THE IMPACT OF GLOBALIZATION ON INDUSTRIAL GROWTH IN

NIGERIA

BY

ERUMEBOR RUME WILSON

A RESEARCH WORK SUBMITTED TO DEPARTMENT OF

ECONOMICS, FACULTY OF SOCIAL SCIENCES, DELTA STATE
UNIVERSITY, ABRAKA, NIGERIA

NOVEMBER, 2010
 ABSTRACT
The increasing breakdown of trade barriers, interdependence of nations and integration
of the world economy has significantly aided the growth of economies, output and world
standard of living. Contrary to these benefits, globalization has also had negative effects
on various economies especially that of the less developed or developing countries. The
study therefore examines the impact of globalization on industrial growth in Nigeria using
the scope 1986 to 2008. The econometric method of data analysis and estimation adopted
was the Ordinary Least Square (OLS) technique. Variables adopted in this study include:
industrial output as a dependent variable, trade openness and exchange rate as
explanatory variables. The relationship between globalization and Nigerian industrial
growth was empirically tested and evidence from the study revealed that globalization
has a significant effect on industrial growth in Nigeria. The results showed that the more
the Nigerian Economy is open to trade with the outside world, the more the industrial
sector suffers. Trade openness showed a negative relationship with industrial sector
growth. It was further revealed that exchange rate was positively related to industrial
growth in Nigeria. Both variables were shown to be statistically significance in explaining
the impact of globalization on industrial growth. Owing to these findings, some
recommendations were suggested so as to maximize Nigeria’s benefit in the globalization
process and reduce the risk and cost of globalization.

1.0 INTRODUCTION
Over the past few decades, there have been gains and benefits from increased border
transaction and massive flow of investment, technology and information between and
among countries. Many other countries have however been faced with enormous
challenges of partaking in the benefits of globalization. Such challenges include
structural deficiencies, inefficient and inappropriate economic policies and high
existence of corruption in the country amongst others. All these internal problems
reduce their strength and capacity to successfully compete in the global trend rather
they tend to reap the negative effects of globalization. According to the World
Development Indicators (2007), “globalization has created opportunities and
challenges for developing countries. While the experience of China, India, Indonesia,
Thailand and some other countries have demonstrated that integration into the global

2
economy is necessary for long term growth and poverty reduction, concerns have
been expressed over equality of opportunity and unequal distribution of benefits”. By
integrating the world into a global economy through trade liberalization,
commercialization and privatization, globalization can undermine industrial growth in
Nigeria as it exposes local businesses and industries to competition from global
corporation who often have better financing, technology, advertising and market
reach.

Globalization has largely been driven by the interests and needs of the developed
world who have access to the markets of developing countries. However, developing
countries have a major problem accessing the markets of developed countries, many
tariffs and non tariffs barriers in developed countries have continued to hinder exports
from developing countries (Obadan, 2008). This problem however lies beyond the
control of developing countries. Also with increased dependence of nations, most
developing countries have been exposed to external shocks and crises and these
economic crises tend to exist much longer in the developing countries due to the
unwary and unstable nature of their economy. In an attempt to reduce these negative
effects and reap the benefits of globalization in Nigeria, various policies have been put
in place by the government to strengthen performance of the industrial sector; to
ensure growth and increase output in the sector; to encourage increased investment in
the industrial sector by granting incentives to new and existing firms in various sub
sectors of the industrial sector. Little improvement have been recorded so far in
achieving the above objectives. Flow of cheaper foreign goods as a result of trade
liberalization, increased trade barrier in developed countries, heavy dependence on
crude oil for foreign exchange earnings and government revenue thereby giving low
priority to the industrial sector, poor infrastructural facilities and unhealthy business
environment undermine the potentials of the industrial sector in Nigeria.

1.1 Statement of the problem

The Nigerian economy is characterized by high dependence on crude oil and this
feature has seriously served as a constraint in maximizing the benefits of globalization
rather it has partly led to slow growth in non–oil export and poor development of
other sectors mainly the agricultural and industrial sector of the economy. With
increasing breakdown of trade barriers in developing countries including Nigeria as a

3
result of globalization, industrialized nations have therefore taken advantages of trade
liberalization thereby seeking markets to dump their cheap manufactured goods
rendering the local industries inefficient leading to slow growth rate, low capacity
utilization and low output of the sector as the demand for goods produced within the
country decline due to cheap imported goods and high cost of production faced by
firms in the sector. These problems have therefore caused firms to leave their
industries rendering many Nigerians unemployed. This research therefore intends to
address these problems and determine how Nigeria’s interest can be protected in the
globalization process.

1.2 Objectives of the study

The aim of this study is to portray vividly the impact of globalization of industrial
growth in Nigeria. The following are the specific objectives:
i. To analyze the challenges, opportunities and risks of globalization and their
application for sustainable industrial growth in Nigeria.
ii. To examine and analyze the reasons behind industrial growth or industrial
backwardness in Nigeria
iii. To recommend ways on how Nigeria can maximize her benefits and minimize
the risks and cost of globalization

1.3 Hypothesis of the study

Ho: There is no significant relationship between globalization and industrial growth in

Nigeria.
HR: There is significant relationship between globalization and industrial growth in
Nigeria.

1.4 Significance of the study

The importance of the study is to analyze and show the effects of Nigeria’s
participation in the globalization trend and render suggestions on how Nigeria can
maximize her benefits and reduce the negative effects of globalization on the
industrial sector and on the economy at large. The study is also significant as it
provides a framework to enable the government and planning authorities develop

4
policies and strategies on improving the performance of the industrial sector and
overcome the overbearing effects of globalization in her effort towards
industrialization, economic growth and development. The study is also important as it
offers reasonable suggested solutions to the problems facing the industrial sector and
recommend ways for ensuring growth and productivity in the industrial sector with a
critical look at various sub sectors of the industrial sector. A number of policy
implications emerge from the study for Nigeria as well as for other developing
countries.

1.5 Scope of the study

This research is geared towards examining the impact of globalization on industrial

growth in Nigeria. It is however portrayed on the course of this study that globalization
became paramount in Nigeria after the introduction of the Structural Adjustment
Programme (SAP) in 1986 with increased breakdown of trade barriers and massive
flow of Foreign Direct Investment (FDI) in the country. The data therefore collected for
the purpose of this study is from the period 1986 – 2008. The data include industrial
output as proxy for the industrial sector growth, exchange rate and trade openness as
proxies of globalization. The trade openness will be measured by the ratio of total
trade which is import plus export to Gross Domestic Product (GDP). All data are limited
to Nigeria.

1.6 Methodology of study

The approach in the study will be to move from the theoretical dedications that have
been accepted to empirical testing. Econometric tools, such as multiple regression
would be employed in analysing data collected to determine the effects of
globalization on Nigeria’s industrial growth. Various test such as standard error test; f –
test, R – Square to Durbin Watson statistics will be used. In order to have the
background knowledge of the study, journal and textbooks will be consulted;
secondary data will also be collected from the following sources: CBN annual report,
CBN statistical bulletin, CBN Economic and Financial Review, National Bureau of
Statistics publication.

5
2.0 LITERATURE REVIEW

This chapter contains the review of relevant literature of various authors in relation to
the subject of study. The literature review would be divided into various sections as
listed below:
i. Globalization as a concept
ii. Forces of globalization
iii. Aims and benefits of globalization
iv. Globalization and Nigeria: Its Origin
v. An overview of the Nigerian industrial sector
vi. The Nigerian Industrial Sector and the Global Economy
vii. Globalization and its implication on the industrial sector in Nigeria
viii. Maximizing the benefits of globalization in Nigeria

2.1 Globalization as a concept

The concept “globalization” has attracted the attention of many scholars from diverse
fields and has been explained differently by these scholars. The phenomenon of
globalization is a multi-dimensional and multi-faceted process that encompasses
political, economic, social and cultural dimensions that have been variously explained
in different terms and context (Akinboye, 2008). Although the political, cultural, social
and environmental aspects of globalization are no doubt important, the economic
aspect is perceived to be the heart of globalization process (Obadan, 2008).
Globalization summarize a number of inter related features of the world economy;
rapid advances in communication and transportation technology, expanding
geographical scope for business activities of private corporation and financial
institutions, the integration of market across national border and higher degree of
uniformity in policy and institutional environment that set the rules of the game for
economic actions and interventions on the part of private agent based in various
countries (Court and Yanagihara, 1988). Globalization according to Islam (2002) is the
intensification of cross border trade and increased financial and Foreign Direct
Investment (FDI) flows among nations, promoted by rapid advances in trade and
liberalization of communication and information technology. Kwanashie (1998), see
globalization as the process of integrating economic decision making all across the

6
world and creating a global market place in which increasingly all nations are forced to
participate. Thus, globalization entails a borderless world and ensures increased
international trade and capital flows among countries of the world. Globalization is
therefore the integration and unification of the world economy and it involves the
interdependence of nations around the world through increased border transactions
and increased financial flows.

Globalization has over the years been a contentious issue that has been criticized by
some and yet widely accepted by many because of its features and consequences
which varies from economy to economy arising from frequent changes in its indicators
and forces in the economy.

2.2 Forces of globalization

Globalization has been directly associated with the movement and changes of certain
macroeconomic variables which reveal the extent and depth to which the country
actively partakes in the global economy. The extent and depth to which a country
partakes in the global economy can be measured through the performance of the
forces and indicators in the economy. Experts stressed that the main mode and
indicators of globalization are rapid growth in international trade, foreign direct
investment and international flow of capital and information (Iyoha and Unugbro,
2005). Obadan (2008) affirms that trade, investment and capital flows are the driving
force of globalization and the extent of global economic integration can be gauged by
the development in trade and financial flows.
The major forces of globalization to be considered in this context would be
International trade and capital flows mainly Foreign Direct Investment because of its
direct impact and relation to the Nigerian industrial sector.

Growth in International trade

Growth in International trade has been a major feature of globalization as it facilitates

exchange of goods between countries. OECD (2005) opined that in a globalizing
economy, distances and national boundaries have substantially diminished with the
removal of obstacles to market access. The markets and the production of different

7
countries have become increasingly interdependent through the changes induced by
the dynamics of trade and capital flows and transfer of technology –changes of which
the primary vehicles are Multinational Enterprises (MNEs). Growth in international
trade accompanied by increased border transaction between countries has increasingly
united the world into a global village, enhancing trade relations between countries,
increasing dependency ratio of countries and enabling the flow of capital which has
tremendous effect on the balance of payment situation and foreign exchange of a
country. The flow of goods between countries has been heightened through the
breakdown of trade barriers as a result of trade liberalization enabling countries, firms
and individuals to access markets and products of other countries. Liberalization of
trade has in some cases led to development and improvement in entrepreneurial
activities resulting from competition and openness to ideas and innovations amongst
countries.

International Capital Flows

International Capital Flow is a major indicator of financial globalization. International

Capital Flow consists of two major types: Foreign Portfolio Investment (FPI) and
Foreign Direct Investment (FDI). Foreign Portfolio Investment involves financial inflows
used to purchase equities, stocks, bonds, etc in another country. This type of capital
investment are very risky and can be reversed in a very short time because foreign
portfolio investors may suddenly decide to leave the country in which they are
investing owing to factors that are not connected with problems in economic
fundamentals but due to herd behaviour (Obadan, 1999 and 2004). This form of ICF is
however accompanied with high volatility especially in the developing countries with
weak institutions. FDI on the other hand is a major component of international capital
flows and it involves not only a transfer of funds but also a whole package of physical
and capital techniques of production, managerial and marketing expertise, products,
advertising and business practices for maximizing global profits. One of the most
salient features of today’s globalization drive is conscious encouragement of cross-
border investments, especially by transnational corporations and firms (TNCs). Many
countries and continents (especially developing) now see attracting FDI as an
important element in their strategy for economic development (Ayanwale, 2007). IMF
(2003) summarized that FDI is one form of capital inflow that tend to be found

8
positively associated with domestic investment and domestic growth in a relatively
consistent manner. Other forms of capital inflow could also have a positive relationship
but their effects tend to be less robust or less strong. FDI has been the most
advantageous form of capital flows because of its benefits to build sustainable growth,
enhance the optimum distribution of global resources, expedite industrial
restructuring and promote innovations in technology in the receiving country. Dinda
(2009) noted that FDI serves as an important engine for growth in developing
countries through two modes of action: (i) expanding capital stocks in host countries
and (ii) bringing employment, managerial skills, and technology. Thus, within this
perspective, FDI therefore remains a significant force of globalization with its huge
implications on industrial growth in countries around the world.

2.3 Aims and benefits of globalization

Nemedia (1998), noted that globalization of the world economy can bring immense
benefit to countries that are able to harness the resulting opportunities to the proper
development of their material and human resource endowment. Globalization is a dual
sided phenomenon which has been beneficial to many countries and has not helped
matters in the same or many other countries especially the developing countries. This
is so because most developing countries have very weak capacities to take advantages
of global markets as they are still grappling with the provision of basic necessities and
amenities such as roads, railways, food, and water among others. In the absence and
inadequacy of these basic necessities, it becomes difficult to fully utilize the
opportunities and benefits of globalization.
The benefits and opportunities of globalization include:
i. Globalization brings about greater specialisation between nations in their
production processes thereby increasing national output and world output in both
quantity and quality which is expected to translate into higher living standards of
the world population.
ii. Expansion of global markets and corporations. The expansion of global markets
and corporations as a result of globalization promotes efficiency through
competition and division of labour that allows people and economies to focus on
their best. Global markets offer greater opportunity for people to tap into more
and larger markets around the world. It makes people to have access to capital
flows, technology, cheaper imports and larger export markets.

9
iii. Globalization provides opportunity for the transfer of technology through research
and development and exposure to new ideas and products through the operations
of Multi-National Corporations (MNCs). In most cases, it entails better quality
products are produced and give wide options to consumers
iv. With differences in natural endowment among countries, globalization brings
about gains in efficiency in the utilization of world productive resources. It
increases the tendency to establish more competitive production structures which
tend to be more efficient and result in productivity gains.
v. Globalization has led to increase in international capital flows which enhance
foreign exchange earnings to supplement domestic savings and increase
investment levels-for the host countries, transfer of technology and increase
sources of revenue for government of the host countries through taxes and
royalties.
vi. Globalization enables a global financial integration which enables countries
especially developing countries to access a diversified investor base for bonds and
equity issues and also access capital market of the developed countries.
vii. Globalization gives the domestic market, enhanced opportunity for generating
revenue from foreign investor through the inflow of portfolio investments.
viii. Globalization provides opportunities for export led growth of an economy fuelled
by increased exportation on manufactured goods.
ix. Globalization provides opportunities for increased foreign direct investment which
helps in industrialization, building up of economic overhead capital and upgrading
domestic human capital through managerial capacity building.

2.4 Globalization and Nigeria: Its Origin

Globalization through its indicators, growth in international trade and financial flows,
has had massive effects on the industrial sector in Nigerian over the years. These
effects can be categorized as positive and negative and have either contributed to or
hampered the growth of the industrial sector in the Nigerian economy. It is therefore
important to examine the traces of globalization in Nigeria so as to effectively study its
impacts on industrial growth in Nigeria.
Globalization has long been in existence in the world and even in Nigeria during the
colonial era with the export of primary products and also crude oil following its
discovery in 1956. Nigeria however became actively involved in the globalization

10
process in 1986 through the Structural Adjustment Programme (SAP) following the
economic crisis that hit major countries in the early 1980s. Obadan (2008) argued that
the developing countries have since the mid-1980s undertaken widespread and rapid
trade liberalization, essentially in response to the conditionalities attached to the
stabilization and Structural Adjustment Programmes that they were cajoled to
implement by the Bretton Woods institutions. While economic stabilization policies
were put in place from the late 1970s, the formal adoption of the economic
globalization in the Nigeria began with the introduction of the Structural Adjustment
Programme (SAP) in July, 1986 by the regime of General Ibrahim Babaginda
(Onyeonoru, 2003).

The elements of the Structural Adjustment Programme (SAP) were introduced by the
International Monetary Fund (IMF) and the World Bank to resolve economic hardship
in many developing countries including Nigerian in the mid-1980s. These institutions
according to Egware (1998) were referred to as the institutional agents of
globalization. With the introduction of SAP in Nigeria, external trade was liberalized
and the allocation of external resources such as foreign exchange was left to the
exchange rate of the naira. The execution plans of SAP relied heavily on foreign
resources and thus, trade policies were aimed at generating export surplus so as to
earn enough foreign exchange to finance imports that were urgently needed for
development (Analogbei, 2000). Trade liberalization and deregulation were the main
driving force of the Structural Adjustment Programme (SAP). The Structural
Adjustment Programme (SAP) was intended to restructure the economy from
overdependence on the oil sector for government revenue and foreign exchange
earnings, diversify the non-oil export base and ensure the attainment of internal and
external balance of the economy. All these were followed by trade and foreign
exchange liberalization, removal of import and export licensing, encouragement of
export with the introduction of Nigerian Export-Import Bank (NEXIM), a reduction in
the number of items initially prohibited to be imported thereby increasing the activities
of the external sector and throwing open the economy to foreign participation. The
post-SAP policies liberalized trade by removing the import-licensing requirement and
using instead customs tariffs (Feridun, Balouga and Ayadi, 2006). Successively, there
was an increase in total trade- Import plus export- by 224% in 1987, 9% in 1988 69% and
77% in 1989 and 1990 respectively. Obadan (1996) argued that the value of total exports
has shown remarkable upward growth particularly since the period of SAP when the

11
large depreciation of the naira exchange rate led to substantial increase in the value of
merchandise exports. Specifically the value of export which was put at N8.920 billion
rose to N109.886 billion in 1990. UNEP (2003) acknowledge that the Structural
Adjustment Programme period 1986–1993, especially trade liberalization, enhanced
export prices partly due to the devaluation of the Nigerian currency. Also, the value of
imports rose from N5.983 billion to N45.717 billion in 1990. The Nigerian economy
relatively became more open as a result of the Structural Adjustment Programme and
tremendous growth in output was recorded during the early years of SAP.

Capital flows on the other hand also constitute a major indicator of globalization and
has become increasingly significant to the Nigerian economy after the Structural
Adjustment Programme (SAP) especially in the aspect of Foreign Direct Investment
(FDI). Odozi (1995) accounts on the factors affecting FDI flow into Nigeria in both the
pre and post structural adjustment programme (SAP) eras and found that the
macroeconomic policies in place before the SAP were discouraging foreign investors.
He also revealed that the policy environment led to the proliferation and growth of
parallel markets and sustained capital flight. In support of this view, Ayanwale (2007)
argued that the adoption of the structural adjustment programme in 1986 initiated the
process of termination of the hostile policies towards FDI. A new industrial policy was
introduced in 1989 with the debt to equity conversion scheme as a component of
portfolio investment. The Industrial Development Coordinating Committee (IDCC) was
established in 1988 as a one-step agency for facilitating and attracting foreign
investment flow. He further stressed that the low level of FDI inflow into all the
sectors, however, took an upward turn in 1986 following the adoption of the SAP. FDI
friendly policies increasingly soared after the SAP in 1986. Net FDI, which is the
difference between FDI inflows and outflows, in Nigeria grew by 233.4% in 1987 and has
significantly increased each year up till 2006. FDI in Nigeria is a major tool for the inflow
of technology, expansion and integration of global marketers through the Multi-
National Corporations (MNCs).

2.5 An overview of the Nigerian industrial sector

The industrial sector consists of the secondary sector of the economy and includes
sectors which are responsible for the production of goods which are either consumed
in the country or exported to other countries. The industrial sector according to CBN

12
Statistical Bulletin (2007) will be divided into three major sub-sectors which include
Manufacturing, Mining and Quarrying and Petroleum and Natural Gas sectors.

The role of the industrial sector in the growth of developing countries is very
significant because sustained economic growth and development of developing
countries including Nigeria lies so much on the growth of the industrial sector. The
Nigerian industrial sector would be discussed in two phases: The Pre-SAP era and the
Post-SAP era (globalization era).

The Pre – SAP era (1970 – 1985)

1970 marked the end of the Nigerian Civil war and the second National Development
Plan (1970-1974) was established. Analogbei (2000) stressed that the major strategy of
the plan was to secure economic growth through the replacement of destroyed assets
and restoration of the productive capacity of the country as well as ensure equitable
distribution of the fruits of development. The plan was aimed at increasing agricultural
and industrial output and therefore import licensing and increasing trade barrier which
was dominant in the 1960s was maintained. As regards the industrial sector, the
development of the petroleum, iron and steel industries and the establishment of the
Nigerian Bank for Commerce and Industries (NCBI) to support industrial financing were
executed. The industrial sector’s share to Gross Domestic Product (GDP) which stood
at 22.4% in 1970 increased to a peak of 40.8% in 1980. The relative high growth in the
index of industrial output in the 1970s was traceable to the promotion of industries
through high trade barriers and incentives which offered protection and concession to
the infant industries (Anyanwu, 2000). Policies during this period such as indigenization
policy which aimed at increasing and protecting domestic participation in productive
activities in the economy and import substitution industrialization policy were
embarked upon.

The Nigerian economy during the end of the second National plan was characterized
by high dependence on crude oil due to increase in crude oil price in the international
market which led to increased exploration and production of the product. NCEMA
(2005) in a study revealed that in 1969 the oil sector accounted for less than 3 per cent
of GDP and a modest US$370 million in exports (42 per cent of total exports); per
capita income was only US$130; and more than half of GDP was generated in the

13
agricultural sector. By 1980, the oil sector had come to account for nearly 30 per cent
of GDP, oil exports totaled US$25 billion (96 per cent of total exports), and per capita
income exceeded US$1,100. The production and sales of crude oil left the country with
so much revenue and excess funds during the later part of the 1970s. Part of this fund
was expended on the industrial sector and this consequently led to the growth in
output of the sector. With the increase in oil prices in the 1970s, Nigeria relied heavily
on imported goods in the late 1970s. The situation was compounded by a fall in oil
revenue as a result of the oil shock of the early 1980s and balance of payment deficit
was recorded. Funding imports became difficult and the shortage of essential items
became a reality all over the country. The relaxation of import controls and the massive
importation of essential commodities exposed local industries to stiff competition
(Analogbei, 2000).The economic policy orientation during the 1970s left the country ill
prepared for the eventual collapse of oil prices in the first half of the 1980s. Public
investment was concentrated in costly, and often inappropriate, infrastructure projects
with questionable rates of return and sizable recurrent cost implications, while the
agricultural sector was largely neglected. Nigeria’s industrial policy was inward-looking,
with a heavy emphasis on protection and government controls, which bread an
uncompetitive manufacturing sector. Nonetheless, Nigeria’s economy has remained
dominant in Africa (NCEMA, 2005). Despite the drastic measures taken by the
government to resolve the economic problem such as the establishment of the
Economic Stabilization Act of 1982, the problems still persist in the economy. This
therefore led to the introduction of SAP in 1986.

The Post – SAP era (Globalization era)

Following the globalization trend, Nigeria has been liberalizing its economy but the real
sector have had to function under conditions of unstable macroeconomic
management, inadequate technology and credit facilities (Onwuka and Eguavoen,
2007). Trade openness was however at its peak after the introduction of SAP in 1986 as
a result of the policy measures of the programme. Commercialization and privatization
of countries which is a major aspect of globalization was paramount after 1986. In
1988, the policy thrust of legalizing commercialization and privatization of public
enterprises was promulgated. Other industrial policy instruments include the New
industrial policy of 1989 widely accredited as a replacement of the amended
indigenization policy of 1977 to specifically encourage foreign investments, the

14
Nigerian investment promotion decree No 16 and the Foreign Exchange decree No. 17
of 1995 (Ajayi, 2007).

As noted by Okoh (2004), trade policies since 1986 have aimed at liberalization of the
economy as well as achievement of greater openness and greater integration with the
world economy. The policies thus ranged from abolition of marketing boards, to
introduction of the second tier foreign exchange market (SFEM), various export
expansion incentive schemes, establishment of the Nigeria Export- Import Bank etc.
Analogbei (2000) observed that specific to international trade, the primary focus was
on liberalization of trade and pricing system, with emphasis on the use of appropriate
price mechanism for the allocation of foreign exchange. The Second – tier Foreign
Exchange Market (SFEM), a major policy measure contained in the Structural
Adjustment Programme (SAP) was then introduced under which the exchange rate of
the naira was to be determined by the market forces of demand and supply. The naira
was considered to be overvalued particularly between 1975 and 1985. The
overvaluation of the naira was believed to be the core source of the structural
problems in the country. The principal objective of SFEM therefore was to achieve a
more realistic value for exchange rate for the naira. This value of the naira through
official manipulation and interference with the market by the Central Bank of Nigeria,
the naira became undervalued exchanging for about N4.01 to $1 USD in 1987, N7.39 in
1989 and N22.05 in 1993. Iyoha and Unugbro (2005) noted that the continuous
depreciation of the naira has not resulted in raising significantly the proportion of total
exports. Thus, this incentive effect of production to naira depreciation seems to have
been quite limited. Besides, the depreciating naira has a devastating effect on the
development of the industrial sector in addition to exacerbating the problem of
inflation.

The National Technical Working Group (2009) observed that the impact of SAP on the
productive sectors of the economy was mixed. Industry had to devise strategies to
cope with the various aspects of the new regime as well as a slump in effective
demand. There were evidences of deliberate shift to local raw material sourcing by
industry as one of the ways to cope with some of the challenges of this era. The
increase in the cost of imports and pressure by government resulted in the rise of local
raw material sourcing by industry from 38 percent in 1985 to 50 percent in 1988. The
industrial sector witnessed an increase in output after the structural adjustment

15
programme. The output was largely fuelled by the increase in the production of crude
petroleum and natural gas. The industrial sector output immediately after SAP grew by
110.3% in 1987, 19.5% in 1988 and 462.67% from 1988 to 1993. The manufacturing sector
output as a percentage of the industrial sector output stood at 21.5% in 1987, 26.6% in
1988 declined to 13.7% in 1989 and averaged 15.9% from 1990 to 1994.

The Nigerian economy during this period was characterized by high importation of non
– oil products in relation to its export which led to a slow growth rate of the
manufacturing sector. Non oil imports grew by 203.8% from 1990 – 1994 while non oil
exports grew by 64.1% in the same period. The overdependence on imports with no
significant increase in non – oil export and the concentration on crude oil for
government revenue adversely affected the growth and performance of the industrial
sector especially the manufacturing and mining and quarrying sub – sectors. Anyanwu
(1998) averred that the Nigerian industrial sector after the Structural Adjustment
Programme was faced with series of problems which include: high cost of production,
obsolete machinery and equipment, loss of competitiveness, low rate of capacity
utilization due to foreign exchange scarcity, failure to utilize the advantages of labour
intensive, among others.

Presumably, some of the current problems of the industrial sector are as a result of the
globalization process, making the economy externally dependent on policies and
practices of other countries putting Nigeria in a situation where she lacks direct control
over the crisis on her economy. With globalization, Nigeria kept importing everything
at the expense of her own domestic industries (Aluko, Akinola and Fatokun, 2004). The
domestic industries faced unfavorable competition with the influx of cheap finished
products and the dumping of sub – standard goods from industrialized and other
developing nations. These problems are still in existence in the country with the
manufacturing sector contributing 9.58% in the period 1981 – 1985, 7.08% from 1986 –
1990, 5.8% from 1991 – 1995 and 4.95%, 3.9% and 2.6% during the periods 1996 – 1999,
2000 – 2003 and 2004 – 2007 respectively to the Gross Domestic Product (GDP).
Capacity utilization rate followed the same downward trend from an annual average of
53.6% in the period 1981 – 1985 to 41.1%, 35.4% and 31.8% during the periods 1986 – 1990.
1991 – 1995 and 1996 – 1998 (Anyanwu, 2000). The manufacturing sector in spite of its
huge potentials to create wealth, reduce poverty and generate employment has
remained stagnant contributing a single digits percentage on the average to GDP

16
annually. The stagnation and unimpressive performance of this sub – sector is injurious
to the industrial sector growth and also a major obstacle facing the attainment of the
vision 20 – 2020.

2.6 The Nigerian Industrial Sector and the Global Economy

This section examines how actively Nigeria partakes in the global economy and also
Nigeria’s contribution to the global economy which would be measured by Nigeria’s
share of total world trade; and the contribution of the industrial sub – sectors to
national output and to external trade of the Nigerian economy.
Ojo and Obaseki (1998) revealed that the place of Nigeria in the global economy has
become an important issue of policy relevance as a result of the rapid integration of
the world’s goods, services and financial markets. According to Obadan (2008),
“Nigeria’s share of world trade is very low and has been declining over the years. The
country’s share of total world trade declined from an average of 0.92% in 1975 – 1979 to
0.28% in 1985 – 1989 to 0.26% in 2002 to 2005. The shares of exports and imports in
world exports and imports respectively have exhibited similar downward trends. The
very poor performance of non – oil exports contributed to the rather poor
performance of Nigeria’s share in global exports”. The exportation of crude oil and
primary products and also the importation of goods are largely responsible for
Nigeria’s share of world trade. Sub-sectors of the industrial sector such as
manufacturing and mining and quarrying sectors contribute minimal to the external
sector of Nigerian economy. Erumebor (2010) argued that the industrial sector has
been faced with enormous challenges that have resulted in low capacity utilization,
under utilization of resources, firms leaving their industries rendering many Nigerians
unemployed, low output and poor contribution of the industrial sub- sectors except
crude oil to the GDP. The manufacturing sector for instance has contributed about
3.31% annually on the average to GDP in the period 1998-2008. This figure is insignificant
to national output and Nigeria’s external sector.
National Technical Working Group (2009) argued that the manufacturing is the driver,
mover and core of industrialization of the fully industrialized, leading economies of the
world. The role of manufacturing in the modern knowledge-based technologically
driven global world is vital. The bulk of global trade (77 percent) is in the form of
manufactured goods; food and agriculture account for a mere 9 percent of global
merchandise trade followed by fuels with 8 percent and ores and minerals accounting

17
for 3 percent of world trade. Manufacturing is therefore not only the major foreign
exchange earner but a stable and reliable source of foreign exchange earnings for
major economies worldwide. For Abah (2009), no meaningful economic growth,
wealth creation, employment generation and poverty reduction can be achieved in any
country without a robust manufacturing sector. This therefore depicts the importance
of the manufacturing sector in the growth of the real and external sectors of an
economy as it facilitates the use of human resources in the procurement of raw
materials and in the production and distribution of goods. Besides, most manufactured
goods are easily transferable across national and international boundaries. While
manufacturing sector’s share to GDP in other developing countries such as Malaysia
stood at 30.9% in 2003, 25% on the average from 2000 to 2006 in Singapore, the
Nigerian manufacturing sector is fast crumbling. As reported in Vanguard Newspaper
(July 10, 2008), “Textile industry has further lost additional 15,000 direct jobs in the last
one year with the danger of more closures and more job losses following the closure of
UNT PLC, Atlantic Textile mill and United Textile limited amongst others. The
manufacturing firms in Nigeria are faced with high cost of production, uneasy access to
markets and low profit level which reduces their competitive strength with
Multinational Corporations (MNC) in the country. Nigeria’s aspiration to be among the
20 largest economies of the world by the year 2020 will remain hollow and trivial in the
absence of a vibrant manufacturing sector that is able to cope with the dynamic
challenges of an increasingly globalized world.

Lawal (2006) examines the contribution of the mining sector to output and finds that
despite the mineral potential Nigeria possesses (proven reserves in 33 types of
minerals in over 400 locations), solid mineral exportation constitutes a mere 1% to its
GDP. This extremely low share is mainly due to Nigeria’s dependence on oil but also
largely due to the underdeveloped mining sector, primarily resulting from inadequate
and inefficient policies for mineral exploration development. The mining and quarrying
sub – sector still remains under developed and unproductive in the country. Its
contribution to GDP remains insignificant contributing 0.24% annually on the average to
GDP between 1998 and 2008. ALISON-MADUEKE (2009) observed that some of the
problems facing the mining sector include: Inefficient State Operations and
participation in mining activities, Depleted Surface Alluvial Deposits (Especially Tin),
Inadequate Geological Information & Data, Cumbersome mining license application
processes, Prevalence of Illegal Mining Activities, Jurisdictional Conflicts between

18
Federal and State government. As a result, existing material resources are
underutilized and its usefulness is not well known. These mineral resources however
form a major source of revenue for most countries and accounts for larger share of
exports and outputs. A large number of these solid materials are newly discovered and
some are still in prospects. This however shows the neglect of the mining and
quarrying sector of the Nigerian economy.

Okoh (2004) opined that a prominent feature of Nigeria’s external sector has remained
basically the same since 1960. The export sector is characterized by the dominance of a
single export commodity, crude oil. The petroleum sector has remained the most
active sub-sector of the industrial sector in Nigeria and accounts for about 80 to 85% of
industrial output from 1998 to 2007. The sector however is a major source of
government revenue thereby given much attention when compared to others sectors
of the economy. The discovery of crude oil in 1956 followed by the increased crude oil
price in the international market in the 1970s led to the structural shift from agricultural
sector to heavy dependence on crude oil in the Nigerian economy. Sekumade (2009)
reveal that Oil export has contributed greatly to the foreign exchange earnings of the
country and has led to the neglect of the agricultural sector. The shift from agriculture
to crude oil in the 1970s has also contributed to low performance of other sub-sectors
in the sector knowing fully well the relationship between the agricultural and industrial
sector since most of the agricultural sector’s output could serve as input for the
industrial sector. Odularu (2008) noted that petroleum production and export play a
dominant role in Nigeria's economy and account for about 90 % of her gross earnings.
This dominant role has pushed agriculture, the traditional mainstay of the economy,
from the early fifties and sixties, to the background. Nigerian’s continued dependence
on crude oil to the neglect of her agricultural and industrial sectors is dangerous. There
is need to emphasize that our oil is very much exhaustible while other sub-sectors of
the industrial sectors remains an unending means of creating employment, expanding
wealth and generally improving the standard of living. When the oil market collapsed in
1982/1983 and in 2008, Nigeria experienced serious economic turmoil. However, this
sector account for larger share of Nigeria’s export and larger portion of Nigeria’s share
to the global economy.

19
2.7 Globalization and its implication on the industrial sector in Nigeria

Empirical research has examined the effects of globalization on growth, productivity

and efficiency at cross-country, industry and firm-level across countries. Existing
empirical evidence shows mixed results about the relationship between globalization
through its forces and industrial growth. Several reasons may be advanced to explain
such disparity of empirical results. To mention a few, first, tests are traditionally
conducted using data sets usually belong to heterogeneous groups of countries.
Second, previous studies have used a variety of theoretical models. Third, empirical
studies have usually implemented a number of different econometric techniques in
testing and estimation. However, this disparity in results does not preclude the need
for further investigation of the subject as long as it is clearly indicated that the analysis
and the obtained results are not necessarily generalized to other cases. The literature
discusses past empirical results on the impact of globalization on the economy of
developing countries with special reference to the Nigerian economy.

Axel Dreher (2002) concludes that globalization is good for growth. His empirical
findings further showed that on average, countries that are more globalized
experienced higher growth rates. This is especially true for actual economic integration
and – in developed countries – the absence of restrictions on trade and capital.
However, Dreher (2004) went further to state that countries with the lowest growth
rates are those who did not globalize. Countries like Rwanda or Zimbabwe, e.g.,
insulated themselves from the world economy. They have poor institutions which
repress growth and promote poverty. Nevertheless, all else equal it will not be enough
for poor countries simply to globalize their economies to spur growth rates and reduce
poverty. His study revealed that countries with greater economic integration
experienced higher growth than countries with low economic integration. Similarly,
Pleskovic and Stern (2003) points out that openness is highly correlated with changes
in growth, with a point estimate suggesting that an increase in the trade share of GDP
from 20 to 40 percent over the decade would raise real GDP per capital by 10 percent.
They showed that openness is a fairly robust cause of growth. In the aspect of FDI,
similar results were obtained. Their results revealed that FDI as a share of GDP predicts
growth. Sachs and Warner (1995) examined the experience of countries that opened
since 1975 and found higher growth in two years after liberalization and further relative
to the years prior to liberalization. As demonstrated by Dollar and Kraay (2001) there

20
exists a positive relationship between growth and openness. They classified countries
into globalizers and non-globalizers based on three criteria: One, countries whose
trade as a share of GDP rose faster between 1975-79 and 1995-97; Two, countries who
had the largest reductions in average tariff over the period 1985-89 to 1995-97 and
Three, those nine countries that were in both groups. They showed that the globalizers
enjoyed a substantial increase in growth rates in the 1990s relative to the 1980s from
2.4 percent to 3.8 percent, whereas the non-globalizers experienced slow growth rates
from -0.1 percent to 0.8 percent. Goyal (2006) showed that globalization has not only
increased the GDP of India but also the direction of growth in the sectors has also been
changed. Earlier the maximum part of the GDP in the Indian economy was generated
from the primary sector but now the service industry is devoting the maximum part of
the GDP. The services and industrial sector remains the growth driver of the Indian
economy with a contribution of larger percentage share of GDP. Balasubramanyan et
al. (1996) report positive interaction between human capital and FDI. They had earlier
found significant results supporting the assumption that FDI is more important for
economic growth in export-promoting than import-substituting countries. This implies
that the impact of FDI varies across countries and that trade policy can affect the role
of FDI in economic growth. Shiro (1999) found that there is a positive relationship
between foreign direct investment and industrial production. The elasticity of the
index of industrial production with respect to foreign direct investments of 0.14
indicates that one percent increase in foreign direct investment will lead to fourteen
percent increase in the level of industrial output. Salimono (1999) state that since
globalization entails trade liberalization, it is therefore imperative that there is free and
unrestricted movement of trade, finance and investment across the international
border. The advantage here is that globalization allows Nigeria to export and import
goods, capital and investment without restriction.

In contrast with the above empirical studies, several studies have shown that
globalization through its indicators have had adverse effects on industrial output and
economic growth of countries most especially developing countries. Robert Johnson
(2002) in his regression analysis of growth per GNP in 72 countries between 1960 to
1978, found stocks of foreign direct investment to be positively associated with
economic growth at statistically significant level for relatively advanced economies. He
therefore concluded that once the size of a developing country is taken into account,
the level of direct investment has no consistent effect on growth. According to Obadan

21
(2008), although globalization has had some positive effects on the Nigerian economy,
especially through the oil sector, there seems to be a consensus that the positive
impacts have been negligible considering macroeconomic indications such as growth,
poverty and other social indicators. Nemedia (1998) in his findings revealed that that
trade liberalization pose a great challenge to the growth of the industrial sector in
developing countries. He further stated that as a result of poor technological
development and weak managerial know-how, the developing countries run the risk of
marginalization from globalization. He argued that growth in manufacture and
industrial sector poses a major challenge for developing countries given their greater
dependence on export of primary commodities and mineral products. Ayanwale (2007)
while contributing to the impact of globalization on the industrial sector notes that
though FDI contributes positively to Nigeria’s economic growth with FDI in the
communication sector which currently has the highest potential to grow the economy,
the FDI in the manufacturing sector has a negative relationship with economic growth,
suggesting that the business climate is not healthy enough for the manufacturing
sector to thrive and contribute to positive economic growth.

2.8 Maximizing the benefits of Globalization in Nigeria

As earlier discussed, the Nigerian economy is not spared from the phenomenon of
globalization. However, Nigeria as a country is faced with the challenges of maximizing
the benefits and reducing the cost of globalization. Diversification of the economy
from heavy dependence on the petroleum sector to the development of other
secondary sectors of the economy such as manufacturing, mining and quarrying sector
to ensure that output in such sectors are optimum with lowest possible cost should be
embarked upon. Also the promotion of manufactured exports rather than dependence
on crude oil and primary products exports should be embarked upon. Obadan (2008)
stressed that dependence on primary commodity exports has not significantly aided
Nigeria’s integration into the global economy nor minimized its marginalization, even
though the economy is open. In order to ensure the industrial sector growth,
development and promotion of manufactured exports in the areas of comparatives
advantages have to be carried out thoroughly. This however can be achieved by the
government and its agencies initiating grass root production through the promotion of
Small and Medium scale Enterprise (SMEs) to produce what is imported and to meet
the basic domestic needs and tailor Nigeria’s participation in the globalization process.

22
This will, if properly instituted and managed, generate production externalities that
could lead to productivity, industrialization, economic growth and development and
strengthen Nigeria’s status and prospects in the globalization trend.

The rapid economic growth and prosperity in the Asian developing countries is derived
from their ability to enhance manufactured exports and industrialization and produce
goods in which they have comparative advantages which turns out to be cheaply
produced and affordable by their trade partners. But in the case of Nigerian industries,
the ability is produce these goods is constrained by many domestic factors which
includes infrastructural inadequacies such as bad roads, inadequate water supply,
erratic power supply, macro economic instability leading to low level of output, high
cost of production, low capacity utilization and unfavorable business environments.
The adverse business conditions coupled with insecurity of life and property, political
instability makes it difficult for Nigerian industries to take advantages of the
opportunities offered by globalization for Nigeria to become a manufactured export –
driven nation, it becomes pertinent that these problems be addressed so as to
encourage growth and development of the industrial sector and the economy as a
whole.

Knowing fully well the positive effects and impacts of Foreign Direct Investment in a
country, friendly, stable and sound economic and financial policies should be adopted
to heighten the inflow of Foreign Direct Investment (FDI) into particular sectors of the
Nigerian economy. However, before these policies are made, the local industries
should be well – equipped and prepared to face the competitive strength of the MNCs
ensuring that their products are quality inclined to enable international
competitiveness with foreign forms on the country.

Also, the use of modern technology in the production processes of local firms should
however be encouraged. Owolabi (1998) opined that computer and
telecommunication technology are the means of investment, production and
marketing in the globalization process. A system of global links must be established to
other international databases and information networks, for collecting processing,
repackaging and disseminating information on market industry, investment and
technology so as to catch the opportunities in developing global markets for exports
and imports, gain advantages of patents and technological progress to support

23
innovation and develop new products and increase the competitive edge and business
connection as well as strengthen their business structure networks and increase
productivity levels in the industrial sector in Nigeria.

Ayadi and Balonga (2006) argued that trade liberalization have had negative effects on
the environment in Nigeria. In specific terms, increased trade openness have led to
increased environmental pollution which have a significant and negative impact on
agriculture particularly the soil and water and also on the industrial sector. They
therefore recommended that trade liberalization be accompanied by government
investment in education, skills, research and development so as to equip people to
take advantage of new employment opportunities and to create adequate safety nets
to protect the environment in this era of trade liberalization.

24
3.0 Theoretical Framework and Research Methodology
3.1 Theoretical Framework

The Dependency theory and the Classical theory of international trade would be
examined to further explain the impact of globalization on industrial growth.

3.1.1 The Dependency Theory

The dependency theory asserts that underdeveloped and developing countries need to
reduce their connectedness with the world so that they can pursue a path more in
keeping with their own needs, less dictated by external pressures. The dependency
theory portrayed that developing and poor nations are at a disadvantage in their
market interaction with wealthy nations. The theory asserts that poor or developing
nations provide natural resources, cheap labour, destination for obsolete technology
and markets to wealthy nations without which the latter could not have the standard
of living they enjoy. Wealthy nations actively perpetuate a state of dependence by
various means. This influence may be multifaceted, involving economics, media
control, banking and finance, education, politics, culture, sports and all aspects of
human resource development. In this theory, it is believed that a high proportion of the
developing nations’ economic activities consist of exports and imports from other
developing nations – in many cases with only one or few developed nation. By
contrast, only a small proportion of the economic activity of the developed nations
consists of trade with the developing nations; a developed nations’ trade consists
mostly of internal trade and trade with other developed nations. This therefore puts a
poor nation in a weak bargaining position in the globalized world as against the
developed nations. Furthermore, the dependency theorist argued that there is harmful
long-term impact of FDI on economic growth. They argued that FDI may promote
growth in the short run but it is usually accompanied by numerous adverse effects on
economic growth in the long run most especially in developing countries.

Proponents of the dependency theory therefore proposed or suggest for developing

countries to embark in the promotion of their domestic industries by imposing
subsidies to protect domestic industries; rather than simply exporting raw materials,
they should however promote manufactured export; adopt import limitations
strategies by limiting the importation of luxury goods and manufactured goods that

25
can be produced within the country; prevent foreign investment and enforce
nationalization whereby the government takes control of foreign owned companies on
behalf of the state, in order to keep profits within the country. In summary, the theory
affirms that globalization is beneficial only to developed countries and the developing
or poor nations tend to reap the negative effects of globalization.

3.1.2 The Classical Theory of International Trade

The orthodox theory of trade as propounded by classical economists such as Adam

Smith and David Ricardo stressed that trade can promote growth and development in
the form of higher output. The Ricardian model however revealed that trade between
countries is attached with enormous benefits and consequently leads to growth of the
economy. In the Ricardian Model, trade leads to international specialization with each
country shifting its labour force from industries in which that labour is relatively
inefficient to industries in which that labour is relatively more efficient thereby
enhancing output of the industry. The Ricardian model asserts that not only that all
countries gain from trade but that every individual is better of as a result of
international trade. The Ricardian model assumes two countries, two commodities and
one factor of production, labour. Labour is the only primary input to production and
labour is internationally immobile. It focuses on comparative advantages and is
perhaps the most important concept in international trade theory. In the Ricardian
model, countries specialize in producing what they produce best. Unlike other models,
the Ricardian model predicts that countries will produce goods in which it has
comparative advantage. Differences in climate and environment tend to result in
differences in comparative advantage: differences in comparative advantage lead to
trade. Comparative advantage explains that trade can create value for both parties
even when one can produce all goods with fewer resources than the other. The net
benefits of such an outcome are called gains of trade. Conclusively, the theory reveals
that trade between countries would be beneficial to both countries, thus supporting
the process of globalization.

3.2 Research Methodology

Almost every scientific research can really be conducted by employing any four of the
alternative methods such as: the econometric method, the comparative method, the

26
experimental method and the documentary or case history method (Teign, 1976). The
nature and peculiar characteristics of the problem under investigation and the
objectives of the research will inform the choice of the research method to be adopted
(Umoru, 2007).

The econometric method however would be adopted for the purpose of this research.
The econometric method facilitates the specifying of statistical or econometric model,
estimation of parameters of chosen econometric model, checking for model accuracy
and testing the hypothesis derived from the model.

3.3 MODEL SPECIFICATION

In relation to the economic theories, the variables to be adopted in the model in

explaining the impact of globalization on industrial growth in Nigeria are: industrial
output which is the dependent variable; trade openness defined by the share of total
trade (import plus export) to Gross Domestic Product (GDP), the explanatory variable
and exchange rate which is also an explanatory variable. The model specification
implies expressing the relationship among variables in functional, mathematical and
econometric form. The relationship is given as thus:
i) Function form of the model
IOt = f (TOt, ERt)
ii) Mathematical equation of the model
IOt = βo+ β1TOt+β2 ERt
iii) Econometric equation form of the model
IOt= βo+ β1TOt+ β2ERt + Ui

Where
IO = Industrial Output
TO = Trade Openness
ER = Exchange rate
Ui = Stochastic error term

The stochastic term captures all other factors that could influence industrial output
other than the two variables listed above.

27
Based on the economic a priori condition, trade openness and exchange rate is
expected to have either a positive or negative impact on industrial output in Nigeria
thereby a positive or negative sign in the model. Specifically in terms of trade
openness, the Ricardian model for instance asserts that there are enormous benefits
from trade between countries. The dependency theory on the other hand posits a
negative relationship between trade and output in developing countries. Therefore
trade openness could be beneficial or not in relation to the above theories.

Trade openness would be beneficial ceteris peribus if goods imported are capital goods
which could be used to enhance production and increase output which in-turn could
lead to export driven growth of a nations’ economy. The industrial sector however in
Nigeria relies heavily on imported inputs such as raw materials, machines, equipment
and capital goods which would promote efficiency, growth and development of the
sector as this input would be employed in ensuring increased output in the sector.
Given such cases trade openness is however expected to have a positive relationship
with industrial growth or output in an economy. Conversely, trade openness if
accompanied by the inflow of consumer goods could enable the importation of
inflation and encourage the inflow of goods that happen to be cheaper and better in
terms of quality when compared to locally produced goods. With local industries
grappling with internal problems like poor infrastructural facilities, poor power supply
amongst others, trade openness seems to be injurious on industrial growth in the
country.

Exchange rate on the other hand is a major determinant of foreign direct investment
(FDI) and it is expected to have either a positive or negative effect on industrial growth
in Nigeria. A weak exchange rate in relation to other currency tend to encourage FDI
which is the most advantageous form of capital flows as it promotes innovation in
technology, enhance optimum distribution in technology and build sustainable growth
with the movement of multi-national corporations across countries. This could
however promote export driven growth in various sectors of the economy.
Notwithstanding the above benefits, a weaker exchange rate could also discourage the
importation of capital goods and inputs thereby negatively affecting productivity in the
industrial sector; attract FDI through Multinational Corporations allowing firms in the
industrial sector to face unfavorable competition. Exchange rate is thus expected to
have a positive or negative impact on industrial growth in Nigeria.

28
3.4 Description of Variables

The variables to be adopted in this research work include trade openness, exchange
rate and industrial output.
i) Trade Openness: This measures the extent to which and economy is open to
trade and it is measured by the share of total trade to GDP. Plaskovic and stern
(2003) asserts that measuring openness as import and export as a share of GDP
combines the effect of natural openness and trade policy and that this level of
openness reflect the level of economic development, such as geographic
factors as distance from trading partners and resources endowment (in that
countries with unusual resources endowment are likely to trade more). Trade
openness would however serve as a proxy for globalization in this research
work.
ii) Exchange rate: Exchange rate is defined as the rate at which a country’s
national currency exchanges for another country’s currency. It is expressed as
the amount of a currency needed to purchase a unit of another currency. The
exchange rate in this research work is the naira as against the US dollar.
iii) Industrial Output: The industrial output would be used as proxy for industrial
growth as there exist a positive relationship between growth and output. The
output in this case is the monetary value (in naira) of goods produced by the
industrial sector during the specified period.

3.5 Nature and Sources of Data

The data used for this research work covers the period 1986-2008. The data are annual
time series data collected from secondary sources such as the CBN statistical bulletin
2008 and the National Bureau of Statistics (NBS) publication 2008.

3.6 Method of Data Analysis and Estimation

The method of estimation adopted in this research work is the Ordinary Least Square
(OLS) technique. The OLS technique would be adopted so as to empirically examine
the impact of globalization on industrial sector growth in Nigeria from the period 1986-
2008.

29
The OLS technique was adopted for this research because it establishes a linear
relationship between the dependent and independent variable and it is easy to
understand, simple in computational procedure and it possesses a unique property,
Best Linear Unbiased Estimator (BLUE) in which the estimators acquire minimum
variance among a class of unbiased estimators.

Test such as the t-test, f-test and R2 which is the coefficient of determination would be
used to measure the statistical significance of the coefficients and also measure the
goodness of fit of the model.

4.0 Presentation of Result

The model used in this analysis is a single equation model consisting of three variables,
one dependent variable and two explanatory variables. The result of the equation is
presented below:

LIO = 5.074987 – 0.074987LTO + 0.85214LER

SB(i) (0.106223) (0.005727) (0.039559)
t (47.11670) (13.0945) (2.154078)
probability (0.0000) (0.0000) (0.04336)

R2 = 0.80705

R2
= 0.787755
F statistics = 28.61114
Prob (f statistic) = 0.000
DW = 1.995725
N = 23
Where:
L = Natural Logarithm

30
4.1 Analysis of the Result

SIGNS/MAGNITUDE

The result suggests a positive linear relationship between ER and IO and a negative
linear relationship between TO and IO. Thus, an increase in the value of ER by a unit will
increase the IO by 0.085214 units, while an increase in TO by a unit will reduce the IO by
0.074987 units.

2
R /R
2


2
R
The which is the co-efficient of determination and the goodness of fit test
suggests that 81 percent in the total variation in Industrial output has been explained
by the Exchange rate and trade openness taken together. This is a good fit since the
unexplained variation is just 19 percent (1-0.81). The R2 which is the adjusted R2 for
degrees of freedom suggests that 79 percent of the total changes in the IO has been
explained by the TO and ER taken together.

F Test

The f-test is used to test the overall significance of the model. The f test with a value of
28.61114 and probability of 0.000 suggests that the IO and ER are significant factors to
be taken into consideration when explaining the changes in the IO. This suggests a
rejection of the null hypothesis and an acceptance of the alternative hypothesis.

T test

The t-test is used to test the statistical significance of each independent variable in
explaining the changes in the dependent variable. The t-test with values of 2.154078
and -13.09450 and probabilities of 0.0000 and 0.0436 is an indication that both the TO
and ER are statistically significant in explaining the changes in IO. This further suggest
that the TO and ER are good predictors of the IO. This suggest that the TO and ER are
good predictors of the IO.

31
DW test

The Durbin Watson test is used to test for the presence or absence of first order serial
correlation in the series. The DW value of 1.995725 did not show significant support for
the existence of first order serial correlation in the model.

4.3 Policy Implication

The result shows that trade openness and exchange rate are important determinants
of the level of industrial output. This suggests that the trade openness and exchange
rate are important factors that to a large extent influence growth of the Nigerian
industrial sector. However, the positive relationship between exchange rate and
industrial output implies that an increase or appreciation of the value of the naira by
one unit would increase industrial output by 0.085214 unit. This can be attributed to
the reason that as the naira appreciates as against the US dollar, imports becomes
cheaper thereby increasing the importation of capital goods, machineries and
equipments that are needed to simulate the industrialization process and in turn
increase industrial output. Thus, a depreciation of the value of the Naira is likely to have
a negative impact on industrial sector growth in Nigeria. The result also showed that
trade openness has a negative sign. This suggests that the openness of the Nigerian
economy to the outside world has not been too beneficial to the industrial sector. This
is visible from the collapse of local industries that could not compete with their foreign
counterparts as a result of globalization. Thus, an increase in the level of openness by a
unit would reduce the level of industrial output by 0.074987 units.

5.0 Summary of Findings

The purpose of this research is to examine the impact of globalization on industrial

growth in Nigeria. Trade openness and exchange rate were used as proxies for
globalization to determine the relationship between globalization and industrial output
in Nigeria.

Trade openness was found to be negatively related with industrial output. This result is
however in support of the dependency theory earlier discussed. This is due to the
reason that openness weakens the competitive strength of local industries with the

32
presence of multinational companies who usually have better and cheaper products
and use advanced technology of the developed countries. Also, the openness of the
Nigerian economy perpetuates the inflow of both essential and non-essential goods
enabling easy access of the Nigerian market by the developed countries thereby
rendering our local infant industries unprotected. Conversely, the developing countries
protect their economy from exports of the developing countries. Therefore, trade
openness retards industrial output in the economy and thereby reduces industrial
growth in Nigeria.

Exchange rate on the other hand is positively related to industrial output n Nigeria. As
the value of the Naira appreciates with respect to the US Dollar, industrial output
would increase on the average. This implies that as the value of the Nigerian naira
appreciates, imports would seem cheaper and imported capital goods and machineries
needed for the promotion of industrialization process would appear cheaper in the
country. The importation of such capital goods would help in the promotion of import
substitution process which would help increase industrial output in the long run.

5.1 Conclusion

Based on the findings of this research work we would reject the null hypothesis that
there is no significant relationship between globalization and industrial output. Thus,
globalization is an important factor that should be considered in determining the
performance of the industrial sector.

Globalization is a complicated phenomenon which is accompanied with enormous

benefits and costs among countries around the world. Nigeria is not exempted from
the benefits and cost of globalization. The study reveals the benefit accruing to the
Nigerian economy as a result of globalization and examines how Nigeria can maximize
these benefits. The study also shows that the adverse performance of the non-oil sub-
sector of the industrial sector was not modified or resolved by the globalization
programmes introduced by the Structural Adjustment Programme (SAP) in 1986 rather
these problems was heightened as a result of the globalization process.

Owing to the empirical evidence of the study, globalization can be said to have a long
term impact on the growth of the Nigerian industrial sector and the growth of the

33
industrial sector relies heavily on the performance of the indictors and agents of
globalization as earlier discussed.

5.2 Recommendations

In order to reduce the cost of globalization and maximize its benefits on the industrial
sector in Nigeria, the following recommendations should be considered.

i) Development of the manufacturing and mining and quarrying sub-sectors of the

industrial sector – the extreme dependence on the crude oil revenue has partly
led to the neglect of other sectors like the manufacturing and mining and
quarrying sector. This has hereby led to poor performance of these sectors
which can be seen in their output, capacity utilization and contribution to Gross
Domestic Product (GDP). Enacting business friendly policies and granting
incentives like tax holidays to producers and firms in these sectors so as to
stimulate production should be done by the Nigerian government.

ii) Protection of local infant industries – Adopting protective policies and

strategies such as restricting the participation of foreign firms in certain sectors,
avoiding multiple taxes on infant and local firms by the federal, state and local
government, e.t.c so as to reduce unfavorable competition between them and
other large Multinational firms should be adopted.

iii) Promotion of manufactured export – Dependence on crude oil and primary

products for exports has served as a major constraint in integrating Nigeria into
the global economy. The prices of the above named products are externally
determined outside the economy and this leads to fluctuations on their prices
thereby dwindling revenue becomes the order of the day. The development of
the industrial sector would require the promotion of manufactured exports in
areas of comparative advantage. These if properly done would not only increase
manufacturing sector output but also stimulate industrial growth ceteris
peribus.

iv) Development of technology – The Nigerian government should encourage the

development and transfer of technology from advanced countries so as to bring

34
 about advanced production techniques, better machine, better products design
that can help increase their competitive edge and also better marketing
techniques in the industrial sector in Nigeria.

v) Infrastructural development – One major factor inhibiting industrial sector

growth is infrastructural failures. Inadequate infrastructure make locally
produced goods less competitive locally and abroad. A notable reason for this is
high cost of production occasioned by infrastructural failures. Inadequate
power supply, water supply, transportation sector and minimize Nigeria’s
benefits in the globalization process. The development of infrastructural
facilities would however reduce the problems of the industrial sector in Nigeria.

vi) Attraction of foreign direct investment to particular sectors – Having analyzed

the benefits of FDI in a country, there is therefore the need for the government
to enact and develop policies that would encourage and attract long-term
capital inflows particularly FDI into selected sectors of the economy. There is
also the need to develop policies and design benefits of FDI in relation to the
costs.

vii) Regulation of imported goods should also be done by the government of the
country. Imposing higher tariffs on non-essential goods and the control of
imported essential goods so as to prevent Nigerian market from being a
dumping ground should be carried on.

viii) Formulating and implementing efficient fiscal and monetary policies should also
be considered by the Nigerian government. Adequate structural and sectoral
policies in order to improve macroeconomic stability, ensure external sector
development, reduce vulnerability to external shocks and crisis and ensure
stable exchange rate and interest rate should be carried out.

35
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 APPENDIX
Table 1
Trade Exchange
Total trade Openness Industrial Output Rate Naira/
Year GDP (N’million) (N’million) (TT/GDP) (N’million) US Dollar

1986 69,147.00 14,904.20 0.2155 16,392.90 2.0206

1987 105,222.90 48,222.30 0.4583 34,477.30 4.0179

1988 139,085.30 52,638.50 0.3785 41,200.30 4.5367

1989 216,797.50 88,831.40 0.4097 89,596.70 7.3916

1990 267,550.00 155,604.00 0.5816 115,591.40 8.0378

1991 312,139.80 208,555.60 0.6681 136,627.70 9.9095

1992 532,613.80 353,177.40 0.6631 274,755.30 17.2984

1993 683,869.80 384,870.50 0.5628 282,305.90 22.0511

1994 899,863.20 368,848.00 0.4099 283,563.10 21.8861

1995 1,933,211.60 1,705,789.10 0.8824 873,884.70 21.8861

1996 2,702,719.10 1,872,170.00 0.6927 1,293,225.60 21.8861

1997 2,801,972.60 2,087,379.30 0.7450 1,215,912.20 21.8861

1998 2,708,430.90 1,589,275.40 0.5868 882,034.00 21.8861

1999 3,194,023.60 2,051,485.50 0.6423 1,179,551.20 92.6934

2000 4,537,637.20 0.6459 2,359,313.30 102.1052

39
 2,930,745.70

2001 4,685,912.20 3,226,134.20 0.6885 1,874,082.90 111.9433

2002 5,403,006.80 3,256,873.00 0.6028 2,042,716.50 120.9702

2003 6,947,819.90 5,168,121.70 0.7438 3,037,706.30 129.3565

2004 11,411,066.90 6,589,826.80 0.5775 4,610,083.70 133.5004

2005 14,610,881.50 8,400,905.20 0.5750 6,090,547.40 132.147

2006 18,564,594.70 10,477,389.80 0.5644 7,488,743.50 128.6516

2007 20,657,317.67 11,009,191.20 0.5329 8,085,380.04 125.8331

2008 24,296,329.29 12,868,045.80 0.5296 9,719,513.86 118.5669

Source: CBN Statistical Bulletin 2008

40
Table 2
Manufacturing Industrial sector Manufacturing
Year Output (N’million) growth rate sector growth rate
1986 6,580.20 -10.1% 2.9%
1987 7,422.40 110.3% 12.8%
1988 10,960.50 19.5% 47.7%
1989 12,304.70 117.5% 12.3%
1990 14,527.50 29.0% 18.1%
1991 19,118.00 18.2% 31.6%
1992 26,522.00 101.1% 38.7%
1993 38,520.00 2.7% 45.2%
1994 62,470.20 0.4% 62.2%
1995 103,736.30 208.2% 66.1%
1996 130,456.80 48.0% 25.8%
1997 141,922.30 -6.0% 8.8%
1998 140,035.50 -27.5% -1.3%
1999 148,649.20 33.7% 6.2%
2000 163,667.00 100.0% 10.1%
2001 185,279.70 -20.6% 13.2%
2002 223,017.50 9.0% 20.4%
2003 270,373.20 48.7% 21.2%
2004 326,859.40 51.8% 20.9%
2005 379,330.05 32.1% 16.1%
2006 441,066.18 23.0% 16.3%
2007 479,527.27 8.0% 8.7%
2008 537,990.95 20.2% 12.2%
Computed from CBN Statistical Bulletin data 2008

41
Table 3
Year Manufacturing Share of GDP Industrial Share of GDP
1985 9.42% 26.84%
1986 9.52% 23.71%
1987 7.05% 32.77%
1988 7.88% 29.62%
1989 5.68% 41.33%
1990 5.43% 43.20%
1991 6.12% 43.77%
1992 4.98% 51.59%
1993 5.63% 41.28%
1994 6.94% 31.51%
1995 5.37% 45.20%
1996 4.83% 47.85%
1997 5.07% 43.39%
1998 5.17% 32.57%
1999 4.65% 36.93%
2000 3.61% 51.99%
2001 3.95% 39.99%
2002 4.13% 37.81%
2003 3.89% 43.72%
2004 2.86% 40.40%
2005 2.60% 41.69%
2006 2.38% 40.34%
2007 2.32% 39.14%
2008 2.21% 40.00%

42
Computed from CBN Statistical Bulletin data 2008

Table 4
Growth rate of Import, Export and Total Trade
Year Import Export Total Trade
1986 -15% -24% -21%
1987 199% 240% 224%
1988 20% 3% 9%
1989 44% 86% 69%
1990 48% 90% 75%
1991 90% 11% 34%
1992 68% 71% 69%
1993 14% 6% 9%
1994 -2% -6% -4%
1995 364% 361% 362%
1996 -25% 38% 10%
1997 50% -5% 11%
1998 -1% -39% -24%
1999 3% 58% 29%
2000 14% 64% 43%
2001 38% -4% 10%
2002 11% -7% 1%
2003 38% 77% 59%
2004 -4% 49% 28%
2005 -10% 44% 27%
2006 64% 14% 25%
2007 41% -9% 5%
2008 -20% 39% 17%

Computed from CBN Statistical Bulletin Data 2008

43
Computed from CBN Statistical Bulletin Data 2008

44