity and imports, as well as other variables like exports, and manufacturing capacity utilization (MCU). Cointegration was determined using the bounds testing approach which led us to an error correction model/analysis. The findings of the study are that imports have a positive impact on total factor productivity in the short-run with potential for higher impact in the long-run. We also found that exports have a short-run positive impact on total factor productivity while foreign direct investment was found to be negatively cointegrated with total factor productivity. We therefore recommend import-friendly trade policies as well the provision of an enabling environment, particularly, critical infrastructural base to support the efficient utilization of imports as a driver of total factor productivity. We also encourage the implementation of export promotion strategies as well as the provision of a suitable legal framework which will promote effective FDI inflow. 

Keywords: Imports, Exports, Total Factor Productivity, Cointegration, Bounds Testing, Error Correction Model, ARDL model

TABLE OF CONTENTS

DECLARATION ............................................................................................................................. i

APPROVAL ................................................................................................................................... ii

DEDICATION ............................................................................................................................... iii

ACKNOWLEDGEMENT ............................................................................................................. iv

TABLE OF CONTENTS ................................................................................................................ v

LIST OF TABLES ........................................................................................................................ vii

LIST OF FIGURES ..................................................................................................................... viii

ABSTRACT ................................................................................................................................... ix

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY ............................................................................................. 1

1.2 STATEMENT OF PROBLEM ..................................................................................................... 4

1.3 RESEARCH QUESTIONS........................................................................................................... 6

1.4 RESEARCH OBJECTIVES ........................................................................................................ 6

1.5 RESEARCH HYPOTHESES ...................................................................................................... 7

1.6 JUSTIFICATION OF THE STUDY ........................................................................................... 7

1.7 SCOPE OF THE STUDY ............................................................................................................. 7

CHAPTER TWO

LITERATURE REVIEW

2.1 THEORETICAL LITERATURE........................................................................................................ 8

2.2 CONCEPTUAL ISSUES .............................................................................................................. 13

2.2.1 Imports ....................................................................................................................................... 13

2.2.2 The Concept of Total Factor Productivity (TFP) ..................................................................... 14

2.3 EMPIRICAL LITERATURE ...................................................................................................... 14

2.4 SUMMARY OF LITERATURE REVIEW ...................................................................................... 19

2.5 LIMITATION OF PREVIOUS STUDIES .................................................................................. 21

CHAPTER THREE

AN OVERVIEW OF TRADE POLICY AND PRODUCTIVITY TRENDS IN NIGERIA

3.1 AN OVERVIEW OF TRADE POLICIES IN NIGERIA ............................................................ 22

3.2 PRODUCTIVITY TRENDS IN NIGERIA ................................................................................. 23

CHAPTER FOUR

METHODOLOGY

4.1 ANALYTICAL FRAMEWORK ................................................................................................ 27

4.2 MODEL SPECIFICATION ........................................................................................................ 28

4.3 MODEL EVALUATION ........................................................................................................... 30

4.3.1 Breusch-Godfrey (B-G) Autocorrelation Test .................................................................... 31

4.3.2 Breusch-Pagan (Bp) Heteroscedasticity Test ...................................................................... 31

4.4 ESTIMATION PROCEDURE ................................................................................................... 32

4.4.1 Unit Root Test ..................................................................................................................... 32

4.4.2 Granger Causality Test ........................................................................................................ 33

4.4.3 Cointegration: A bounds testing (ARDL) approach ........................................................... 34

4.5 MODEL JUSTIFICATION ................................................. 37

4.6 DATA .................................................................. 37

CHAPTER FIVE

PRESENTATION AND ANALYSIS OF RESULTS

5.1 UNIT ROOT TESTING .............................................................................................................. 38

5.2 TOTAL FACTOR PRODUCTIVITY ESTIMATION ............................................................... 39

5.2.1 Diagnostics of the Estimated Production Function ................................................................ 40

5.2.2 Extraction of the TFP and Analysis ........................................................................................ 41

5.3 GRANGER CAUSALITY TEST ................................................................................................ 43

5.4 MODEL ESTIMATION – DRIVERS OF TOTAL FACTOR PRODUCTIVITY ..................... 44

5.5 COINTEGRATION (BOUNDS TESTING) .............................................................................. 47

CHAPTER SIX

SUMMARY, RECOMMENDATIONS AND CONCLUSION

6.1 SUMMARY ................................................................................................................................ 52

6.2 RECOMMENDATIONS ............................................................................................................. 53

6.3 CONCLUSION ............................................................................................................................ 54

REFERENCES

APPENDIX