Environmental and Economic Challenges of Nigeria’s Manufacturing Sector

Annotation

The Nigerian #manufacturing sector comprises #agricultural companies, consumer goods, #industrial goods, conglomerates, #pharmaceutical companies, and natural resources. The sector continues to face many challenges preventing it from contributing significantly to the nation's development. This paper discusses the factors affecting the manufacturing sector of the #Nigerian economy by reviewing existing literature. The paper concludes that economic and environmental factors significantly influence the manufacturing industry. These factors include poor technological environment, social environment, and political /legal factors. Other specific factors include low capacity utilization, classification of the sector as a high-risk industry for bank lending, high cost of #production, and #globalization. The study also recommends government/public policy to improve productivity in the nation’s manufacturing sector.?

Keywords: Capacity utilization, Developing countries, economic factors, environmental factors, Nigeria, manufacturing sector.

1.??INTRODUCTION

According to the #WorldBank (2014), Nigeria is the largest economy in #Africa, with a population of approximately 180 million and a Gross Domestic Product (GDP) of about US$500 billion. The economy has recorded a significant increase in growth as the real GDP appreciated consistently from 2009 to 2011 by an average of 7 per cent (World Bank, 2014). Significant contributors to the GDP of Nigeria include the raw materials industry, manufacturing and construction, and the service and intellectual industry. During #independence, the contribution from the primary sector to GDP was about 70 per cent. Primary sectors accounted for over half of GDP, with agriculture playing a significant role. For years now, the oil and gas industry has continued to be the major contributor to the economy, with over 95 per cent of export earnings and 85 per cent of government revenue in 2011, which equals 14.8 per cent of GDP contribution in 2011. However, the industrial sector accounted for a meagre proportion of 6 per cent of economic activity, whereas the total manufacturing sector contribution was only 4 per cent of GDP. Over the years, successive #governments have tried to expand the #economy, shifting from primary to secondary production and ultimately to tertiary activities. In 2009, the primary sector generated about 50 per cent of the country’s output, while the secondary sector contributed the least to GDP (CBN, 2010).

The manufacturing industry plays a crucial role in the economic growth and development of developed and developing nations. The industry accounts for a significant share of the industrial sector in developed countries Dickson (2010). Nigeria's sector comprises agricultural, #consumergoods, industrial goods, conglomerates, pharmaceutical companies, and #naturalresources. The manufacturing industry continues to witness many upheavals, both social and economic. One of the reasons for the dismal performance of the manufacturing sector is the gradual shifting of attention from manufacturing to the oil sector since the days of the oil boom. Successive Nigerian governments were blamed for their inability to give the industry the attention it requires to foster technological innovations and entrepreneurship and achieve accelerated economic growth and development (Anamekwe, 2001). However, the manufacturing sector has been given much attention since the coming of the present administration because of the economic recession in 2015 and 2016, which adversely affected the oil sector(Abiola, Henry, Lawal &Arisukwu, 2018). Despite the efforts to diversify the economy, the country faces numerous challenges that hurt the industry.

Over the years, several government policies were introduced to stabilize the economy through the manufacturing sector but without much success. However, the sector faces numerous challenges, including ineffective economic policies and corruption (Gbosi, 2007), inability to integrate macroeconomic plans and lack of harmonization and coordination of fiscal policy, and mismanagement of public funds (Onoh, 2007; Okemini&Uranta, 2008). Thus, despite the various fiscal policies introduced over the years, the Nigerian economy is yet to achieve healthy and sustainable growth and development on account of the low input of the manufacturing industry). This paper seeks to assess the #environmental and economic factors facing the #manufacturing sector in Nigeria. The paper adopts a qualitative approach by identifying the factors from the existing literature and concludes therefrom. Approximately 40 studies were reviewed, showing that environmental and economic factors affect the manufacturing sector.

The paper contributes to the ongoing discussion on reviving the manufacturing sector by exposing the environmental and economic factors hindering the sector’s growth and development. The study contributes to the discussion on the Nigerian manufacturing industry to aid the government, #policymakers, economic planners, researchers and academia in understanding the #economic and environmental challenges that hinder the growth and development of the sector. The paper also provides insight to the government on how to bring about economic growth and development.

In the next section, the paper summarizes the literature that assessed the environmental, social and economic challenges of the manufacturing sector in Nigeria. The section also discussed the factors in detail to provide further explanation of how these factors contributed to or hindered the growth and development of the manufacturing sector. In section three, the paper concludes the research and proffers recommendations that are considered pertinent in reviving the manufacturing sector.

2. ECONOMIC AND ENVIRONMENTAL CHALLENGES

Manufacturing refers to producing goods for use or sale using labour and machines, tools, chemical and biological processing, or formulation. The manufacturing sector comprises companies producing items through a new product or value addition (Adebayo, 2010). The sector provides a much-needed avenue for enhancing productivity regarding export expansion and reducing imports. Manufacturing helps improve foreign exchange earnings, reduce unemployment and increase per capita income (Loto, 2012). The Nigerian manufacturing sector has a long history of under-performance caused by various social, economic, political and environmental factors.

The Nigerian economy is fossil-fuel dependent, with a thriving agricultural sector. The central government’s policies focus on the agricultural sector to help diversify the economy and reduce poverty. The sector is also sensitive and vulnerable to environmental, social and economic challenges. Part of the present government’s resolve is to achieve higher growth and a socioeconomic system that is resilient and environmental development (Onwutuebe, 2019). Central to the achievement of the country’s Vision 20: 2020 are investments in renewable energy and low-carbon fuels. However, numerous challenges threaten the possibility of achieving these goals. These challenges include a stable and sustainable environment, efficient institutional framework and human capital capacity, and available resources to tackle adaptation and mitigation initiatives in response to the manufacturing sector's needs (Haider, 2019). Thus, the government must develop resource management, economic growth, and manufacturing sector response strategies that are adequate to achieve its objectives in the near future.

Most studies in this area are only interested in assessing fiscal policy and its effect on capital stock and formation, economic growth, and other macroeconomic factors (Ogbole, 2010). Some research focused on only the macroeconomic factors influencing the manufacturing sector (Imoughele&Ismaila, 2015; Omotola, 2016; Ogu, Aniebo&Elekwa, 2016). Other streams of the literature assessed the challenges facing Small and Medium Enterprises (Abiodun, 2015; Tom, Glory & Alfred, 2016), whereas the study of Nmadu, Sallau and Omojesu (2015) examined only the socioeconomic factors influencing cocoa farmers. From the available literature, it is evident that despite the theoretical linkage between social and economic factors and the growth and development of the manufacturing sector, studies about their relationship have yet to receive much attention.

Previous studies have identified several factors affecting the growth and development of the manufacturing sector in different countries (for example, Aluko, 2014; Chete et al., 2014; Onokwai, 2020).

Table 1 below summarises some literature on the challenges confronting the Nigerian manufacturing sector.

Table 1; Literature Summary

The challenges of the Nigerian manufacturing sector can be categorized into environmental and economic challenges. Both are discussed below.

2.1 Environmental Challenges

The environmental factors are those internal and external factors affecting business operations (Ogundele & Opeifa, 2004). The #business environment, therefore, is the set of factors having both positive and negative impacts on the business. Thus, the business environment has both opportunities and challenges. It is the responsibility of businessmen to minimize threats and exploit every opportunity. The environmental factors that previous studies have identified include:

Technological Environment: Technological environment relates to knowledge used in production, materials, machines, innovations, and machines involved in producing goods and services. Technology impacts different aspects of organizations, such as improving customer service and demand. Technology affects the production and distribution process of goods and services, thereby affecting the speed and efficiency with which goods and services are made available to customers cost-effectively. Berisha-Namani (2010) believes that technology significantly impacts the operation of the manufacturing industries, and it is claimed to be essential for the survival and growth of economies in general. In Nigeria, there needs to be more modern technology, which negatively affects the manufacturing sector. Obsolete technology is one of the challenges deterring the development of the local industry leading to their inability to manufacture capital products, such as machines and spare parts, the bulk of which the country imports.

Social Environment: Social environment comprises of factors having to do with human business relationships. These involve demographic characteristics, including age distribution, gender diversity, and population density. The demand for companies’ products and labour force availability is affected by demographic changes (Oluremi& Gbenga, 2011). Nigeria, with a population of over 180 million people, is viable for establishing the process industry.

Legal/Political Environment: Political system comprises structures and institutions within which a government operates. The Nigerian political landscape has not been stable due to military coup d’états in response to unfavourable socioeconomic challenges, including minimum wage, tax programs, and trade restrictions, tax programs. Studies have demonstrated that inadequate legal systems enhance firm growth (Ogundele&Opeifa, 2004). The study of Ogundele&Opeifa (2004) suggested that countries with poor manufacturing sector performance must reform their legal system and put adequate structure to fight corruption.

Low-level capacity utilization: Capacity utilization is the degree to which enterprises use their installed productive capacity to achieve their objectives. Over the years, several commentators submitted that low capacity utilization is one of the major problems of the Nigerian manufacturing sector, which found its root during the Structural Adjustment Program in 1986 by the Babangida administration (Aluko et al., 2014). Low capacity utilization usually results in a declining contribution to national output and negative real growth rates. The manufacturing sector's capacity utilisation rate was approximately 40 and 45 per cent in 2018 (Onokwai, 2020). The low capacity utilization could be due to power outages leading to higher production costs, among other problems.

Inadequate Bank Lending: Poor access to finance adversely affects the capability of manufacturing firms to invest in human resources, modern machines and information technology. These are critical factors needed to raise productivity, minimize #production costs, expand operations, and improve competitiveness. Banks have consistently refused to #invest in the manufacturing sector because of the gap between the short-term nature of banks' funds and the medium to #long-term nature of funds needed by the sector (Ogu et al., 2016). Besides, due to the perceived risky nature of the industry, financial institutions tend to give out loans to other ventures, including commerce which typically provides higher returns. Manufacturing sector lending usually attracts higher interest rates, thereby eroding their #profitability.

High Cost of Production: Most business organizations in the sector are recording high costs of production due to inadequate infrastructure, importation of raw materials, high bank interest rates, high foreign exchange rates, liquidity squeeze, low demand for locally produced goods, etc. These factors contribute in many ways to preventing the manufacturing sector from performing up to their expectation.

Globalization: Globalization refers to the interaction of markets across international borders, which fosters the division of labour, the information technology revolution, and global capitalization. Studies have shown that under globalization, Nigerian-made products cannot compete with imported goods from America, Europe and other advanced economies (Akanji, 2003). As such, Nigerian companies are at the mercy of their foreign competitors, lagging in acquiring large market share domestically.

2.2 Economic Challenges of the Manufacturing Sector in Nigeria

Although macroeconomic variables influence the performance and survival of corporate entities (Gordon, 1988), there has yet to be much research in studying the challenges confronting the Nigerian manufacturing sector. However, Aluko et al. (2004) found that firm growth positively correlates with economic development and an efficient financial system. Aluko et al. (2004) studied the correlation between firm growth and factors such as bank control, bankruptcy law, corporate law, fair market competition and accounting standards. The study concluded that legal environments with effective structures play a significant role in protecting investors’ interests and helping growing firms to raise equity capital from the market. They observed that effective legal environments also affect financial market development and facilitate firm growth.

Since independence, several factors have affected the legal environments, including inward-looking strategies such as protectionism and direct government intervention. Specifically, the following economic factors are found to affect the operation of the manufacturing sector of a country.

Unpredictable Fiscal Policy: Nigeria witnessed a substantial devaluation of the Naira during the Structural Adjustment Programme between 1986 and 1988, which led to a sharp rise in the costs of imported raw materials (CBN, 2000). Also, the restrictive monetary policies during the same period increased the cost of credit to the productive sector, adversely affecting the effective demand for commodities. In addition to declining power generation and the decay of vital infrastructures, these factors resulted in high production costs. These also increased product prices and consequent low demand for consumer products. Consequently, the manufacturing sector's contribution to GDP registered a dismal percentage, which continued to the present time.

Interest rate: The relationship between inflation, interest rate and manufacturing sector survival has been examined by previous studies. Typically, Wadhwani (1986) found that inflation and the level of cash flow volatility decrease the ability of the manufacturing firms to settle the interest on debts when due and threaten their business viability. There is a usual positive correlation between high inflation and interest rate.

Weak Financial Market: Financial markets remain essential for promoting economic growth. Well-functioning financial markets help to promote greater competition, allow access to new markets, and encourage innovation and productivity. Many firms need more resources to exploit business opportunities even when seeing profitable investment opportunities.?The role of financial markets in the development of firms cannot be overemphasized. They help create an enabling environment for investment and determine the opportunities and incentives for firms to invest profitably to create employment and expand operations (Ogundele & Opeifa, 2004).

Income and Employment: Many studies have shown that income level and general employment affect the performance of companies. A country with that high employment rate will have more demand for produced goods and services. In Nigeria, unemployment has been on the increase. Many factors are responsible for the increase in unemployment. One important factor is the closure of businesses due to the oil boom in the late 70s. Today, the government is the major employer of labour, and it is becoming evident that they can no longer sustain the massive employment of graduates. The implication is that there is a fall in demand for goods and services, which causes many manufacturing companies to perform below their expectation.

General Price Level (Inflation): Changes in general price levels of commodities affect the growth and development of the manufacturing sector. Price levels rise because of increases in the cost of raw materials and transportation, among other factors, lowering the profit derived from produced goods. In Nigeria, recently, there has been an unprecedented rise in general price levels. The price rise was caused partly by the flexible exchange rate policy. Since Nigeria is an oil-dependent country, the rise in prices is caused by importing foreign goods at high prices. The closure of the Nigerian border and the ban on the importation of food items, such as the rise, has also led to an increase in the price of food items, which reduces the purchasing power of the citizen, thereby leading to low demand for the goods manufactured in Nigeria.

Trade Cycles: Trade cycles play a role in the growth and development of manufacturing sectors of all economies. The phases of the trade cycle play a significant role in shaping general economic activities and dictate the demand and supply of all goods and services and the general prices of all commodities. During the boom period, for example, there will be an increase in the demand for goods and services due to an increase in economic activities. This period is also accompanied by inflation because employment and money supply increase. The trade cycles have affected the Nigerian manufacturing sector, especially where recession periods have not been matched with adequate fiscal and monetary policies (Ulma et al., 2019).In 2006, Nigeria entered into recession because of the sharp fall in the price of crude oil. The GDP witnessed a poor growth rate, and general economic activities fell. For the first time in decades, inflation reached double digits. The increase in the price of raw materials is reflected in the price of commodities.

3. CONCLUSIONS

Nigerian manufacturing companies face numerous challenges that affect their productivity and performance. These challenges are economic, social, environmental and political. The main aim of this study is to evaluate the social and economic factors which affect the manufacturing companies in Nigeria and make recommendations on strategies to grow the manufacturing sector to improve the Nigerian economy. The paper employs a qualitative research methodology. The paper draws analysis based on existing literature, especially those that address manufacturing sector challenges in Nigeria. A total of 40 studies were reviewed, and the factors that affect the manufacturing sector were extracted from these studies. The paper concludes that economic and environmental factors affect the Nigerian manufacturing sector in many adverse ways. These factors include a weak legal environment, inadequate infrastructure, inaccessibility to sources of finance, over-reliance on imported raw materials, high cost of production due to rising inflation and general price levels, and weak financial markets. Other factors include unpredictable fiscal policy, high-interest rates, and unemployment.

Based on the discussions, the following recommendations are relevant for stakeholders to revive the manufacturing sector.

1. Financial institutions should invest more in the manufacturing industry by acquiring shares and granting credit facilities with low-interest rates. By having enough resources, the manufacturing firms will have more resources to invest in modern production techniques and in technology-driven ways, which will enable the firms to compete favourably in the international market.

2. The Nigerian manufacturing industry should be able to invest in modern technology that minimizes waste in production, increases capacity utilization and efficient resource employment. These will attract foreign direct investment and promote the nation to the rank of developed industrialized countries.

3. The Nigerian government should design and implement favourable fiscal and monetary policies to stabilise the industry's growth. Encouraging medium and long-term funds should be matched with financial institutions lending. In addition, the government should also implement policies that encourage converting agricultural products into finished goods to increase its foreign earnings base.

5. There is a need for the introduction of fiscal incentives. i.e. granting industries tax holidays for the first six years of their operation. Also, the Central Bank of Nigeria should set credit guidelines/rules requiring the commercial bank to set aside a certain percentage of their funds as a loan to support the manufacturing sector. There should also be export incentives from the Nigerian Export-Import Bank (NEXIM) to encourage export loan facilities to the manufacturing sector and export duty exemptions administered by the Nigeria Export Promotion Council (NEPC).

The study contributes to the discussion on the Nigerian manufacturing industry to aid the government, policymakers, economic planners, researchers and academia in understanding the economic and environmental challenges that hinder the growth and development of the sector. The paper also provides insight to the government on how to bring about economic growth and development.

This paper had two main limitations. One, the analysis was based on reviewing previous studies that assessed the factors that affect the Nigerian manufacturing sector. This qualitative approach usually leaves room for subjectivity because the researchers’ perceptions influence the arguments and discussions. Two, the literature has been sourced from available studies online. The researcher did not pay attention to the quality of the journals hence there is the possibility that some of the studies reviewed are not from high-quality journals. The qualitative approach becomes necessary due to the difficulty in obtaining primary data due to the lockdown in various states of the federation in response to the Coronavirus pandemic. However, despite these limitations, the paper contributes to understanding the many challenges confronting the Nigerian manufacturing sector.

Consequently, future studies should consider incorporating an empirical approach to explain the factors influencing manufacturing firms in Nigeria by using questionnaires or interviews to obtain information from corporate stakeholders. This will help to shed more light on the topic of research.

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Approved by;

Dr Minh Nguyen

The author has written about environmental and economic challenges in Nigeria’s manufacturing sector. The article was written to address the issues related to economic, business, and environmental challenges and prospects for manufacturing firms in Nigeria. Businesses need to succeed especially manufacturing firms, if we understand the environment. Many factors determine the environments of the business we operate in, such as the nature, infrastructure, location, and business conditions.?How is the supplier interaction, and what are the economic governance and policy? How the political, cultural and economic factors impact the firms' growth, productivity and performance. The author has used the qualitative research method and existing literature review from previous studies to examine the challenges of the manufacturing sector in Nigeria.?This study will provide significant results to the government and the city council or local community manufacturing firm industries to adopt the set of recommendations and practices to improve the productivity of manufacturing firms in Nigeria.