INFRASTRUCTURAL DEVELOPMENT AND ECONOMIC

GROWTH; EVIDENCE FROM NIGERIA

BY

NAME:
MATRIC NO: 2018040XXXX

BEING A RESEARCH WORK SUBMITTED TO THE DEPARTMENT OF

ECONOMICS, COLLEGE OF SOCIAL SCIENCE, TAI SOLARIN UNIVERSITY
OF EDUCATION, IJAGUN, OGUN STATE

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD

OF BACHELOR OF SCIENCE EDUCATION ([Link]. Ed) DEGREE IN
ECONOMICS EDUCATION

MARCH, 2023

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ii
 CERTIFICATION

I certify that this original work was carried out by Name with Matriculation Number

2018040XXXX of the Department of Economics, Faculty of Social Science, Tai

Solarin University of Education, Ijagun, Ijebu Ode, Ogun State, Nigeria.

..................................... .......................................

Date

Supervisor Lecturer

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 DEDICATION

I dedicate this research work to God Almighty for His blessings and protection over

my life all through the programme.

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 ACKNOWLEDGMENT

All thanks are due to God Almighty, the lord of the Heavens and Earth. Also my

sincere gratitude goes to my parents for her understanding and support.

My profound gratitude goes to my supervisor xxxxxx for his guidance, patience and

support throughout this project, may the lord continue to bless you Sir.

My special thanks goes to my parents Mr. & Mrs. xxxxxxxx for their moral support,

prayers, financial support and co-operation throughout my education and to all my

friends who supported me during this project, I love you all.

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 ABSTRACT

This study critically investigated the relationship impact of infrastructure development

on the economic growth of Nigeria. The objectives of the study used to investigate the
research includes: to examine the impact of capital expenditure on economic growth
in Nigeria; to impact of foreign direct investment (FDI) on the economic growth in
Nigeria. The theoretical model or theory used for this research study includes
Structural Functionalist Theory. The design was descriptive and adopts an
econometric research design which involves the use of secondary data source and
econometric model to test statistically the significance relationship and impact of
infrastructure development on the economic growth of Nigeria. The data collected
were analysed using Ordinary Least Square estimation technique through the E-views
7.0 software. The study showed that there is positive relationship between capital
expenditure and gross domestic product in Nigeria which denotes that increase in
infrastructural development in Nigeria has positive impact on the economic growth in
Nigeria. Also, the study proves that there is a positive relationship between foreign
direct investment and gross domestic product in Nigeria which is justified on the basis
that when the foreign direct investment increases, the economic growth also
increases. Based on these findings, it is recommended that government need to
implement policies that would help manage and improve the infrastructural
development such as capital expenditure and foreign direct investment in Nigeria, so
as to improve the economic growth in Nigeria.

Keywords: Infrastructural development, Economic growth, Capital expenditure,

Foreign Direct Investment, Nigeria economy

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 TABLE OF CONTENTS

Pages
Title page
Certification i
Dedication ii
Acknowledgement iii
Abstract iv
Table of contents v
CHAPTER ONE: INTRODUCTION
1.1 Background of Study 1
1.2 Statement of the Problem 6
1.3 Objective of the Study 8
1.4 Research Questions 8
1.5 Research Questions 8
1.6 Justification for the study 9
1.7 Scope of the Study 9
1.8 Plan of the Study 10
CHAPTER TWO: LITERATURE REVIEW
2.1 Conceptual review 11
2.1.1 Concept of Infrastructure Development 11
2.1.2 Concept of Economic Growth 19
2.2 Theoretical Review 23
2.2.1 Structural Functionalist Theory 23
2.2.2 Endogenous Growth Theory 25
2.2.3 The New Growth Theory 25
2.3 Empirical Review 29
2.4 Summary of Literature Review 36

CHAPTER THREE: METHODOLOGY

3.0 Introduction 37

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3.1 Research design 37
3.2 Source of Data and Data Source 37
3.3 Model Specification 37
3.4 A priori Expectation 38
3.5 Diagnostic Test 39
3.6 Method of Data Analysis 41
CHAPTER FOUR: PRESENTATION OF RESULT AND DISCUSSIONS
4.0 Introduction 42
4.1 Analysis of Results and Interpretation of Results 42
4.2 Discussion of Results 45
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION
5.0 Introduction 48
5.1 Summary of the Study 48
5.2 Conclusion 49
5.3 Recommendations 49
References 51
Appendix I (Tables) 54

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 CHAPTER ONE
INTRODUCTION

1.1 Background to the Study

Governments around the world are continually looking for new strategies to increase

the ability of their economies to produce goods and services. In this light, over the last

two and half decade’s attention has shifted to infrastructure development as a veritable

tool for raising the productive capacity of the economy (Ogunlana, Yaqub &

Alhassan, 2016). According to Sawada (2015), infrastructure development plays a

significant role in the growth process of an economy. In fact, development economists

have considered infrastructure to be a precondition for industrialization and economic

development.

Also, Owolabi-Merus (2015) opined that infrastructure and its development plays an

essential role in the growth of nations’ economy, whether developing or developed.

Additionally, the need for good infrastructure management is of great importance to

the economy of countries all over the world and the various sectors of the economy

need to be understood. Besides, the world is fast becoming a global village and a

necessary tool for this process is a functional infrastructure that can contribute to the

economic development.

Okolo (2018) equally pointed out that infrastructural development has been on the top

of priority list for governments all over the world; as policymakers believe that

appropriate infrastructural investment holds the key to social and economic

development and growth. Also, World Bank as cited by Ogbaro and Omotoso (2017)

reiterated that improving infrastructure of countries around the world play a key role

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in reducing poverty among citizens and improving economic growth of the nation.

Additionally, the need for infrastructure development is indeed crucial for developing

countries, especially Africa; as the lack of modern infrastructure has been regarded as

an impediment to economic development and a major constraint not only on poverty

reduction, but also on the attainment of the Goals of Vision (2030) in many African

countries (Ogunlana, Yaqub & Alhassan, 2016). Furthermore, Owolabi-Merus (2015)

attributed the rise in the transaction costs of business in most African countries to

inadequate infrastructure. Today, African countries exhibit the lowest levels of

productivity of all low-income countries and are among the least competitive

economies in the world.

Similarly, Ogbaro and Omotoso (2017); Ogunlana, et al (2016); and Nedozi,

Obasanmi and Ighata (2015) emphasized that infrastructure development in any

developed or developing countries is regarded as a critical factor driving economic

growth. Also, these researchers added that the development in whatever dimension

cannot result into good healthy living if infrastructure such as telecommunications,

transport, energy, water, health, housing and education are not invested on.

Additionally, Sawada (2015) pointed out that infrastructures raise growth quality,

reduces economic disparity and poverty level. Direct investment on infrastructure is

capable of promoting positive externalities in terms of making available production

facilities and at the same time lowers costs associated with trade transactions and

generate employment opportunities for the people.

In the case of Nigeria, the importance of infrastructure cannot be over-emphasized.

The role of infrastructures has gained renewed attention from Nigeria government

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over the years. According to Michael (2016) and Owolabi-Merus (2015), from the

policy point of view, the renewed concern with infrastructure can be traced to the

world-wide development that has taken place in the two decades. The first one was the

retirement of the public sector since the mid-1980s in most industrial and developing

countries from its sole position in the provision of infrastructure to private

participation in the provision of infrastructure. This was part of the worldwide drive

towards increasing reliance on markets and private sector activity (privatization of

public utilities) and multiplication of concessions and other forms public-private

partnership (PPP). Umar, Ogbu and Ereke (2019) as well as Okolo (2018) argue that

infrastructural development is critical to the achievement of the nation’s

developmental goals in relations to poverty alleviation, quality education for all, good

health and the fast growth of SMES among others.

Michael (2016) opined that significance infrastructure in developing countries

translate to the rising quality of life by creating amenities, providing consumption

goods (transport, energy and communication services and contributing to

macroeconomic stability. Unfortunately, in Nigeria in particular, traffic congestion,

power black outs in major cities, bad quality of roads, access to capital and market,

inadequate telecommunication services, shortage of drinking, irrigation and industrial

water, all bear witness to the inadequate existing infrastructure facilities. Even schools

are not equipped with basic infrastructure that enhances human capital development.

Infrastructures in certain remote areas can serve as an incentive to attract certain levels

of industrial activities in such places, in that wise, infrastructure provision facilitates

investment in less developed areas (Ogbaro & Omotoso, 2017).

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Still, Nedozi, et al (2015) reiterated that the attainment of sustainable economic

growth remains a paramount objective of every country and the primary source

required for achieving this objective is through increased domestic productivity.

However, for this to occur, such country must be able to create quality and sufficient

infrastructure to stimulate such desired economic growth. In other words,

infrastructure development is a major contributor, catalyst and determinant of a

country’s economic growth.

Conversely, Sawada (2015) pointed out that the deficiency of infrastructure

constitutes serious hindrance to sustainable growth and development and possibly

worsen poverty level. A number of studies have documented positive relationship

between economic growth and infrastructure development (Ogbaro & Omotoso, 2017;

Ogunlana et. al, 2016). These studies have maintained that investment in

infrastructures directly affect economic development. However, Owolabi-Merus

(2015) noted that the only avenue a country can explore to attain some reasonable

growth potentials is to commit resources to the provision of infrastructures such as

good roads, functional railway networks, water, electricity, schools, houses, hospitals

etc.

Economists, however, hold a mixed view about the consequences of infrastructure

development. One of the views about infrastructural investment is that high rate of

infrastructure growth raises the level of productivity in the current period, and also

leads to a higher potential level of output for the future (Umar et al, 2019). The

argument in opposition is that rapid infrastructural development leads to unbalanced

form of development process; as some areas develop rapidly, whereas other areas

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remain underdeveloped, as result, people especially the working population from

underdeveloped areas move to developed areas imposing a burden on resources in

these areas (Nedozi, et al, 2015).

According to World Bank (2018), countries that invest in improving its infrastructure

such as roads and railways, schools and tertiary institutions, high standard hospitals

among others often experience growth its economic activities as well as human

development which in turn improve the economic growth of the nation. In most

countries, capital expenditure aspect of the budget often set aside for the development

of this infrastructures which means more money set aside for infrastructural

development simply translate to more infrastructural development in the country as

experienced in Nigeria government (Ogbaro & Omotoso, 2017). As a result, increased

growth rate in nation’s economy can be achieved by higher capital expenditure which

is mainly spent on capital expenditure (Okolo, 2018).

Equally, Ogunlana et al (2016) explained that capital expenditure is regarded as the

money spent by the government on the development of machinery equipment,

building, health facilities, education among others. Besides, all things equal in a

functioning economy, it is believed that the infrastructure developed from the capital

expenditure is expected to contribute enormously to the development of the nation’s

economy. Therefore, it can be concluded that a country with low capital expenditure is

mostly likely not improving on its infrastructure probably due to the fact that these

infrastructures are still relevant, up-to-date, fully functioning and contributing to the

economic development of host country; else, the country is bound to experience a

decline in its economy.

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More importantly, the availability of quality physical capital attracts Foreign Direct

Investment (FDI) inflow, which is an integral macro-economic variable necessary for

increasing a country’s economic prosperity. Fortunately, this can be achieved through

high capital investment on the present infrastructure existing the country; so as to

improve the economic activities taken place in the country which ultimately results in

increased production in the long run, higher profits and a positive spill-over effect on

a country’s economic growth (Okolo, 2018)

Based on the discussion so far, an intuitive conclusion that a key precondition for

ensuring and enhancing sustainable economic growth is through increased

infrastructural development in the country. This study is geared towards investigating

the contribution of Infrastructure development towards economic growth in Nigeria. It

also aims to determine if there a relationship between infrastructural development and

economic growth in Nigeria as well as exploring whether there is a causal relationship

between both variables.

1.2 Statement of the Problem

Infrastructural development plays a huge role in the economic development of any

growing nation across the world (Michael, 2016). Though, huge sum of money is

being set aside in the nation’s yearly budget in form of capital expenditure mainly to

serve a specific purpose which is to improve the existing infrastructure in the country

considering its multiplier effect on the economic growth rates after being achieved.

For instance, infrastructure development such as road and railway often improve the

movement of goods and services from the seller to the buyer, hence contributing to the

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economic growth in one way other. Another example is the construction or upgrading

of schools and tertiary institutions which when completed will improve the human

development of the country as well as the economic development of the country.

Likewise, the construction of energy source that can provide adequate power of the

nation will tremendously improve the economic growth of nation (Anyaduba &

Aronmwan, 2017). No doubt, infrastructure development through capital expenditure

contributes positively to the economic development of the nation.

Unfortunately, in a country like Nigeria, huge sum of money in form of capital

expenditure spent on infrastructure development has not visibly translate into

economic development as it is experienced over the years. The country has been

experiencing stunted growth due to sluggish infrastructure development considering

the amount of money that has been channelled to the provision of infrastructure

services in areas where they are largely inadequate and sub optimal. According to

Umar, et al. (2019), the capital expenditure that was directed for the provision or

upgrade of infrastructures were either embezzled or out rightly diverted to less

productive needs which are susceptible to corruption. This, however, created a lacuna

in infrastructure development process which in turn affected the economy growth of

the country. Also, Michael (2016) attributed the downward trend in the growth rate of

the economy to the poor state infrastructure development in the country. As a result,

there is need to sincerely invest on infrastructure in order to maintain a stable growth

momentum in productivity and at the same time improve the quality of living standard

of the people. However, there are only a few studies to rely on the impact of

infrastructural development on Nigeria economy considering the conflicting results of

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different scholars on the topic, hence creating a gap in the study that need to be

worked on by the researcher.

1.3 Objective of the Study

The main objective of this research is to investigate the relationship impact of

infrastructure development on the economic growth of Nigeria. The major objectives

are as follows:

i. To investigate the impact of capital expenditure on economic growth in

Nigeria.

ii. To ascertain the impact of Foreign direct investment (FDI) on the economic

growth in Nigeria

1.4 Research Questions

The research questions that guide this study are:

i. What is the impact of capital expenditure on economic growth in Nigeria?

ii. What is the impact of foreign direct investment (FDI) on the economic growth

in Nigeria?

1.5 Research Hypotheses

H01: There is no significant impact of capital expenditure on economic growth in

Nigeria.

H01: There is no significant impact of foreign direct investment (FDI) on the

economic growth in Nigeria.

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1.6 Justification for the Study

The motivation of this study lies in the urgent need to document the attributable

benefits that come with Infrastructural development through funds from capital

expenditure in the country and the definite steps or processes to fully utilize

infrastructural development in a developing economy like Nigeria so as to develop

evidence based procedures for monitoring, managing and improving infrastructural

development in developing Nigerian economy and its impact on the economic growth

of the country.

There’s currently not enough published studies on the effectiveness of infrastructural

development towards the economic growth of developing countries like Nigeria.

Findings from this study therefore will provide a valuable reference to the economic

community (economists) and body of knowledge at large as far as the impact of

infrastructural development on the economic growth in developing country is

concerned.

The findings from this study will provide a critical appraisal of the current protocols

for monitoring the consistent development of infrastructure in developing countries

with respect to the economic growth of the nation; as well, it will generate

recommendations to improve these protocols.

1.7 Scope of the Study

The project covers every aspect of the infrastructure development and the economic

growth of Nigeria. Additionally, the scope of this study between 1980 and 2021 will

be selected for this research work. This study will provide in-depth information on the

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impact of infrastructure development in Nigeria since the beginning of Oil boom on

the growth Nigeria economy.

1.8 Plan of the Study

This study will be divided into five chapters, chapter one will focus on introduction

such as the background of the study, statement of the problem, research questions,

objectives of the study, justification for the study, scope of the study and plan of the

study. Chapter two will examine literature review on the impact of infrastructure

development on the growth of Nigeria economy, theoretical framework, methodology

and empirical review. Chapter three will focus on the research methodology, chapter

four will embrace data analysis and interpretation of result and finally, chapter five

will embrace summary, conclusion and policy recommendation.

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 CHAPTER TWO

LITERATURE REVIEW

This chapter seeks to review relevant literature concerning infrastructural

development and the economic growth of Nigeria. The review is further broken down

into four major segments which include: conceptual review, theoretical review,

methodological review and empirical review.

2.1 Conceptual Review

2.1.1 Concept of Infrastructure Development

Infrastructure development, according to Nedozi, et al (2015) is the construction of

basic foundational services in order to stimulate economic growth and quality of life

improvement. Besides, most advanced economies have gone through periods of

intensive infrastructure construction that have improved the efficiency and

competitiveness of the host nations.

Similarly, Umar, et al (2019) explained infrastructure from a functional perspective as

a tool which facilitates the production of goods and services, and also the distribution

of finished products to end-users (markets), as well as basic social services such as

schools and hospitals; for example, roads enable the transport of raw materials to a

factory. Still, Ariyomo (2016) reiterated that infrastructure is an umbrella term for

many activities usually referred to as “social overhead capital” by development

economists. Precisely, infrastructure refers to a network of transport, communication

and public (social) services – all functioning as a system or as a set of interrelated and

mutually beneficial services provided for the improvement of the general well-being

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of the population. They refer to those services or facilities meant for the common

goods of the people. They include water supply, health care delivery, education, postal

and telecommunication facilities, electricity, etc.

Also, Michael (2016) pointed out that adequate infrastructure often boosts a nation’s

success through economy growth, production diversification, population growth

sustenance, reducing poverty and enhancing environmental conditions but low level of

infrastructure development in many sub-Saharan countries in Africa has negatively

impacted economic growth. For instance, the poor state of infrastructure in developing

countries such as Nigeria has made the efforts towards growing the economy to be

abortive. No wonder, Okolo (2018) noted that one of the most important limiting

factors to economic growth and the achievement of the MDGs in several developing

countries is the lack of infrastructure.

Ogbaro and Omotoso (2017) opined that infrastructure development is vital in

maintenance of growth and alleviation of poverty; and the socio-economic

development of a nation can be accomplished by appropriate planning of

infrastructure. Though, in most cases, infrastructure is grouped into two main classes:

social infrastructure (education, waste disposal plant, sporting facilities, health,

recreation and housing) which boosts the quality of life (human capital) and has

multiple consequences on the economy. Besides, the enhancement of human capital

will guarantee innovation, invention and advancement of productivity in the economy.

The quality of social infrastructure, according to a recent World Bank survey affects

urbanization which is directly proportional to gross development product. Secondly,

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physical infrastructure such as roads, electricity and telecommunication leads to

economic growth and development of any country (World Bank, 2018).

According to John (2018), Africa is blessed with immense potentials which involves

clean energy resources like solar, hydropower, biomass, geothermal, compressed

natural gas, and wind, but hardly utilized because investment have been drastically

inadequate in the procurement of new facilities and maintenance of existing

infrastructure leaving many African countries with insufficient electricity service,

poor quality roads, port, railway and inadequate information communication

technology (ICT). Considering the fact that infrastructure is the foundation on which

other super-structures are built, specifically the economic and institutional

infrastructures (Kumar, et al, 2016).

Additionally, Ogbaro and Omotoso (2017) highlighted that infrastructural

development in many developing countries has not been given adequate attention by

successive government in Africa and Nigerian government cannot be exonerated for

this. Even, some scholars have acknowledged the important role of infrastructure in

stimulating foreign direct investment, among them are Ogunlana, et al (2016),

Owolabi-Merus (2015), Sawada (2015) who argued that infrastructural development is

a necessary condition for foreign investors to operate successfully as poor

infrastructural development increase costs for firms in the country. No wonder,

Diugwu et al (2015) reiterated that the availability of good infrastructures like roads,

railways, highways, ports, communication networks and electricity with stable policy

would increase the productivity of firms and thereby attract higher levels of foreign

direct investment (FDI) into the host country. However, for a country like Nigeria

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with many nearby developing countries, infrastructural development could be a

comparative advantage to attract investment.

Ogunlana, et al (2016) opined that Nigeria has the potential to house a large number of

the world's investments, but due to poor state of infrastructure development, this

potentials could not be showcased to a greater height. The deplorable state of

infrastructures and poor state of repairs and maintenance are evident on electricity,

roads, railways and water facilities. The reasons for the deplorable conditions of the

infrastructures are: reduction in government spending on infrastructure, vandalization

of existing ones, corruption, bureaucratic bottlenecks and delay, maintenance and

repairs of damaged facilities. As rightly submitted by Owolabi-Merus (2015), these

could result into: low productivity growth, low income growth, low savings, low level

of industrial development and ultimately end up as vicious cycle of poverty.

Infrastructure deficit have decimated Nigeria's growth potentials and made doing

business very difficult and restrictive. For Nigeria to realize its growth potentials, a

fully structured and sustainable infrastructure development policy is desirable.

Still, Nedozi, et al (2015) reiterated that infrastructure development and management

constitute the critical area which requires efficient developments that the society

heavily relies upon and this would provide a good yardstick of measuring socio-

economic development. Also, Ogunlana et al (2016) noted that the growth process in

Nigeria can be ascertained through the quality of infrastructures supporting it.

Infrastructures could be financed through domestic savings or foreign direct

investment. The bulk of infrastructure financing in Nigeria comes from direct budget

investment from fiscal resources, borrowing and market based financing. A large

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number of urban infrastructures in Nigeria were financed through direct budget

expenditures from the three layers of government (Central, State and local

governments). However, the dimension of finance differs due to constitutional

limitations. Infrastructure development remains grossly inadequate relative to the

nation’s requirements due to lack of funds. Revenue inflows from taxation and other

income generating activities have been quiet epileptic and inadequate to address the

question of bourgeoning infrastructural needs in Nigeria (John, 2018).

There is no doubt that sufficient infrastructural services are indispensable for

economic development (Kumar et al, 2016). The adequacy of infrastructure helps to

determine a country’s success or failure in diversifying production, coping with

population growth, reducing poverty, improving environmental conditions, etc.

Indeed, socio-economic development can be facilitated and accelerated by the

presence of infrastructure. If these facilities and services are not in place, development

will be very difficult and in fact can be likened to a very scarce commodity that can

only be secured at a very high price and cost.

However, adequate access to social and welfare services, such as medical services,

education, potable water supply, roads, electricity, employment opportunities etc, are

strong indices of development (Kabiru et al, 2015). In any discourse on infrastructure,

it is important to note that infrastructure can be broadly classified in two: physical

(roads, electricity, telecommunication, etc) and social (education, health, recreation,

housing etc.). In some clime, physical infrastructure is often referred to as economic

infrastructure (Michael, 2016). Therefore, it is highly instructive to dissect the role of

infrastructure in relation to economic development.

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Forms of Infrastructure Development

a. Social Infrastructure

Social infrastructure has enormous externalities. Education and health are both

social infrastructure and are also social goods under social marginal productivity

(SMP) which exceeds the private marginal productivity (PMP). Therefore private

investment capital in such social infrastructure is likely to fall far short of what is

needed. In that case, it is imperative for the state to provide the finance and other

complementary resources for the take-off of such social infrastructural projects.

Education is a very important source of economic growth, though education may be a

social investment it is also an economic investment, since it enhances the

stock of human capital (Diugwu et al, 2015).

Human resource development may be a more realistic and reliable indicator or

modernization or development than any other single measure. It is one of the

necessary conditions for all kinds of growth. Social, political, cultural or economic,

this economic development is not possible without education and investment in

human capital which is hugely productive. Therefore Hingham as cited by Ariyomo

(2016) states that it devolves on the state to initiate a long term programme of

educational expression and reform stretching from a literacy drive to the university

level so that in all branches of national life, education becomes the focal point of a

country’s development.

The role of education as a social infrastructure, and as a stimulant of growth and

development can be enhanced only if it is qualitatively provided. Qualitative

education is a major determinant of the stock of human capital. In fact UNESCO

16
recommends a minimum of fifteen percent (15%) of national expenditure to be on

education some advanced countries spend more than 5% of their GDP on education

and yet education still remains in the front burner of national debate on the

development priorities.

b. Physical (or Economic) Infrastructure

Economic infrastructure has played a very significant positive role in the growth

performance of countries in recent times where development of economic

infrastructure has followed a relational, well-coordinated and harmonized path,

growth and development have received a big boost. Umar, et al (2019) gives examples

of economic infrastructure as public utilities such as power, telecommunication, piped

water supply sanitation, sewage, solid waste collection and disposal and pipe gas as

well as public works which include roads, major demand canal works for irrigation

and drainage, and other transport projects like urban transport, sea ports, waterways

and airports.

The provision of economic infrastructure can expand the productive capacity of the

economy by increasing the quantity and quality of such infrastructure. The

transformation curve or the production possibility frontier curve would shift with the

expansion of the economic infrastructure bases, thereby accelerating the rate of

economic growth and enhancing the pace of socio-economic development better and

proper management of economic infrastructure would have positive output income

and employment effects on the economy. Moreover, it will impact directly on the

poor, thus reducing poverty (Sawada, 2015).

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The Nature and Challenges of Infrastructural Development in Nigeria

Arguably, infrastructural facilities are in deplorable state in Nigeria. The basis for bad

governance is explained from this understanding. This is one of the reasons Ogbaro

and Omotoso (2017) posited that, infrastructure development is one of the foundations

for assessing the achievements of democratic leaders and it is the foundation of good

democratic governance. Experience in Nigeria shows that agitation for infrastructural

development is higher in democratic government than in military dictatorship. This is

because the resources for provision of infrastructure are always scarce. This lack has

opened unquantifiable loopholes for infrastructural deficits.

In fact, the Infrastructural report of Nigeria just like any third world country is nothing

to write home about. The housing situation is in a sorry state both quantitatively and

qualitatively (Okolo, 2018; Anyaduba & Aronmwan, 2017; Nedozi et al., 2015). Most

infrastructures are now decayed and need repair, rehabilitation or replacement. The

governance needed to provide this is glaringly absent. Government is the system that

plans, organizes, controls and supervises the people who are resident in an area in

other for all to have conducive-environment for living and a sense of belonging.

Governments have the power to put in place all measures that it deem fit will make an

environment beneficial for living for everybody.

Additionally, infrastructure development in developing countries like Nigeria is more

challenging because of the accessibility of people to government and involves

identifying the right project, carrying out feasibility and viability studies and

embarking out physical development of the project. The challenges are numerous and

include finance, technology for development, maintenance and design. The challenges

18
also include quality requirements of projects to meet international standard and to be

sustainably developed. Projects must meet the carbon emission standard set by

international organizations like International Standard Organisation. Air capture and

analysis are done in communities to ensure that they emit

as little greenhouse gases (GHGs) as possible, human settlements must be bio-

diversified with co-habitation of other animals and plants and natural environment

must be conserved for sustainable development and so on (Kadiri et al., 2015).

The numerous challenges have not been tackled as they should. Nigeria's lack of basic

infrastructure to facilitate sustainable development and trade – both regionally and

globally – and to ensure competitiveness is already known by all. In particular, for the

large number of local governments, especially the rural ones, the dwellers produce

have no access to markets and are not stored, hampered by weak transport and energy

infrastructure (Ogunlana et al., 2016).

The trickle-down effects of the above are numerous. For instance, tradesmen and other

technical human resources needed for infrastructural development are scarce because

of lack of training and motivation. “As a result many professional people, tradesmen

and senior managers are migrating to other countries” (Ariyomo, 2016). Because of

fast money, most youths that are supposed to learn a trade are now “commercial

motorcycle riders”.

2.1.2 Concept of Economic Growth

Economic growth according to Nedozi, et al (2015), is the process whereby the real

per capital income of a country increases over a long period of time and is measured

19
by the increase in the amount of goods and services produced in a country. Also,

Michael (2016) opined that economic growth refers to the increase in the value of

goods and services produced by an economy. It is conventionally measured as the rate

of increase in GDP. Growth in output can be divided into two categories; growth

through increased input and through improvement in productivity.

According to Ogbaro and Omotoso (2017), economic growth is defined as a long term

rise in capacity to supply increasingly diverse economic goods to the population, this

growing capacity based on advancing technology and the institutional and ideological

adjustments. Economic growth is theoretically and empirically established to be

dependent on capital accumulation and investment. Equally, Ondiege, Moyo and

Verdier-Chouchane (2013) described economic growth as a long-term rise in capacity

of the economy to supply increasingly diverse economic goods to its population. This

growing capacity is based on advancing technology and the institutional and

ideological adjustments that it demands. Besides, the achievement of a high

sustainable level of economic growth and development has been the main objective of

many countries in Africa. The search for ways to improve the level of economic

growth has encouraged researchers to develop different models and theories in a bid to

explain the phenomenon of economic growth. Economists traditionally have looked at

factors such as capital, labour and technology as the only factors which matter to the

process of economic growth. Kabiru (2016); Afolabi (2015); and Kadiri et al (2015)

among others have argued that stock market development spurs economic growth.

On the other hand, Chizonde (2016); and Diugwu et al (2015) stressed that economic

growth can be affected by functions exercised by stock market such as mobilizing

20
capital, assisting in the allocation of resources, monitoring managers, and

facilitating risk management. However, with recent developments in the economic

growth theory, there has been a shift in the focus of growth literature from the

traditional factors (capital, labour and technology) to other factors that might also

contribute to the growth process. These other factors include financial and stock

market development, macroeconomic environment, political stability and foreign

direct investment, among others.

Stock market development provides a platform that helps in improving the allocation

of capital and thus enhancing the prospects of long-term economic growth. A liquid

stock market development offers the potential for investors to quickly and cheaply

alter their portfolios thereby reducing the riskiness of their investment, thus,

facilitating investments in projects that are more profitable (Ariyomo, 2016). Without

a liquid stock market, many profitable long-term investments would not be undertaken

because savers would be reluctant to tie up their investments for long periods of time

(Ogbaro & Omotoso, 2017). The essence of this economic growth is for the creation

of economic and social overhead capitals (or costs), which leads to increase in

national output and income through the creation of employment opportunities and

reduction of the vicious circle of poverty both from the demand side and supply side.

Nigerian economy has undergone at least three distinct phases since independence

from colonial rule in 1960 (Akinwale, 2018; and Kadiri et al., 2015).

Interest in the study of economic growth has experienced remarkable ups and downs

in the history of economics. Economic growth is commonly measured as the annual

rate of increase in a country’s gross domestic product (GDP). In other words,

21
economic growth is defined as long-term expansion of the productive potential of the

economy. According to the neoclassical point of view, economic growth is entirely

driven by the accumulation of input factors and technical progress while Endogenous

growth approaches stress the role of entrepreneurship and innovations. Kuznet defined

economic growth as a long term rise in the capacity to supply increasingly diverse

economic goods for the country’s population (Anyaduba & Aronmwan, 2017).

Economic growth depends on the rate of investment which in turn largely depends on

savings. However, gross domestic savings are very low in least developed countries

(LDCS). Foreign direct investment is an alternative source to fill the gap between

savings and the required investments. Iheanacho (2016) argue that foreign firms bring

not only financial capital but also managerial, entrepreneurial, and technological skills

that lack in LDCS and these skills can be transferred to domestic firms through

different channels. Also government’s budget deficit can be filled by tax on profit that

may be collected from transnational companies.

In the words of Nedozi, et al (2015) economic growth is the basis of increase

prosperity and it comes from accumulation of more capital and innovations which lead

to technical progress, the idea similar to Ogbaro and Omotoso (2017) growth model

who sees economic growth in terms of growth in total GDP due to increase in

population, technical progress and investment. Growth according to Classical

Economist signifies increase in the rate of investment. In other words, growth is a

function of share of profit in the national income. There exists a positive relationship

between higher rate of profit and higher rate of growth in the long run.

22
2.2 Theoretical Review

This segment of the chapter reviews the theories relating to Infrastructure

development as well as the economic growth which include: Structural Functionalist

Theory, Endogenous Growth Theory and The New Growth Theory. However, the

structural functionalist theory which serves as the theory in focus that looked into how

there is high demand for infrastructural development in the country which result to

improved economic growth.

2.2.1 Structural Functionalist Theory

This study adopts the Structural Functionalist Theory as developed by Emile Durkeim,

Talcott Person and Robert Merton as theoretical framework of analysis. The theory is

chosen because it serves as a means of explaining the functions performed by the

structures in a system. The theory suggests that every system (Society) has various

departmental structures that perform certain functions for the utmost survival of the

whole system. It argues that every system has structures that must function to remain

in balance; if one structure of the political system changes, equilibrium or balance is

temporarily disrupted until other structures change to create a new equilibrium

otherwise the entire system may go dysfunctional. It focuses on social integration,

stability and co-operation.

According to Merton as cited by Diugwu et al (2015), some functions are manifest

functions and they are intended and recognized but latent functions are unintended and

unrecognized. These social patterns that contribute to the maintenance of a political

system are regarded as functional while those that have negative consequences are

23
considered dysfunctional. Talcott person observed the structural functionalist theory

as a political system made of different but interrelated parts. These parts are supposed

to work harmoniously to ensure the survival of the whole system.

However, when related to society, structural functionalism can be described as a

means of explaining basic functions of societal structures in the political system and it

also serves as a tool of investigation. Since the society is made up of parts, structural-

functional approach explains the relationship between the parts (structures) on one

hand and the relationship between the parts and the whole (political system) on the

other hand. The structures are many and they can take any form. It is the contribution

of each part (structure) that sustains the political system (whole) (Sawada, 2015).

Relating the structural functional theory to this study, an infrastructure is the

structural, functional and basic element needed for economic development of the State

to take place. For a political system to be effective, every facility including the social

and physical must be made available and functional. Hence, it is important to

recognize the fact that infrastructural facilities like roads, power, transport,

telecommunication, healthcare system, educational system, governance process

amongst several others must be put in place and adequately developed to suite the

societal need of the people. When not made available, a society may suffer

incomprehensible level of institutional decay and backwardness as the above instances

of infrastructures are necessary condiments for the survival of the society (Owolabi-

Merus, 2015). Therefore, the theory provides basic tool for understanding the nature

and character of the Nigeria status when infrastructural development forms a

discourse.

24
2.2.2 Endogenous Growth Theory

The endogenous growth theory tries to overcome this deficiency by constructing

macroeconomic models beyond microeconomic foundations. Households are

presumed to maximize utility subject to budget constraints whereas firms maximize

profits. Key importance is generally given to the manufacture of new technologies and

human capital (Owolabi-Merus, 2015). The engine for growth can be as simple as a

constant return to scale production function (the AK model) or more complicated

systems with spillover effects (spillovers are positive externalities, which are credited

to costs from other firms), rising numbers of goods, increasing qualities, etc.

Frequently, the endogenous growth theory presumes constant marginal product of

capital at the aggregate level, or at least that the maximum value of the marginal

product of capital does not lean towards zero. This does not mean that bigger firms

will be more productive than small ones, since at the firm level the marginal product

of capital is still reducing. Thus, it is likely to build endogenous growth models with

perfect competition (Ogbaro & Omotoso, 2017). Nevertheless, in lots of endogenous

growth models the assumption of perfect competition is rested, and some degree of

monopoly power is believed to exist. Normally monopoly power in these models

occurs from patent holdings (Nedozi, et al, 2015).

2.2.3 The New Growth Theory

The new growth theory was stimulated by Romer (1986) as cited by Michael (2016);

it is known as the endogenous growth theory. It integrates technology in the form

where it can relate with the function of the market. It incorporates technical

25
advancement in such a way that it is a consequence of investment level, capital stock

and also, human capital. The theory improved on earlier ones by emphasizing the

importance of technology as a market force product. Its emphasis as regarding the

economy encompasses the opinion that technological progress draws on economic

engagements. It also enumerates the ability of technology to relate not as static but

rather with the increasing return capability towards driving the process of growth

(Umar, et al., 2019).

The theory basically emphasizes on knowledge as an essential driver of growth. This

is accessed in the form of buildup of ideas and critically ensuring their maximal

utilization to the extent it boosts economic growth. The point of the new growth

theory is that knowledge drives growth. It accentuates a paradigm shift from the

regular resource based to knowledge based investment into the economy (Kabiru,

2016). It particularly encourages new knowledge as basis for shaping growth of the

economy. The Solow model on the other hand is usually called the “exogenous”

model of growth. It depicts technology to be an incessantly intensified knowledge

collection that just became apparent with time, and not essentially existing with

economic forces. This overview was the basis by which economists modeled the

economy utilizing diminishing returns, however, this was done excluding technology

from the economic model. The specified reason was that technology was supposedly

determined by factors remote to the economy, otherwise not internally generated

(Solow 1957 as cited by Umar, et al., 2019).

The neoclassical theory asserts that, the minimal relative amount capital to labour of

developing countries promises extremely high investment return. The liberalization of

26
national market according to them draws more domestic investment, likewise foreign

investment, thereby increasing capital accumulation. The resultant growth thereby of

Gross National Product is similar to increasing domestic savings rate which enhance

capital-labour ratio and per capita incomes in capital poor countries (Ogbaro &

Omotoso, 2017).

The new growth theory discards diminishing returns to capital investment assumption

of the Neoclassical, therefore permitting increase to scale in aggregation of

production, role of externality focus in determining investment return, with the

assumption that public and private investment in human capital stimulate external

economies for productivity improvement that counteract normal inclination of

declining returns asserted by the neoclassical, the new growth economists, highlight

external economies to capital buildup which can persistently make the marginal

product of physical or human capital to exceed the interest rate. It puts a stop to

declining returns from being made inactive thereby resulting in long term growth

patterns in developing countries (Michael, 2016).

The new growth theory, which is the most prominent element for emerging

development theory, however, confront the neoclassical model in certain congent

aspects. The exogenous growth models developed by Solow (1957) as cited by Umar,

et al (2019) and other neoclassical researchers to a large extent made no explanation

for what was responsible for the improvement of technology. The implication that

technology just emerged resulted into concentration on accumulation of capital and

labor force enhancement as avenue for growth. The summation of the classical school

was about the wealth accumulation in relation to more investment in physical capital

27
(Romer 1986 as cited by Umar, et al., 2019). The fundamental point to note regarding

physical capital is the critical issue of declining returns; this invariably implies that

economies cannot thrive merely by increasing capital.

The new growth theory revisited the ancient tradition of reasoning regarding the

impact of increasing returns. Economists deliberated extensively on the concern of

increasing returns as definite and hypothetical occurrences (Kumar et al, 2016).

However as economists developed better in theory articulation it was cumbersome to

include increasing returns as a factor in modelling, supposing declining returns-

produced equations are stable and could be solved mathematically. This has not been

realistic mathematically based on the said assumptions, it is therefore understandable

why economists were constrained to diminishing returns, because it had better

equilibrium capability and could be wholly evaluated (Ariyomo, 2016).

Regarding the interrelation of reciprocity nature of investments, especially in

advanced technology, alongside with the recurring nature of spending in scientific

research and development (R&D), the anticipation of business about growth are most

possibly personally rewarding (Sawada, 2015). The desire for growth in individual

economies prompt their level of investment in R&D, this also will generate and

maintain the level of growth attained. The increasing return associated with innovative

technology is a sufficient platform for sustainability. Conversely, the investors if

skeptical, cut research and development expenditure and put in minimal investment,

thus, posing a causative factor or compounding an economic deceleration (Owolabi-

Merus, 2015).

28
It is expected that macroeconomic policies will clearly aspire attaining and upholding

greater altitudes of growth, this is due to the existing relationship linking increasing

returns, anticipations and the expectation for sustained growth. The approach that

embraces greater growth will be faced head-long by investing additionally in R&D.

This will invariably direct investment towards innovative productive capital, which

will accelerate the velocity of efficiency of growth economically, thereby, increasing

income and improving the living standard of the people (Anyaduba & Aronmwan

2017).

2.3 Empirical Review

This section will review previous literature from different scholars on the impact of

infrastructure development on the economic growth of Nigeria.

Cesar and Luis (2014) carried out a study on “The Effects of Infrastructure

Development on Growth and Income Distribution.” This study provides an empirical

evaluation of the impact of infrastructure development on economic growth and

income distribution using a large panel data set encompassing over 100 countries and

spanning the years 1960-2013. The empirical strategy involves the estimation of

simple equations for GDP growth and conventional inequality measures, augmented

to include among the regressors infrastructure quantity and quality indicators in

addition to standard controls. To account for the potential endogeneity of

infrastructure (as well as that of other regressors), we use a variety of GMM

estimators based on both internal and external instruments, and report results using

both disaggregated and synthetic measures of infrastructure quantity and quality. The

29
two robust results are: (i) growth is positively affected by the stock of infrastructure

assets, and (ii) income inequality declines with higher infrastructure quantity and

quality. A variety of specification tests suggest that these results do capture the causal

impact of the exogenous component of infrastructure quantity and quality on growth

and inequality.

Mustapha, et al (2018) carried out a study on “Infrastructural Development, Economic

Growth and Poverty in Nigeria.” The study used government capital expenditure as a

proxy for infrastructure development between 1992 and 2016. The data was analysed

using seemingly unrelated regression estimation technique (SURE). Results of the

study revealed that economic growth, employment rate and real wages reduce poverty.

The findings also suggest that investment rate, population growth, capital expenditure

in education is found to be substantially strong in increasing economic growth. The

results of the employment model indicate that economic growth, education in health,

agriculture and transport sector exert significant influence on the employment rate.

Finally, results of the wage model indicate that capital expenditure in education,

health and transport are positively related to a real wage.

Nedozi, et al (2014) carried out a study on “Infrastructural Development and

Economic Growth in Nigeria: Using Simultaneous Equation.” This study in line with

has tried to evaluate infrastructural development and economic growth of Nigeria,

using simultaneous analysis. In this study, two models are specified, and after

applying the substitution method (reduce form equation), the two models collapsed to

one which enabled researchers to use OLS to run the regression. From the result, it is

clear that infrastructure is an integral part of Nigeria economic growth. Underminding

30
it (infrastructure) is underminding the growth and development of Nigerian economy.

The study has shown that infrastructure is an intermediate goods and service for the

real sector and a finished goods and service for consumers. So, if the real sector which

is the engine of growth is to propel Nigerian growth and development, infrastructure

should be given qualitative and adequate attention.

Ayeni and Afolabi (2020) carried out a study on “Tax Revenue, Infrastructural

Development and Economic Growth In Nigeria.” This study examined the dynamic

relationship between tax revenue, infrastructural development and economic growth in

Nigeria, using an annual secondary time series data from 1981 – 2018. The unit root

properties of the series were examined using both Augmented Dickey Fuller (ADF)

test and Phillip Perron (PP) test, while the Johansen Cointegration test was employed

to examine if the series are cointegrated. The results reveal that the series are all

integrated of order 1 and non cointegrated. To examine the direction of causality and

the interrelationship among the variables, a vector autoregression (VAR) causality test

was carried out, and a VAR at-first difference model was estimated. The results reveal

a unidirectional causality running from tax revenue to economic growth and from

economic growth to infrastructure, while a bi-directional causality is found between

tax revenue and infrastructural development. Findings from the impulse response

results show that while tax revenue influences economic growth and infrastructure,

infrastructure does not influence economic growth, but significantly influence tax

revenue collected.

Ogbaro and Omotoso (2017) carried out a study on “The Impact of Infrastructure

Development on Economic Growth in Nigeria.” This study examines the role of

31
infrastructure development in promoting economic growth in Nigeria over the period

1980-2015. A Cobb-Douglas production function which models infrastructure as a

stock variable is specified and estimated using the ordinary least squares method. The

study finds positive and significant effects of total air transport infrastructure,

communication infrastructure, power infrastructure and total rail lines on economic

growth with estimated elasticities of 0.035, 0.016, 0.141 and 0.132, respectively.

Similarly, Kamuri and Sharma (2017) conducted a study on physical and social

infrastructure in India and its influence on economic development between the period

of 1995 and 2013. They adopted unrestricted Vector Autoregressive (VAR) Model

and granger causality and discovered both economic and social infrastructures have a

positive linkage with economic growth in the country. In China, Shi et al. (2017) on

the other hand, reported a U-shape relationship between infrastructural investment and

growth, while looking at the role of infrastructural capital on China’s regional

economic growth, using VECM technique. They argue for crowd-out of private

capital when infrastructural investment becomes too dominant.

Inyiama et al. (2017) examined the effect of Federal Government of Nigeria’s tax

resources on infrastructural development in Nigeria. The research adopted ex-pos-

facto research design as secondary data covering the period of 2006-2015 were used

for the analysis. Using a multiple linear regression technique, the result reveals that

tax revenue resources had positive and insignificant effect on infrastructural

development in Nigeria. In agreement with this finding, Ajiteru et al. (2018)

investigated the effect of tax revenue on infrastructural development in

Osun state, using a survey data and found tax revenue to be a very strong tool for

32
infrastructural development in the state. They identified that the inability to raise tax

might lead to under development in the region.

Ogunlana, et al (2016) carried out a study on “Infrastructure Finance and

Development In Nigeria.” This study analyzed the effect of public and private

investment on infrastructures and its impact on economic growth in Nigeria during the

period 1970 to 2014. The Engel-Granger(1987) cointegration and Error correction

mechanism (ECM) were employed to analyze the unit root procedures, ascertain the

long run relationship and establish the values of long run parameters. Empirical results

show that infrastructure components exert positive contribution on economic growth

in Nigeria. Domestic investment on infrastructure and total labour force correlated

with economic growth negatively.

Owolabi-Merus (2015) carried out a study on “Infrastructure Development and

Economic Growth Nexus in Nigeria.” This study through the use of Ordinary Least

Squares and Granger Causality econometric techniques investiages the infrastructural

development and economic growth nexus in Nigeria. The former is proxied by Gross

Fixed Capital Formation (GFCF) while the latter is proxied by Gross Domestic

Product (GDP). The period under review is from 1983 to 2013 and the data for this

study is obtained from the World Bank’s Africa Development Indicators. The

empirical results from this study reveal that infrastructural development has a positive

and statistically significant impact on Nigeria’s economic growth. However, the

Granger Causality test connotes that there is no mutual correlation between both

variables in Nigeria in the period under review.

33
Nwangugu (2012) carried out a study on “The role of infrastructure Development on

National Economic Growth: A Case Study of the Telecommunication Sector in

Nigeria.” The study examines the role of infrastructure development in national

economic growth. A model was specified for the purpose and secondary quarterly data

was collected for the period 2000-2010. Statistical technique of ordinary least square

(OLS) was employed for the estimation. Our result shows that developments in

telecommunications sector provided by tele-density have positive and significant

impact on economic growth in Nigeria. We recommend that increased infrastructure

development in the telecommunications sector, and greater deregulation for

competition among operations will bring about sustained economic growth.

Nurudeen and Usman (2010) use cointegration and error correction methods to

analyze the relationship between government expenditure and economic growth in

Nigeria over the period 1970-2008. Their results reveal that government total capital

expenditure, total recurrent expenditures, and government expenditure on education

have negative effect on economic growth. On the contrary, rising government

expenditure on transport and communication results to an increase in economic

growth. Using both primary and secondary data, Siyan,

Eremionkhale and Makwe (2015) examined the impact of road transportation on

economic growth in Nigeria. Probit model was used to analyse the primary data while

multivariate model was used for analyzing the secondary data to determine the long

run relationship between growth and road transportation. Their results show that the

transport sector has a positive impact on the economic growth in Nigeria. In an

empirical analysis of the relationship between infrastructural development and

34
economic growth in Nigeria between 1981 and 2013, Michael (2016) collapsed two

models, one of which is a Cobb- Douglas production function, into one which he

estimated using OLS. From the results, it is clear that infrastructure (measured by the

road component alone) is an integral part of Nigeria economic growth.

Garba (2014) conducted a study on tax revenue and economic growth in Nigeria,

using Vector Error Correction Model (VECM) and found a significant relationship

between tax revenue and economic growth. Decomposing the tax structure, the study

found only petroleum tax, company income tax and value added tax as positively

influencing growth, while custom and excise duties show an indirect relationship. In a

similar study by Arowoshegbe et al. (2017)

conducted using Ordinary Least Square (OLS) it was also discovered that both

petroleum tax, company income tax positively influence growth in Nigeria. On the

contrary, Adegbie et al. (2012) found custom and exercise duties to significantly

contribute to growth and development in Nigeria.

Jerome (2011) examined infrastructure, economic growth and poverty reduction in

Africa and found out that not only is Africa experiencing infrastructural deficit, but

there is also poor maintenance of the existing ones which put them in a dismal

situation and further compound the problem of economic growth and development in

the region. Pradhan and Bagchi (2013) on the effect of transportation infrastructure on

economic growth in India, using the VECM approach present a bi-directional

causality both between transport infrastructure and economic growth as well as gross

domestic capital formation and economic growth.

35
2.5 Summary of Literature Review

This study is an improvement on other studies on infrastructure development and

economic growth in Nigeria for two reasons. Firstly, unlike some of the previous

studies in Nigeria which use data on public capital as proxy for infrastructure, it uses

data on infrastructure. Public capital seems to be attractive because it is somewhat

easier to identify in many countries. But it is a broader concept that is itself quite

unclear. For instance, it can include all public buildings, including often hospitals,

schools or public housing and office stocks, or police and fire stations. Thus the extent

of its relevance to assess the impact of infrastructure on growth is at best unclear. It is

in fact worsening since, as pointed out by Umar, et al (2019), the relative importance

of the private sector in infrastructure has increased a lot more than

in other activities. Some other studies used government total capital expenditure. Even

for thosethat used infrastructure stocks, they concentrated on just one component of

infrastructure at a time. Secondly, this work extends the study period to 2021.

36
 CHAPTER THREE

METHODOLOGY

3.0 Introduction

The chapter deals with methodology adopted in the course of the study which includes

research design, source of data, model of specification, a priori expectation and the

estimation techniques and method of analysis.

3.1 Research design

The research design adopted in this research study was the descriptive survey research

design which was basically used to explain the impact of infrastructural development

on the growth of Nigeria economy.

3.2 Source of Data and Data Source

Basically, this study makes use of data from the secondary source. The secondary data

is obtained primarily from the National Bureau of Statistics (NBS) and Central Bank

of Nigeria (CBN) Bulletin.

3.3 Model Specification

Model specification is concerned with the mathematical relationship that exist

between dependent variables and independent variables which will be include in the

model and a priori expectation about the sign and size of the parameters of the

functions. In this work, the econometric method is the ordinary least square (OLS)

technique to analyze the impact of the independent variables on the dependent

variable. According to Structural Functionalist Theory as cited by Diugwu et al

37
(2015), economic growth is a function of infrastructural development and other

determining factors in a nation; and this is shown in mathematical form stated below:

GDP = f (CEXP, FDI)

The model can be specified as follows:

InGDP = b0 + b1 InCEXPt +b2 InFDI+ Ut;

Where:

GDP = Gross Domestic Product;

CEXP = Capital Expenditure;

FDI = Foreign Direct Investment;

Ut = Error terms

It is expected that all the inputs namely (Capital Expenditure, Foreign Direct

Investment) have a positive effects on the Economic Growth. The choice of the

independent variables excludes measures of government deficits or of the trade

openness which the literature shows affects national output. This is because it is not

the determinants of national output that is being estimated.

3.4 A priori Expectation

As regard the expected signs the independent variable has with the dependent

variables, the gross domestic product rate is expected to increase if the demand for

infrastructure development increases. However, given the situation in Nigeria, this is

not conclusive; therefore, the signs are indeterminate until the econometric test is

conducted to validate the actual direction of relationship.

38
3.5 Diagnostic Test

The diagnostic tests which this study employed were Augmented Dickey-Fuller

(ADF), Phillips-Perron,and Johansen co-integretion test.

3.5.1 Augmented Dickey-Fuller Test

ADF test was developed first Dickey-Fuller (1976) to test for the existence of unit root

in a given time series data. The basis for this test is when the assumption of non-

autocorrelation between the disturbance terms is violated. According to him there is a

tendency for time series data to contain a unit root. Consequently, an attempt has to be

made to render the data stationary prior to specification and estimation. Moreover, as

the residuals of non-stationary time series could be correlated with their own lagged

values, the assumption of OLS theory that disturbances are not correlated with each

other is violated. Hence, OLS estimates of such series are biased and inconsistent, and

standard errors computed with such random walk variables are generally

underestimated. In this case, OLS is no longer efficient among linear estimators

(Ndiyo, 2003).

The model of unit root is specified as follows

ΔGDP = ՓGDP-1 + Єt ---------------------- i

ΔCEXPt = ՓCEXPt-1 + Єt -----------------------------ii

ΔFDIt = ՓFDIt-1 + Єt -----------------------------iii

Decision Rule: The null hypothesis Փ = 1, i.e. a unit root exist in GDP, CEXP and

FDI (are non-stationary) but when ϕ < 1, i.e. a unit root does not exist in GDP, CEXP

and FDI (are stationary). The decision rule as to whether to accept the null hypothesis

or not is that ADF statistics should be less than critical t-value at certain percent level,

39
and hence unit root exist; but if ADF statistics is greater than the critical t-value at

certain percent, then the null hypothesis is reject, hence, there is no unit root and GDP,

CEXP and FDI is stationary. This is similar to all the variables of the model.

3.5.2 Johansen Co-integration Test

Co-integration is a diagnostic test to determine whether there is a long run relationship

between two or more variables in a model. When time series variables are non-

stationary, it is interesting to see if there is a certain common trend between those non-

stationary series. If two non-stationary series XtI(1) has a linear relationship such that

Zt = m + αXt + βYt and Zt I(0), (Zt is stationary), then the two series Xt and Yt are

co-integrated. It is always employed when simple causality test fail to establish such

relationship in the short run. Whenever the variables are found to be related in the

long run, it then follows that the variables can affect each other in the long run. There

are two broad approaches to test for the co-integration, Engel and Granger (1987) and

Johansen (1988). Broadly speaking, co-integration test is equivalent to examine if the

residuals of regression between two non-stationary series are stationary. This thesis

employed a simple test of co-integration: the Johanson Test. Johanson develops

maximum likelihood estimators of co-integrating vectors.

Decision Rule: The decision rules upon which to accept or not that there exist a long

run relationship between variables is thus. The TRACE statistics value, Max-Eigen

statistics value and the critical value at an appropriate level of significance determine

whether to accept or to reject the null hypothesis. If TRACE statistics value or Max-

Eigen statistics value is greater than the critical value, the null hypothesis is rejected;

on the other hand, if TRACE statistics value or Max-Eigen statistics value is less than

40
the critical value, the null hypothesis is accepted. The hypothesis indicates the number

of co-integrating equation(s) and the usual levels of significance are 1 and 5 percents.

3.6 Method of Data Analysis

Based on the fact that the data employed are time series, the Ordinary Least Square

estimation technique using the E-views 7.0 software was employed to estimate the

significance of the relationship between the earlier identified variables.

41
 CHAPTER FOUR

PRESENTATION OF RESULT AND DISCUSSIONS

4.0 Introduction

This chapter is dedicated to the interpretation of the results of the OLS analysis,

presentation of result tables and estimated models presented in chapter three (3).

4.1 Analysis and interpretation of result

4.1.1 Augmented Dickey Fuller (ADF) Unit root test

In table 4.1, an Augmented Dickey Fuller (ADF) test was performed on by the Gross

Domestic Product (GDP), Capital Expenditure (CEXP) and Foreign Direct Investment

(FDI). In all cases, a constant and a linear trend were included since this represents the

most general specification. Following the Dickey Fuller unit root tests for stationarity,

a variable is stationary if its ADF value is greater than the critical value at a given

level of significance. The level of significance adopted in this research work is the

5% level of significance. According to the results, only Gross Domestic Product

(GDP) is integrated of order 0, Capital Expenditure (CEXP) and Foreign Direct

Investment are stationary at 1st difference meaning that they are integrated of order 1.

Table 4.1: Unit root test

Variables ADF (Intercept & 5% critical Order of

Trend) value Integration
LOGGDP -5.866 -3.532 I(0)
LOGCEXP -4.409 -2.955 I(1)
LOGFDI -5.926 -2.955 I(1)
Source: Researcher’s Computation on E-views

42
4.1.2 Ordinary least square (OLS)

From the table below b1and b2 are 0.313018 and 0.293309 are parameter estimates

for capital expenditure and foreign direct investment respectively.

It was discovered from the regression result that there is a positive and significant

relationship between capital expenditure and gross domestic product (GDP) in

Nigeria. This implies an increase in capital expenditure will translate in a significant

increase in the gross domestic product (GDP) in Nigeria. This is in consonance with

increase a priori expectation: this could be further justified on the basis that an

increase in capital expenditure in the country will lead to a significant increase in the

economic growth of Nigeria. However, the magnitude of the positive relationship is

shown with the value of the parameter estimate (0.313018). Increase in capital

expenditure would result to about 31.3%increase in the gross domestic product of

Nigeria. This is statistically significant at 0.5% level of significance using t-test and

standard error estimate. The t-calculated is 1.936618 while the tabulated t-test is 2.05,

the standard error estimate is 0.141912 while half of the parameter estimate is (1/2 *

0.313018 = 0.1506). Since t-calculated is greater than the t-tabulated and standard

error of the parameter estimate is less than half of the parameter estimate, there is

sufficient evidence to conclude that there is statistical significance between capital

expenditure and gross domestic product in Nigeria.

Equally, it was revealed from the regression result that there is a positive and

significant relationship between the foreign direct investment and gross domestic

product in Nigeria. This implies an increase in foreign direct investment will translate

in an increase in gross domestic product in Nigeria. This is in consonance with

43
increase a priori expectation: this could be further justified on the basis that an

increase in foreign direct investment in the country will lead to a significant increase

in the gross domestic product in Nigeria. However, the magnitude of the positive

relationship is shown with the value of the parameter estimate (0.293309). Increase in

foreign direct investment would result to about 29.3% increase in the gross domestic

product (GDP) in Nigeria. This is statistically significant at 5% level of significance

using t-test and standard error estimate. The t-calculated is 1.75464 while the

tabulated t-test is 2.05, the standard error estimate is 0.106821 while half of the

parameter estimate is (1/2 * 0. 293309= 0.145). Since t-calculated is greater than the t-

tabulated and standard error of the parameter estimate is less than half of the

parameter estimate, there is sufficient evidence to conclude that there is statistical

significance between foreign direct investment and gross domestic product in Nigeria.

R-squared measures the goodness of fit of model. In the analysis the R-squared is

92.0% which is a good measure of fit which shows that capital expenditure and

foreign direct investment in Nigeria for about 92.0% systematic variation in the

dependent variable (gross domestic product) whereas the remaining 18.0% are other

factors which affects the gross domestic product but were not captured in the model.

The adjusted R-squared also showed that after adjusting with the degree of freedom,

the model is still of good fit (90.6%) whereas the remaining 19.4% are other factors

which affects the foreign direct investment but were not captured in the model which

was represented earlier as the stochastic variable or error-term.

Also, F statistic value which is used to test the joint statistical significance of the

parameter estimates. From the result, the f statistic value of 29.68774 (p<0.05) showed

44
that there is a joint statistical significance among population growth, consumable price

index and importation of consumable goods. Furthermore, Durbin Watson statistics is

used to test for the presence or absence of positive serial correlation. Since the Durbin

Watson statistics falls between zero and two that is (1.525207). There is evidence to

show the presence of autocorrelation.

Table 4.2: Ordinary least square (OLS) analysis

Variable Coefficient Std. Error t-Statistic Prob.

LOGCEXP 0.313018 0.141912 1.936618 0.0034

LOGFDI 0.293309 0.106821 1.754637 0.0088
C 3.110963 1.272246 1.472519 0.0014

R-squared 0.920172 Mean dependent var 1.185854

Adjusted R-squared 0.906512 S.D. dependent var 0.516783
S.E. of regression 0.214628 Akaike info criterion -0.105366
Sum squared resid 1.612275 Schwarz criterion 0.145401
Log likelihood 8.160004 Hannan-Quinn criter. -0.014051
F-statistic 29.68774 Durbin-Watson stat 1.525207
Prob(F-statistic) 0.000000

Source: E Views 7 Computations

4.2 Discussion of results

The study investigated empirically the impact of infrastructural development using

economic agents such as capital expenditure and foreign direct investment on the

economic growth of Nigeria using an annual time series of a period of 1990 – 2021.

To achieve this objective, OLS regression model was estimated for gross domestic

45
product. It was revealed that the capital expenditure and foreign direct investment are

significant determinants factors of gross domestic product in Nigeria within the scope

covered. Findings from the study are consistent with previous studies such as Ndanusa

(2019); Muhammad and Benedict (2015); Nwaeze and Okoroafor (2013). The result

of the analysis however, shows that capital expenditure has positive and significant

impact on gross domestic product in Nigeria; also, foreign direct investment has

positive and significant impact on gross domestic product in Nigeria for the period

under review. This agrees with the conclusion of some existing studies reported in our

literature. The work of Nenbee et al (2021); Nwosa (2014); and Odior (2014),

however, shows a positive and significant relationship between infrastructural

development (using proxies such as capital expenditure and foreign direct investment)

and gross domestic product in Nigeria. The reason for the non-conformity with some

study could be as a result of unfavourable macroeconomic environment in Nigeria,

like the inflation rate, general price level, exchange rate etc. that may = be as a result

of the data employed. The previous works reported in our study did not adjust the

figures of gross domestic product (GDP) to take care of inflationary influence, but our

study did. Looking at this result, we conclude that infrastructural development

contributes to the economic growth in Nigeria for the period under consideration. This

is based on the understanding that an economy with a potential for maximizing its

growth will attract more investors as they prefer to invest in countries with better

economic growth. Based on previous findings, Ogbonnaya-Udo and Chukwu (2020)

noted that the infrastructural development have significant impact on the economic

growth in Nigeria. While Omar and Inaba (2020) pointed out that infrastructural

46
development have significant impact on the economic growth in Nigeria. Also,

Olopade et al. (2019) noted that infrastructural development and economic growth

cannot be treated independently because infrastructural development in a growing

economy plays a significant role in the growth of such an economy. Meanwhile,

infrastructural development has tremendous effect on the economic activities in

Nigeria and if properly improved upon will translate positively in the growth of

Nigerian economy.

47
 CHAPTER FIVE

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.0 Introduction

This chapter contains summary, conclusion and recommendations.

5.1 Summary of the study

The study critically investigated the impact of infrastructural development using

economic agents such as capital expenditure and foreign direct investment on the

economic growth of Nigeria. After thorough investigation and analysis of the different

studies relating to the impact of infrastructural development on the economic growth

in Nigeria using its proxies; the empirical findings showed that there is positive

relationship between capital expenditure and gross domestic product in Nigeria which

denotes that increase in infrastructural development in Nigeria has positive impact on

the economic growth in Nigeria. Also, the study proves that there is a positive

relationship between foreign direct investment and gross domestic product in Nigeria

which is justified on the basis that when the foreign direct investment increases, the

economic growth also increases. Therefore, government need to implement policies

that would help manage and improve the infrastructural development such as capital

expenditure and foreign direct investment in Nigeria, so as to improve the economic

growth in Nigeria.

48
5.2 Conclusion

In conclusion, it was established from the study using Ordinary least Square (OLS)

analysis that capital expenditure and foreign direct investment has significant impact

on the gross domestic product in Nigeria. The underlying principle for such a result is

rooted in the Keynesian Growth theory which is applicable to economic growth that is

recovering from economic recession. However, the outcome of this result is in

harmony with and strongly upheld the Keynesian Growth theory’s view that a surge in

capital expenditure and foreign direct investment with favourable interest rate

increases the economic growth in the country.

5.3 Recommendations

On the basis of the evidence before, it is therefore suggested that:

 It will be worthwhile for the Nigerian government and policymakers to

implement policies geared towards the development of infrastructure. This

would result in increasing economic efficiency, productivity and also attract

potential Foreign direct investment inflow in to the country.

 It further recommends that the government should create an enabling

environment conducive for local manufacturing and service industries to

develop and compete in the international market through increased investment

in the infrastructural sector.

 The study suggests that infrastructure finance could raise the quantum of

economic growth necessary to promote development in Nigeria if necessary

and appropriate policy are implemented.

49
 There is need to invest in education and health so as raise production efficiency

emanating from infrastructure spill-over.

 This result, from Nigeria's perspective suggest that it is necessary to design a

practical economic framework that would raise the quality of infrastructure

stock and addresses human capital formation for sustained growth and

development.

50
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 APPENDIX I (TABLES)

INFRASTRUCTURAL DEVELOPMENT AND ECONOMIC GROWTH; EVIDENCE

FROM NIGERIA

Gross Domestic Foreign Direct Log

Capital Investment (FDI)
Product Log Log
YEAR Expenditure
(GDP) (GDP) (CEXP) (FDI)
($ Billion)
$Billion
1990 54.04 1.732 4383 3.6 588 2.77

1991 49.12 1.690 3762 3.6 597 2.78

1992 47.79 1.681 3735 3.6 618 2.79

1993 27.75 1.447 2139 3.3 722 2.86

1994 33.83 1.531 2019 3.3 819 2.91

1995 44.06 1.643 2017 3.3 1079 3.03

1996 51.08 1.708 2551 3.4 1132 3.05

1997 54.46 1.732 2994 3.5 1539 3.19

1998 54.60 1.740 2753 3.4 1051 3.02

1999 59.37 1.771 2509 3.4 1005 3.00

2000 69.45 1.839 3255 3.5 930 2.97

2001 74.03 1.869 3346 3.5 1104 3.04

2002 95.39 1.978 4144 3.6 1281 3.11

2003 104.91 2.021 6701 3.8 1200 3.08

2004 136.39 2.134 6,494 3.8 3351.6 3.53

2005 176.13 2.246 6128 3.8 2593.0 3.41

2006 236.10 2.373 12021 4.1 2962.2 3.47

2007 275.63 2.441 15396 4.2 1637 3.21

2008 337.04 2.528 17318 4.2 1931 3.29

2009 291.88 2.465 20487 4.3 3519 3.55

54
2010 361.46 2.558 62706 4.8 2124.3 3.33

2011 404.99 2.607 65793 4.8 3103.38 3.49

2012 455.50 2.659 67717 4.8 5564.70 3.75

2013 508.69 2.707 75511 4.9 5490.10 3.74

2014 546.68 2.738 78221 4.9 4600.10 3.66

2015 486.80 2.688 81305 4.9 3062.4 3.49

2016 404.65 2.607 82209 4.9 3455.3 3.54

2017 375.75 2.575 89584 5.0 2412.7 3.38

2018 397.19 2.599 120602 5.1 780.89 2.89

2019 448.12 2.651 126385 5.1 2378.4 3.38

2020 432.29 2.635 123148 5.1 2396.5 3.38

2021 440.8 2.644 418550 5.6 2411.2 3.38

55