economic sectors, which hinders the mobilization of savings and discourages financial assets holding, capital formation and productive investment in the manufacturing sector, suggests financial system maladaptation.
welfare of individual private businesses. During this period, the strategy of government simply involved attracting and encouraging foreign capital to partake in manufacturing activities.
ii. The second stage (1986 to date): The period lays emphasis on the economic liberalization policies that replaced the state-led import substitution industrialization strategy and nationalization policy. Government‟s policy in this period focuses on privatization, deregulation of foreign investments, trade liberalization, deregulation of credit policy and the introduction of the Foreign Exchange Market (FEM). Privatization and deregulation has resulted in the reliance on market, rather than state regulation, and is reducing the role and power of government relative to the private sector.
2.1.9 Financial deepening and manufacturing sector performance in Nigeria
Generally, African countries poor economic development has been a source of worry for scholars, policy makers and international organizations (Amsden, 1985; UNIDO, 1988; Haggard, 1990; UNECA, 2006, 2012; Easterly, 2007). More importantly, Africa has lagged behind other developing regions in enhancing manufacturing sector productivity of various forms, and as a result, the continent has not been able to participate competitively in international trade - the two major drivers of long-term and sustainable economic growth (UNCTAD, 2005; Martin, 2008).
Specifically, the case of Nigeria is troubling with the nation now importing several household needs that could be produced locally.
Despite the challenges of institutional efficiency on the continent (Balogun, 2007; World Bank, 1997; IMF, 1999), it must be pointed out that Nigerian economy has made significant efforts to deepen the financial system and promote manufacturing firms productivity, but her efforts have been relatively disappointing.
In an attempt to revitalize the manufacturing sub-sector in Nigeria, there have been numerous policies formulated by the Government to develop the financial system through the
implementation of several financial reforms. Successive governments in Nigeria have come up with several financial reforms to deepen the financial system in order to set the right path and stimulate the real sector, and especially the manufacturing sub-sector to thrive. For example, the country pursued the comprehensive macroeconomic policy reforms under the IMF structural adjustment programs (SAP) that were introduced in the 1980s. Informed by her desperation to attract foreign capital and to promote manufacturing firms productivity, the Nigerian governmentagreed to economic and financial market liberalization without adequate consideration for the establishment of export capacity and possible safety nets to accommodate the effects of foreign competition on the domestic markets (Ojo, 2010).
However, the trend of financial deepening indexes did not experience any dramatic change during the period of study from 1986 to 2017. This is despite the various financial reforms introduced from 1986 which should have led to a more deepened financial system. Although the reforms led to an increase in the number of financial institutions especially banks, but the institutions could not sustain the high level of intermediation in the system for long. Low market capitalization in the capital market with the presence of weak and terminally distressed banks, especially in the late 1990 up to 2009, accounted for the low level of financial deepening indices during the study period (1986-2017). Contrary to expectation, the policy culminated in crowding out most of the fledgling firms in Nigerian manufacturing sector, and the few survivors are operating below their optimal capacity (Ojo, 2010). There are evidence to suggest that the unintended negative consequences of unguided economic liberalization in the face of low manufacturing capacity, weak institutions and low safety nets that characterized almost all the countries in Africa and especially, Nigeria at the time (and even now) have contributed to the present state of underdevelopment on the continent(Stiglitz & Charlton, 2005).
To address some of the bitter lessons learnt through the SAP programme, different Nigeria governments have been particularly diligent in deepening the financial system by reforming the stock markets, and the banking sectors have undergone considerable reforms to ensure their sustainability. Further, Nigerian leaders have been undertaking reforms needed to provide favourable investment climate more than any other developing country outside of Asia, without the expected increase in the manufacturing sector performance (Ojo, 2010).
Measuring the performance of manufacturing sub-sector, Haron and Chellakumar (2012) explains that performance is a quality of any firm and it is achieved by valuable outcome such as higher productivity and can also be measured by the level of firm‟s efficiency.
The term productivity can be explained as the rate of real output per unit of input. It can also be defined as the relationship between production of an output and one, some, or all of the resource inputs (equipment, capital, technology and labour) employed in accomplishing the assigned task. It is also said to be a measure of efficiency, usually considered as output per person hour.
An increase in production occurs when more output is produced with less input, or with the same quantity of input, or with a little increase in input (Odior, 2013).
Generally, there are two divisions of productivity: (1) partial productivity; this is the estimate of the total output per a single input, usually, labour. (2) Total factor productivity; this is the total output per the aggregate measure of the inputs of all the factors of production employed (Odior, 2013).
The productivity of labour is usually measured either as output per man-hour or output per operator, which is either expressed as physical productivity (quantity) or as economic productivity (monetary value).
Output is usually expressed in monetary terms because of its heterogeneity. For manufacturing firms, it is better calculated from ex-factory prices of finished goods, estimated value of work-in-progress and other works and services of an industrial nature (Odior, 2013).
There are different indicators to measure the performance of manufacturing firms. This includes: index of manufacturing production, capacity utilization in the manufacturing sector, contributions of manufacturing sector to gross domestic products, manufacturing value added and employment in the manufacturing sector (Odior, 2013).
Performance of manufacturing firms can be affected by many factors such as, quality, innovation, debts, efficiency, effectiveness, some environmental situations (Luo & Park, 2001);
dynamism, complexity, hostility and some other unobservable factors (Jacobson, 1990); corporate culture, access to scarce resources, management skill and luck, cash flow, current ratio, leverage, firm size, inventory turnover, machinery and equipment (Bayyurt & Sagbansua, 2007).
A well-deepened financial system should sustain and provide basis for moderate lending rates to encourage manufacturing sector productivity in any economy, unfortunately, the prime lending rates had been very high and market capitalization of the manufacturing firms had been very low. According to Ojo (1994) and Nzotta (2004), the major reasonsfor these include technical insolvency and presence of weak banks, the underdeveloped nature of the capital markets, lack of interest rate elasticity, unresponsiveness of the rates to changes in business cycle and the huge fiscal deficits by the public sector over the years in Nigeria.
As a consequence, funding challenges have made it difficult for manufacturing firms to invest in modern machines, information technology and human resources development which are critical to reducing production cost and increasing productivity. The manufacturing sub-sector continued to face challenges of accessing credit from the financial institutions, which in turn
would affect the importation of raw materials leading to poor and low manufacturing sector performance.
The relationship between financial deepening and the performance of the manufacturing sector is explained in figure 2.1 with the transmission mechanism from financial reforms.
Among other things, financial reforms are usually formulated to produce favourable lending rate, exchange rate stability and a reduced inflation rate, with expectation of an enhanced inflow of foreign direct investment, to ensure a deepened financial system. The transmission through the fundamentals is expected to increase manufacturing sector performance. The interaction between the variables is presented in figure 2.1; where
CTSA – Average Capacity Utilization MFGI – Index of Manufacturing Production
RMSP – Manufacturing Sector Contribution to Gross Domestic Product (GDP) FDPC – Ratio of Private Sector Credit to GDP
FDMS – Ratio of Broad Money Supply to GDP MCAP – Ratio of Market Capitalization to GDP
Source: Author’s Computation; Adopted from Ojo (2010)
Fig. 2.1 Transmission from financial reforms to financial deepening, and to manufacturing sector performance.
2.2 Theoretical framework