Stock Investment in Nigeria

Overview

Much has been said about the best means by which to bring developing countries up to a similar level of economic infrastructure as developed countries already enjoy. As a developing country, Nigeria seems ideally situated for research because it is poised between being so well-studied that the path for growth is obvious and nothing new can be said versus being such a maelstrom of chaos that predictions are largely useless anyway. For Nigeria, tests of Granger causality can and have been applied to determine the impact of various financial strategies, as described in Enisan and Olufisayo (2009), who found that in Nigeria, the “Granger causality test based on vector error correction model (VECM) further shows . . . weak evidence of growth-led finance using market size as indicator of stock market development” (p. 162). Though stronger results would be preferable, this evidence at least helps justify the stock market financial theory and research into and suggestions regarding possible paths for stock investment in Nigeria, for if Granger causality is supported, then economic causes should have relatively predictable effects. That is heartening news going forward into the study of this research problem.

Research Problem

The research problem is to make sense of the many studies with sometimes contradictory or weak results on the topic of foreign investment in Nigerian stocks. This shall be done by means of an in-depth literature review, focusing on studies with strong mathematical bases. The hypothesis is that upon performing the much-expanded version of the literature review section of this proposal, it will become apparent that Nigeria’s best route to economic development is through the development of human capital rather than through foreign investment. By summarizing the results of many different studies, this hypothesis will be tested.

Literature Review

One of the challenges of researching this field is that the results already found in the literature appear to be somewhat mixed, with most reported effects of stock investment in Nigeria being fairly small regardless. For example, Akinlo (2004) provides results that contrast two different types of foreign direct investment (FDI), saying, “The results seem to support the argument that extractive FDI might not be growth enhancing as much as manufacturing FDI. In addition, the results show that export has a positive and statistically significant effect on growth” (p. 627). This shows that the problem is very nuanced. However, on another point, there seems to be rather broader agreement among researchers such as Okpala and Chidi (2010) and Anyanwu (1997), a position which some have summarized: “Finally, the results show that labour force and human capital have significant positive effect on growth. These findings suggest the need for labour force expansion and education policy to raise the stock of human capital in the country” (Akinlo, 2004, p. 627). Over and over, the position that human capital is of greater significance to Nigeria’s economic development than stock investment arises, and yet this suggests the question of why the recommendations of so many scholars have not led to solutions. The difficulties are many, however.

Unfortunately, the findings in the literature all point to a degree of unpredictability in the economic situation of Nigeria, which has, in the past, made drawing firm conclusions that continue to be relevant for useful lengths of time difficult. In part, the cause of this lies in Nigeria’s “high degree of macroeconomic instability,” as described by Ezeoha, Ebele, and Ndi Okereke (2009, p. 20). Because circumstances can change so rapidly in sub-Saharan African countries, there have been times when it even seemed that research was stale by the time it was published. However, at least the notion that these changes are completely random can be rejected; Smith, Jefferis, and Ryoo (2002) tested the markets of several African countries, including Nigeria, against the random walk model and found that, “The hypothesis that a stock market price index follows a random walk . . . is rejected in seven of the markets [Nigeria included] because of autocorrelation of returns” (p. 475). Though the autocorrelation of returns is not a particularly strong reason to reject the random walk model, this is at least superior to the results found in South Africa, where the random walk model prevailed. For the purposes of the proposed research here, however, advanced statistical models will not be directly employed. Rather, the approach will be one of a literature review, but a firm grounding in the statistical tools of economics shall be maintained.

Research Protocol

Though some have already performed literature reviews in the area, these tend to be missing some aspects of the relevant topics here. For example, there are more historical approaches like that of Somoye (2008), who examined the performances of Nigerian banks in the post-consolidation period. These types of studies miss the more rigorous aspects of the financial investigation into Nigerian economic growth. On the other hand, other broad sweeping takes on the subject matter examine a broad swath geographically speaking, rather than in chronological terms, as in Magnusson and Wydick (2002), who looked across emerging stock markets over the whole entire continent of Africa. Again, this type of research, while useful, is broader than the approach warranted here.

In general, the protocol here will be to adopt the more general studies as background material and focus on collective for in-depth investigation only those studies which have statistic rigor to them. These can then be summarized to provide an overview that does not compromise depth while obtaining breadth. An example of the type of study that might be reviewed is that of Olowe (1999), who pursued strong evidence that the weak form of the efficient-market hypothesis was in action in Nigeria and found it. It is exactly this type of focused study that is perfect for contributing to the proposed literature review. Slightly less on-target, but still relevant, there is also the work of Agosin and Machado (2005), who applied the “laws of motion of capital stock” (p. 149), so to speak, when comparing the impact of foreign versus domestic investment in the markets of developing countries. This, too, would be a useful piece to include in the work proposed here.

As for practical matters, because this is a literature review, the time schedule is limited only by the availability of the researcher. The only resource required is access to journal articles, but most of these should already be available under the university’s database subscription services. There are no ethical aspects to this proposed study, so submission to the IRB may not even be necessary.

References

Agosin, M. R., & Machado, R. (2005). Foreign investment in developing countries: Does it crowd in domestic investment? Oxford Development Studies, 33(2), 149-162.

Akinlo, A. E. (2004). Foreign direct investment and growth in Nigeria: An empirical investigation. Journal of Policy Modeling, 26(5), 627-639.

Anyanwu, J. C. (1997). The structure of the Nigerian economy (1960-1997). Nigeria: Joanee Educational Publishers.

Enisan, A. A., & Olufisayo, A. O. (2009). Stock market development and economic growth: Evidence from seven sub-Sahara African countries. Journal of Economics and Business, 61(2), 162-171.

Ezeoha, A., Ebele, O., & Ndi Okereke, O. (2009). Stock market development and private investment growth in Nigeria. Journal of Sustainable Development in Africa, 11(2), 20-35.

Magnusson, M., & Wydick, B. (2002). How efficient are Africa's emerging stock markets?. Journal of Development Studies, 38(4), 141-156.

Olowe, R. A. (1999). Weak form efficiency of the Nigerian stock market: Further evidence. African Development Review, 11(1), 54-68.

Okpala, P. O., & Chidi, O. C. (2010). Human capital accounting and its relevance to stock investment decisions in Nigeria. European Journal of Economics, Finance and Administrative Sciences, 21, 64-76.

Smith, G., Jefferis, K., & Ryoo, H. J. (2002). African stock markets: Multiple variance ratio tests of random walks. Applied Financial Economics, 12(7), 475-484.

Somoye, R. O. C. (2008). The performances of commercial banks in post-consolidation period in Nigeria: An empirical review. European Journal of Economics, Finance and Administrative Sciences, 14(1), 62-73.