World Journal of Economics and Finance

Vol. 4(2), pp. 100-105, August, 2018. © www.premierpublishers.org. ISSN: 3012-8103 WJEF

Review Article

Is domestic private investment sensitive to macroeconomic

indicators? Further evidence from Nigeria
1
Lawrence Boboye AJAYI, *2Funso Tajudeen KOLAPO
1,2
Department of Finance, Ekiti State University, Ado-Ekiti, Nigeria
This paper examined the sensitivity of domestic private investment to macroeconomic indicators
in Nigeria from 1986 to 2015 using domestic private investment as the dependent variable and
gross domestic product, money supply, exchange rate, interest rate and inflation rate as
independent variables. The Ordinary Least Square technique, ARDL Modeling technique and the
Engle Granger causality technique for analysis revealed that domestic private investment is most
sensitive to money supply, gross domestic product as a proxy for economic growth and exchange
rate in Nigeria while it is less sensitive to inflation and interest rate in the short run. Gross
domestic product as a proxy for economic growth and exchange rate affect domestic private
investment positively while money supply has a negative effect in the short run. Domestic private
investment is most sensitive to money supply and gross domestic product as a proxy for
economic growth in the long run and both exert a negative and positive effect on domestic private
investment respectively in the long run while inflation and interest rates also exert significant
effect on the same. Meanwhile, the causality test revealed that domestic private investment drives
money supply in Nigeria. Hence, it is recommended that monetary policies which relate mostly to
the control of the cost, supply/availability and direction of money should be reviewed periodically
and ensure that such policies are implemented with little or no lag. Furthermore, the devaluation
of the exchange rate which will spur private domestic investment should be cautiously
implemented.
Keywords: Domestic private investment, money supply, macroeconomic environment, ARDL model, Nigeria
JEL classification: E22; E52; E62

INTRODUCTION

The need for private investment within an economy has
been identified as a booster (propellant) for economic
growth. The amount of private domestic investment
depends on domestic resource mobilisation which also
depends on the macroeconomic environment. Majeed and
Khan (2008) posited that countries with high rate of private
investment have better economic growth. Oshikoya (1994)
argued that private investment performs better and is less
likely to be related to corruption even in developed
countries. A spurt in private investment usually signals
high return on investment in the domestic economy.
However, despite these advantages of private investment
over other investment types such as public investment and
foreign investment, there is a need to provide a conducive
macroeconomic environment for private domestic
investment in every country to ensure that it significantly
contributes to growth.
Is domestic private investment sensitive to macroeconomic indicators? Further evidence from Nigeria
Investment which exists at two levels is essential to ensure
development; while the first level may embrace the public
sector investment that involves investment in
infrastructure; private investment involves investment by
private entities within the economy. However, private
investment has been found to contribute more on
economic growth than the public investment, in that public
investment is seen to be politically motivated most times
and lack economic rationality (Kaputo, 2011). For that
reason, we cannot compared it to private investment that
involves the making of prudent investment decisions.
*Corresponding author: Funso Tajudeen KOLAPO,
Department of Finance, Ekiti State University, Ado-Ekiti,
Nigeria. Email: realvega1959@gmail.com; Co-Author
Email: boblaw2006@yahoo.com
Ajayi and Kolapo 101
Furthermore, the Endogenous Growth Theory
substantiated by Mwega (1997) assume that investment
boosts productivity, but investment does not stand-alone;
it is very much sensitive to various factors within the
macroeconomic sphere of influence. The contributions of
domestic private investment (DPI) to economic growth has
been emphasised in literature even though more literature
exists about foreign direct investment. However, despite
the contributions of DPI to economic growth, literature has
established that it is sensitive to various macroeconomic
factors such as, gross domestic product, money supply
and exchange rate within the Nigerian economy. Hence,
this study will further contribute to existing body of
knowledge from the Nigerian standpoint considering the
key macroeconomic indicators that DPI respond to.
Furthermore, this study is set to improve on previous
studies in Nigeria by adopting the Autoregressive
Distributed Lag (ARDL) model and the Granger causality
Test to determine the causal relationship among the core
macroeconomic indicators which had been established to
significantly determine DPI in Nigeria in extant literatures
from the developed countries. Also, most contributions in
literature has focused on the determinants of private
foreign investment which involves the political,
technological, global and macroeconomic environment,
however, this study will specifically consider the sensitivity
of domestic private investment to the macroeconomic
environment as there exists a paucity of studies in this
regards. Meanwhile, there exist mixed results in literature
as regards the sensitivity of domestic private investment to
macroeconomic indicators. Recent studies (Esubalew,
2014) discovered that it is more sensitive to credit to
private sector, while some studies like Bosco and
Emerence (2016) revealed that it is more sensitive to
economic growth. Hence, it is necessary to further
investigate the discourse by relying on macroeconomic
indicators which has been identified in theoretical and
empirical literatures for which DPI is significantly sensitive
to.
Domestic private investment and the macroeconomic
environment
The simple accelerator theory as put forward by Clark
(1971). The basic notion of the accelerator theory
assumes that investment is sensitive to the demand
conditions which are ever changing and as a result, the net
investment is known by a change in the desired output
(Esubalew, 2014). As a result, when income increases,
demand follows suit and capital stock coupled with
investment responds in the same manner in the economy.
Hence, it can be inferred that capital stock increases in line
with the level of output in the economy. However, this
theory assumes that investment is now a function of the
difference between the desired capital stock and the
existing stock and also the replacement capital required to
replace the worn out existing capital stock (Esubalew,
2014). Investment is therefore a function of capital stock at
present time, previous period and aggregate demand at
present and previous time. However, according to
Is domestic private investment sensitive to macroeconomic indicators? Further evidence from Nigeria
literature as examined by Esubalew (2014), the theory has
been criticised on the grounds that the cost of capital and
technology vary and as a result may not allow output have
a constant effect on investment.
The idea behind the flexible accelerator model is the fact
that the larger the gap between the existing stock of capital
and the desired stock of capital, the greater the investment
of a firm (Ghura & Goodwin, 2000). This model assumes
that firms ordinarily want to close up the gap between the
desired stock and the actual capital stock for each period.
Hence, the desired stock of capital is a function of the real
cost of capital and the level of output to the extent that
when these variables change, capital stock also changes
(Gujarati & Porter, 2009). In line with the above, Chirinko
(1993) posited that the desired capital stock is proportional
to the user cost of capital and the output which all depends
on the price of capital goods, rate of interest, rate of
depreciation and the tax structure.
As much as domestic private investment may contribute to
economic growth in various economies across the world,
the same is not excluded from being affected by other
factors existing within the macroeconomic sphere of the
countries considered. Kolapo, Oke and Olaniyan (2018)
noted that some fundamental macroeconomic indicators,
inter alia, gross domestic product and money supply can
influence investors’ investment decisions. Martin and
Wasow (1992) posited that domestic private investment
are really sensitive to aggregate demand, credit made
available in the economy, infrastructure, public investment
expenditure.
In the same vein, Kaputo (2011) asserted that a high rate
of inflation tends to discourage private savings and
investment while a low inflation rate may assist private
sector investment by maintaining international
competiveness as a high inflation rate points to
macroeconomic instability which may negatively affect
investment. As regards exchange rate, Chibber and
Dailami (1990) assumed that devaluation alters the supply
price of capital goods and the price of imported inputs as
an increase in such exchange rate will discourage imports
and ensure that funds are mobilised for investment and
production within the economy. Also, as a result of an
improvement in public investment here the environment is
conducive for private investment through the availability of
energy, transport and communications, private investment
is improved (Greene & Viullanueva, 1990).
George-Anakwuru (2017) examined the impact of interest
rate on private domestic investment in Nigeria between
1980 and 2015. Using ordinary least square technique, he
found real and prime lending rates to be negatively and
significantly related to domestic private investment.
Diabate (2016) investigated the determinants of domestic
private investment between 1970 and 2012 in Cote de
Ivoire with the use of the Auto Regressive Distributed Lag
Modeling (ARDL) technique, and found that public
investment, foreign direct investment and trade are major

determinants of domestic private investment in the short
and long runs while gross domestic product and interest
rate are insignificant.
Ekpo (2016) examined the determinants of private
investment in Nigeria and observed that inflation rate,
fiscal deficit, public investment rate, poor infrastructure,
institutional factors, political and economic instability have
significant influence on domestic private investment.
Combey (2016) examined the determinants of private
investment in the West African Monetary Zone (WAMZ)
between 1995 and 2014 considering private investment as
the dependent variable and also using GDP, output gap,
interest rate, inflation rate, credit to private sector,
government consumption, term of trade, trade openness
and political stability as independent variables using the
panel data regression technique. It was observed that
economic growth and political stability have significant
effect on private investment in the long run.
Bosco and Emerence (2016) examined the effect of GDP,
Interest rate and inflation on private investment in Rwanda
between 1995 and 2009 employing the Error Correction
Modelling technique. It was revealed that economic growth
significantly affects private investment. Kalu and Onyinye
(2015) investigated the empirical link between domestic
private investment and economic growth in Nigeria
between 1970 and 2012 using Cobb-Douglas model and
observed a significant relationship between real gross
domestic product and domestic private investment.
Esbalew (2014) examined the determinants of domestic
private investment between 2000 and 2012 in six East
African nations adopting the pooled OLS regression
technique also used domestic private investment as the
dependent variable and public investment, inflation, GDP,
credit to private sector, financial deepening, interest rate
and exchange rate as independent variables. Economic
growth and credit to private sector were found to have
positive effect on domestic private investment. Ayeni
(2014) examined the determinants of private sector
investment in Nigeria between 1979 and 2012. The study
used private investment as the dependent variable and
also used real gross domestic product, interest rate,
exchange rate, inflation rate and credit to private sector as
independent variables adopting ARDL bound test
approach to co-integration and Error Correction Modelling
techniques. It was observed that all the macroeconomic
variables have no significant effect on private sector
investment.
Atoyebi, Adekunjo, Kadiri and Falana (2012) examined the
pattern of domestic investment in Nigeria between 1970
and 2012 employing the Johansen Co-integration
technique. It was observed that political and
macroeconomic instability best explained changes in
domestic private investment. Bakare (2011) examined the
determinants of private domestic investment in Nigeria
Is domestic private investment sensitive to macroeconomic indicators? Further evidence from Nigeria
World J. Econ. Fin. 102
between 1978 and 2008. The study used ratio of nominal
private investment to gross domestic product as the
dependent variable and also used nominal public
investment as percentage of nominal GDP, exchange rate,
corruption perception index, inflation rate, infrastructure,
savings rate and political instability as the independent
variables. Employing Error Correction Modeling technique,
it was revealed that political instability and poor
infrastructure have negative effect on private domestic
investment. From the Zambian perspective, Kaputo (2011)
investigated the relationship between macroeconomic
policy and domestic private investment between 1980 and
2008. The study used credit to private sector, exchange
rate, public sector investment, interest rate and inflation as
independent variables while domestic private investment
was utilised as the dependent variable coupled with the
use of the Error Correction Modeling technique.
Macroeconomic phenomena were found to have
significant effect on domestic private investment.
Findings on the effect of macroeconomic indicators and
domestic private investment are mixed. George-Anakwuru
(2017), Diabate (2016), Combey (2016), Bosco and
Emerence (2016), Kalu, and Onyinye (2015), and Esbalew
(2014) agreed that macroeconmic variables have positive
significant effect on domestic private investment. Ekpo
(2016) and Atoyebi et al., (2012) introduced political and
macroeconomic instability into their model and also arrived
at similar conclusion. While Ayeni (2014) found no
significant relationship between macroeconomic variables
and private domestic investment, Bakare (2011), adding
infrastructure and political instability to his analysis found
a significant negative relationship between private
domestic investment and macroeconomic variables. This
study aims at establishing the state of affairs.
METHODOLOGY
The study used Ordinary Least Square (OLS) technique
for short run analysis, the Auto Regressive Distributed Lag
(ARDL) and bound testing approach to co-integration to
analyse the presence of long run relationship. Also, Engle
Granger causality technique was used to test the causal
relationships among the variables under investigation. The
study used time series data spanning from 1986 through
to 2015. The Autoregressive Distributed Lag (ARDL)
bounds testing methodology as developed by Pesaran and
Shin (1999) has been favoured above the co-integration
analysis developed by Engle and Granger (1987) and
Johansen and Juselius (1990) due to the low power
problems associated with the co-integration analysis. It is
used in cases of mixed integration (Shrestha &
Chowdhury, 2007). The methodology as developed by
Granger (1969) shows whether a change in a variable will
cause a change in another variable. Causality can be
unidirectional, bidirectional or no relation at all based on
the probability value of the F-statistics.
Ajayi and Kolapo 103

Model specification
The objective of the study is to investigate the sensitivity
of domestic private investment to macroeconomic
indicators in Nigeria between 1986 and 2015. Hence, the
model formulated for the study is adopted from the study
of Esubalew (2014) is stated hereunder:
Hence, it can be deduced from Table 2 that there exists a
long run relationship between domestic private investment
and macroeconomic indicators. This observation is based
on the greater value of the F-statistics attached to the
ARDL bound test over the lower- and higher-bound values
at 5 per cent of significance level as shown in the Table 2.

DPI = f (GDP, INFL, MS, EXGR, INTR, ε) ……..….eq. 1 Table 3: ARDL long run results
Long run result of the model
We restate equation 1 into an econometric model as: Dependent Variable: DPI
DPIt = β0 + β1GDPt + β2INFLt + β3MSt + β4EXGRt + β5INTRt Variable Co- Std. Error T- p-value
+ εt ……………………………………………… ……………………..eq. 2 Efficient Statistics
GDP 7.363456 2.470203 2.980911 0.0080***
From the equations, domestic private investment is INFL -0.246753 0.635751 -0.388128 0.7025
adopted as the dependent variable while gross domestic MS -7.189170 2.115189 -3.398831 0.0032***
product, inflation, money supply, exchange rate and EXGR 1.045923 0.790707 1.322770 0.2025
interest rate were used as independent variables. INTR -2.408059 1.770441 -1.360146 0.1906
C -2.797060 11.345178 -0.246542 0.8081
ANALYSIS AND DISCUSSION OF RESULTS Source: Author’s Computation (2018)
* Implies a 1% level of significance
This segment of the study discusses the analysis and
result of the study. Regression analysis was conducted In Table 3, the ARDL technique revealed that domestic
using E-Views 9. private investment is most sensitive to money supply and
economic growth in the long run and both exert a negative
Table 1: OLS short run result and positive effect on domestic private investment
Dependent Variable: DPI respectively in the long run while inflation and interest rate
Variable Coefficient Std. Error t-Stat p-value also exert significant effect on the same.
GDP 5.424412 1.272661 4.262260 0.0003***
INFL 0.103863 0.430912 0.241032 0.8115 Table 4: Engle Granger Causality Result
MS -5.742207 1.243283 -4.618586 0.0001*** Null Hypothesis Obs F- p-value
EXGR 1.756271 0.626259 2.804384 0.0096*** Statistic
INTR -1.266035 1.204416 -1.051161 0.3032 GDP does not Granger 29 0.74313 0.3965
Source: Author’s Computation (2018) Cause DPI
*** Implies a 1% level of significance DPI does not Granger 1.77219 0.1947
Cause GDP
The results of the Ordinary Least Square technique in INFL does not Granger 29 0.20985 0.6507
Table 1 revealed that domestic private investment is most Cause DPI
sensitive to money supply, economic growth and DPI does not Granger 0.48151 0.4939
exchange rate in Nigeria while it is less sensitive to inflation Cause INFL
and interest rate in the short run as revealed by the p-value MS does not Granger 29 1.07313 0.3098
attached to each of the variables. The p-values of each of Cause DPI
the variables was reportedly less than 1 per cent. Also, DPI does not Granger 5.83900 0.0230*
gross domestic product, inflation and exchange rate are Cause MS
positively related to domestic private investment whereas EXGR does not 29 0.18652 0.6694
money supply and interest rate are negatively related to Granger Cause DPI
domestic private investment as shown by their respective DPI does not Granger 0.00991 0.9215
coefficients in Table 1. However, economic growth and Cause EXGR
exchange rate affects domestic private investment INTR does not Granger 29 0.06117 0.8066
positively while money supply has a negative effect on the Cause DPI
domestic private investment. DPI does not Granger 2.40089 0.1334
Cause INTR
Table 2: ARDL bounds test results Source: Author’s Computation (2018)
Co-integration result * implies a 10% level of significance
F-Statistics Lower Bound Upper Bound
4.998085** 2.62 3.79 Table 4 showed the results of the Engle Granger causality
Source: Author’s Computation (2018) test. The F-statistics and p-value are used to determine the
** implies a 5 per cent level of significance responses between the variables. Findings revealed that a
Is domestic private investment sensitive to macroeconomic indicators? Further evidence from Nigeria

unidirectional causality exist between domestic private
investment and money supply, and causality runs from
domestic private investment to money supply as
evidenced by the p-value which is less than 10%. Hence,
we reject the hypothesis that DPI do not Granger cause
MS, however, this is not so for other indicators under
investigation. Suffice it to say that DPI in the result
provided in the Table 4 has no causal relations with GDP,
INFL, EXGR, and INTR as shown by their respective p-
values which is greater than 10%.
CONCLUSION AND RECOMMENDATION
The study examined how domestic private investment
responds to changes in macroeconomic indicators in
Nigeria between 1986 and 2015. The findings revealed
that the impact of changes in money supply, economic
growth and exchange rate are strong domestic private
investment in Nigeria while the inflation and interest rates
exert less influence in the short run. Economic growth and
exchange rate affect domestic private investment
positively while money supply has a negative effect in the
short run. Domestic private investment is most sensitive to
money supply and economic growth in the long run and
both exert a negative and positive effect on domestic
private investment respectively in the long run while
inflation and interest rate also exert significant effect on the
same. Meanwhile, the causality test revealed that
domestic private investment causes money supply in
Nigeria. Hence, it is recommended that monetary policies
which relates mostly to the control of the cost, supply/
availability and direction of money should be reviewed
periodically and ensure that such policies are implemented
with little or no lag. Furthermore, the devaluation of the
exchange rate which will spur private domestic investment
should be cautiously implemented. Also, the rate of
inflation should be kept under check to ensure that savings
and investment are accelerated as an increase in inflation
tends to lower the bulk of private domestic investment.
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Accepted 6 April 2018
Citation: Ajayi LB, Kolapo FT (2018). Is domestic private
investment sensitive to macroeconomic indicators?
Further evidence from Nigeria. World Journal of Economic
and Finance 4(2): 100-105.
Copyright: © 2018 Ajayi and Kolapo. This is an open-
access article distributed under the terms of the Creative
Commons Attribution License, which permits unrestricted
use, distribution, and reproduction in any medium,
provided the original author and source are cited.

Is domestic private investment sensitive to macroeconomic indicators? Further evidence from Nigeria