THE IMPACT OF SELECTED MACRO-ECONOMIC VARIABLES ON THE PROFIT PERFORMANCE OF MANUFACTURING COMPANIES IN NIGERIA
CHAPTER ONE
INTRODUCTION
BACKGROUND OF THE STUDY: Researchers have shown interest in investigating the correlation between macroeconomic conditions and organisational performance. Key macroeconomic indicators, like the exchange rate, interest rate, inflation, and gross domestic product, are commonly believed to influence an organization's performance. These are exogenous elements that impact the functioning of daily operations. Macroeconomic factors exert a significant influence on the manufacturing sector of the Nigerian economy, hence affecting the performance of enterprises. Macroeconomic factors are external to the organisation and outside the control of management. These elements encompass social, environmental, and political situations, as well as suppliers, rivals, and government rules and policies (Adidu & Olanye, 2006 as quoted in Egbunike & Okerekeoti, 2018). Important economic indicators that impact manufacturing firms include the Consumer Price Index (CPI), unemployment rate, gross domestic product (GDP), stock market index, inflation rate, exchange rate, corporate tax rate, and interest rates. These macroeconomic factors can either positively or negatively affect the growth and performance of manufacturing firms (Egbunike & Okerekeoti, 2018). This was demonstrated by the crises that occurred in Latin America, East Asia, Russia, and the global financial crisis in 2007 (Issah & Antwi, 2017). The current economic downturn in Nigeria, which experts believe caused certain companies to be removed from the stock exchange, has highlighted the impact of macroeconomic conditions on corporate performance (Zeitun et al., 2007). The monetary policy of a country has a broad impact on several sectors by influencing the cost of borrowing and the availability of money/credit. This, in turn, can affect a firm's ability to obtain external sources of funding. Fiscal policies have an impact on a company's net cash flow after taxes, its cost of capital, and potentially the demand for its products, as well as its survival (Zeitun et al., 2007 as cited in Egbunike & Okerekeoti, 2018). Furthermore, elevations in the nominal interest rate and inflation rate amplify the overall rates of failure or default. Macroeconomic factors, such as hyperinflation and rising exchange rates, have a significant impact on the profitability of manufacturing enterprises in many developing nations, including Nigeria (Owolabi, 2017).
The industrial sector plays a crucial and indispensable role in driving economic growth and development. The text states that the engine of economic growth is the main factor contributing to the economy's development (Libanio, 2006 as referenced in Essays, 2013). Adegbemi (2018) states that the Verdoorn's (1949) and Kaldor's (1975) laws confirm the fundamental importance of the manufacturing sector to the economies of emerging countries. The validity of this position has been corroborated by Onakoya (2014), Szirmai (2009), Amakom (2012), and Arnold, Javorcik & Mattoo (2011) as referenced in Adegbemi (2018). The fundamental deduction is that enhanced worker productivity in the manufacturing sector results in an increase in the growth of manufacturing output due to the impact of amplified economies of scale and technological advancements.
The manufacturing sector include industries engaged in the production and processing of goods, involving the invention of new products or the enhancement of existing ones (Adebayo, 2011 as cited in Nwanne, 2015). Dickson (2010) states that the manufacturing sector plays a substantial role in the industrial sector of developing countries. The end product can function either as a completed item that can be sold to clients or as a component employed in the manufacturing process.
Manufacturing industries play a crucial role in an economy by facilitating the transformation of raw materials into finished commodities. According to Charles (2012) as referenced in Nwanne (2015), it is argued that manufacturing businesses generate employment opportunities, hence contributing to the growth of agriculture and the diversification of the economy. This, in turn, assists the nation in increasing its foreign exchange profits. According to Waiyaki (2017), performance is the ongoing effort to enhance individual performance by matching actual performance with the desired organisational objective. Typically, the performance of an organisation is a crucial determinant of its success or failure.
The financial performance of a corporation refers to the quantitative evaluation of its ability to effectively use its resources in order to generate profit (Omollo, Muturi, & Wanjare, 2018). Financial performance refers to the degree to which a company's financial objectives are being achieved or have been achieved. It evaluates a company's ability to remain financially stable over a long period of time. A firm's financial performance has a substantial influence on various stakeholders, including shareholders, managers, creditors, and the government. This impact is evident in the returns received by shareholders, the compensation received by managers, the firm's ability to repay its debts, and the overall effect on the economy for tax purposes. Additionally, financial performance plays a crucial role in determining the firm's financing options, growth prospects, and long-term survival.
The company's financial performance, including its ability to get both internal and external financing, as well as its capability to grow and endure, can significantly influence its survival. Rafiq (2018) said that the Central Bank of Nigeria (CBN) has stated its intention to streamline the process of providing loans with interest rates in the single digits to companies in the agriculture and manufacturing industries. The government's implementation of port reforms and other business-friendly efforts is facilitating the manufacturing process in the country, albeit to a certain extent. As a result of implemented improvements, Nigeria's position in terms of ease of doing business improved from 169th place in 2016 to 145th place in 2017.
The National Bureau of Statistics reports that Nigeria's GDP from Manufacturing declined to 1,608,461.83 NGN Million in the first quarter of 2019, down from 1,686,416.37 NGN Million in the fourth quarter of 2018. The Gross Domestic Product (GDP) generated from the manufacturing sector in Nigeria had an average value of 1,413,401.85 NGN Million between 2010 and 2019. It reached its highest point of 1,718,985.30 NGN Million in the third quarter of 2014 and its lowest point of 875,408.17 NGN Million in the first quarter of 2010.
The manufacturing sector was similarly impacted by the recent economic recession. There was a decrease of 8.7% in industrial production during the fourth quarter of 2016 compared to the same quarter in 2015. From 2007 to 2016, the average rate of production growth was 1.35%. The highest growth rate of 20.10% occurred in the first quarter of 2011, while the lowest growth rate of -10.10% was recorded in the first quarter of 2016.
Currently, the manufacturing sector is undergoing a significant decline, with an average capacity utilisation of approximately 40 percent. According to a survey conducted by the Manufacturers Association of Nigeria (MAN) in the first quarter of 2019, the manufacturing sector experienced increased stress and low confidence among operators. However, there was a high expectation of improvement later in the year.
Adegbemi (2018) states that the growth rates of the macroeconomic components exhibit similar oscillating patterns. Managing the elements of macroeconomic parameters, such as inflation rate, interest rate, unemployment rate, and exchange rate, is a significant challenge, particularly in relation to the resulting Gross Domestic Product. The interest rate increased from 12% to 15% throughout the third and fourth quarters, accompanied by an unstable foreign currency policy. This was the outcome of the explicit strategy of the Nigerian fiscal authorities to overcome economic recession by implementing expansionary government expenditure. This resulted in a continuous increase in inflation throughout 2016, as demonstrated by the rise in consumer prices from 12.8% in March 2016 to 13.7% in April and 17.6% in September. The core inflation rate in Nigeria rose by 17.85% in January 2017 compared to the same time in 2016. In August 2016, the number of unemployed individuals was approximately 4.58 million. The percentage increased from 12.1% in quarter 1 to 13.3% in quarter 2 and further to 14% in quarter 3. In November 2016, the ratio of foreign direct investments to portfolio investments decreased by 23.75% and 9.49% respectively, with foreign direct investments accounting for 17.8%. The industrial output in Nigeria saw a significant decline in the first quarter of 2016, with a value of -10.1. However, it showed a slight improvement in the second quarter, reaching 0.1%. Unfortunately, it then sharply decreased to -3.6% and -8.7% in the third and fourth quarters of 2016, respectively (Nigeria Industrial Production, 2007 to 2017).
STATEMENT OF THE PROBLEM
Financing, investment, and operational decisions are just a few examples of operational and strategic decisions that are regularly influenced by the macroeconomic environment Owolabi (2017). Internal and external factors impact a company's profitability; the internal aspect focuses on the company's ability to increase productivity and reduce expenses, whilst external factors include the exchange rate, GDP, the stat s of the economy, unemployment rate, government regulation, and so on. However, macroeconomic i dices such as the interest rate, gross domestic product, inflation rate, regulatory policies, and the like have a substantial impact on firm financial performance, which is comprehensible.) As a result, the purpose of this study is to provide macroeconomic variables that impact profit or performance to manufacturing healthcare enterprises, thereby alleviating the problem of caused by macroeconomic variable instability.
OBJECTIVES OF THE STUDY
The primary aim of this study is examine the impact of selected macro-economic variables on the profit performance of manufacturing companies in Nigeria. Specifically, this study seeks to:
- Determine whether exchange rate have a significant effect on return on assets of Manufacturing Firms in Nigeria.
- Determine whether interest rate have a significant effect on return on assets of Manufacturing Firms in Nigeria
- Determine whether inflation rate have a significant effect on return on assets of Manufacturing Firms in Nigeria.
- Determine whether external debt have a significant effect on return on assets of Manufacturing Firms in Nigeria.
- Determine whether trade openness have a significant effect on return on assets of Manufacturing Firms in Nigeria.
RESEARCH HYPOTHESES
The following research null hypotheses will validate this study:
H01: Exchange rate does not have a significant effect on return on assets of Manufacturing Firms in Nigeria.
H02: Interest rate does not have a significant effect on return on assets of Manufacturing Firms in Nigeria
H03: Inflation rate does not have a significant effect on return on assets of Manufacturing Firms in Nigeria
H04: External debt does not have a significant effect on return on assets of Manufacturing Firms in Nigeria
H05: Trade openness does not have a significant effect on return on assets of Manufacturing Firms in Nigeria
SIGNIFICANCE OF THE STUDY
The study on the impact of macroeconomic factors on investment in the manufacturing sector of Nigerian economy is expected to be of great importance to a number of individuals, institutions and the government. First, this study will enable the federal government to have a reform on its policies on the real sectors particularly the manufacturing sector of Nigerian economy. The result of this study will be useful to the government in understanding the importance of macroeconomic factors on investment in the manufacturing sector of the Nigerian economy thus formulating and implementing policies relating to manufacturing sector investment towards improving the manufacturing productivity for economic growth and development. It would provide an empirical support for informed decision making.
Furthermore, the study will be of great relevance to upcoming researchers and scholars who have interest in related study thus using it as a reference point while conducting such study..
SCOPE OF THE STUDY
Generally, this study is focused on examining the impact of selected macro-economic variables on the profit performance of manufacturing companies in Nigeria. Specifically, it is focused on determining whether exchange rate have a significant effect on return on assets of Manufacturing Firms in Nigeria, determining whether interest rate have a significant effect on return on assets of Manufacturing Firms in Nigeria, determining whether inflation rate have a significant effect on return on assets of Manufacturing Firms in Nigeria, determining whether external debt have a significant effect on return on assets of Manufacturing Firms in Nigeria and determining whether trade openness have a significant effect on return on assets of Manufacturing Firms in Nigeria.
The scope of the study covers the period of 2010-2020.
LIMITATIONS OF THE STUDY
Generally, this study is limited to examining the impact of selected macro-economic variables on the profit performance of manufacturing companies in Nigeria. Specifically, it is limited to determining whether exchange rate have a significant effect on return on assets of Manufacturing Firms in Nigeria, determining whether interest rate have a significant effect on return on assets of Manufacturing Firms in Nigeria, determining whether inflation rate have a significant effect on return on assets of Manufacturing Firms in Nigeria, determining whether external debt have a significant effect on return on assets of Manufacturing Firms in Nigeria and determining whether trade openness have a significant effect on return on assets of Manufacturing Firms in Nigeria.
The scope of the study covers some selected manufacturing companies in Nigeria, and a period of 10years ranging from 2010-2020, hence further research is needed before the findings of this work can be used any where else.
DEFINITION OF TERMS
Macro-economic variables: Macroeconomic variables are indicators or main signposts signaling the current trends in the economy. Like all experts, the government, in order to do a good job of macro-managing the economy, must study, analyze, and understand the major variables that determine the current behavior of the macro-economy.
Manufacturing companies: A manufacturing business is any business that uses components, parts or raw materials to make a finished good. These finished goods can be sold directly to consumers or to other manufacturing businesses that use them for making a different product.