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Total factor productivity ...

                                                         CHAPTER ONE


1.1 Background to the Study

Nigeria’s economy is essentially open, with a sizable amount of its total output coming from international trade (Mike and Okojie 2012). Because of the tacit assumption that trade can boost incomes, generate jobs, open up new markets, encourage competition, and spread knowledge, the Nigerian government, like that of many other developing nations, views trade as the primary engine of its development policies (Ogbaji and Ebebe 2013).

However, even if international commerce might spur economic growth, there is no assurance that the combined advantages of this activity will be shared fairly among trading partners. Every trading relationship has winners and losers. Nigeria’s economy has relied more and more on foreign trade in recent years. Goods and services exports and imports have increased significantly. Growing trade volumes raise living standards in a number of ways (Mcteer, 2008).

The import growth theory, which is based on the notion that rising imports are one of the main drivers of productivity, is gaining momentum in the fields of international trade. The fundamental contention here is that, like in the case of Nigeria, rising oil and non-oil exports could contribute to a nation’s total growth in addition to increasing labor and capital.

Whether or not trade policy of import substitution and export promotion promote economic growth and development has been the subject of debate in the economic literature; and especially in 1950s and 1960s most developing countries followed import substitution, which then was regarded as the recipe for economic growth and development. Import substitution proponents centered their case on the necessity for emerging nations to carve out a niche for themselves by creating trade policies that support indigenous technology.

This seems to point to the necessity of promoting local technology and knowledge in the actual economy through “learning by doing” (Todaro and Smith 2003). Like most emerging nations, Nigeria gave up on the import substitution strategy in favor of increased exports. Export expansionists contend that increasing exports boosts the home economy. It produces significant economies of scale in production, boosts the efficiency of resource allocation and utilization, and provides jobs, all of which contribute to economic growth (Egwaikhide, 1997).

The exchange of commodities and services between countries or across international borders is referred to as foreign trade. An economy’s growth rate and per capita income have historically been calculated using data from domestic production and consumption as well as from the exchange of goods and services with other countries. International trade is essential to the restructuring of the economic and social landscape of all nations, but especially of the less developed ones. Economists, policy officials, and decision makers have all expressed interest in foreign trade. It makes it possible for states to export their domestically produced items to other nations (Adewuyi, 2002).

Labor productivity improves in exporting firms when exports raise output, but labor productivity declines in import-competing firms when imports reduce market share and output. As competition increases both domestically and internationally, manufacturers will need to increase productivity to maintain profit margins. Increasing competition raises productivity, and the most significant increase occurs when international competition is present.

Ozler (2007) showed that exposure to foreign trade, particularly import competition, has a significant impact on the ability of domestic sectors to deviate from price-cost margins. Productivity quantifies the correlation between the amount of resources (inputs) utilized in the production process and the number of goods and services generated. Productivity was defined as the ratio of output to input by Atkinson, Banker, Kaplan, and Young (1995). Screyer (2001) corroborated this definition by stating that “productivity is commonly defined as a ratio of a volume of output to a volume of input used.” The quantity of output generated by each unit of input is referred to as productivity.

Productivity as a concept can have two dimensions: namely partial productivity and total factor productivity (TFP) commonly known as Multifactor Productivity. Either labor or capital production might be considered partial productivity. This can be quantified at the plant, industry, or national levels. Labor productivity is the definition of productivity when it is tied to any particular input factor, such as when output is correlated with man-hours or labor units. This merely analyzes how the production per unit has changed over time, ignoring the contributions from other input factors.

The growth in output that cannot be accounted for by higher factor inputs is known as total factor productivity. TFP is defined as the effective use of labor and capital by Hall and Jones (1998). Technical innovation, institutional and organizational changes, the rule of law, and technical knowledge are all included in TFP, according to Hulten (2001). Because continuous economic growth can only be attained through persistent productivity growth, the study of TFP in Nigeria is crucial.

According to Adenikiju (2005), declining returns on factor inputs have caused Nigeria’s output growth to be driven by factor efficiency rather than factor accumulation. The fact that productivity boosts everyone’s welfare in society and is therefore essential to reducing poverty is another compelling argument in favor of placing a strong focus on TFP. Furthermore, Iyoha (2002) states that combating poverty is a top priority for the Nigerian government.

According to proponents of the import-led growth theory, protection typically has the opposite effect of increasing productivity and output growth. Lawrence and Weinstein (1999), for example, discovered evidence in Japan that challenges the significance of exports as a driver of productivity growth and bolsters the claim that import liberalization will increase productivity through competitive pressure that fosters innovation and learning from competitors abroad. A casual examination of Nigeria’s trade statistics indicates that, since the country’s independence in 1960, the value of its total imports has increased significantly.

According to statistics, consumer products continued to be the largest category of imports until 1965, when their relative share fell from 60% in 1950 to 41% in 1965 (Egwaikhide, 1999). This is because, before gaining its independence, Nigeria was largely dependent on the British colonial administration for the supply of manufactured goods, which were at the time impossible to produce domestically due to the widespread usage of primitive technologies.

Therefore, Nigeria’s political independence from Britain was the cause of the stated drop in the share of consumer items in total imports. Meanwhile, empirical research in other nations (for example, Keller (1997) has demonstrated that countries with quicker growth in total factor productivity (TFP) have imported more from the world’s technical leaders.