The Impact of Manufacturing Capacity Utilization on the Economy of Nigeria: An Empirical Analysis.

ABSTRACT

 This study investigated the causal relationship between manufacturing capacity utilization and real gross domestic product of Nigeria and determined the trends of industrial capacity utilization in Nigeria’s manufacturing firms. The stationarity tests using Augmented Dickey-Fuller (ADF) and Phillip-Perron (PP) test carried out proved that all variables were stationary in first difference except for labour which was stationary in second difference, and real gross domestic product which was stationary in level. The Pair Wise Granger Causality test results showed that Real Gross Domestic Product, Labour and Capacity utilization have a causal impact on Gross Fixed Capital Formation. Engle and Granger Co-integration results showed that a long run relationship existed between the independent variables and economic growth. Empirical evidence showed that manufacturing capacity utilization rates responded positively to economic growth in the short-run. The over-parameterized error correction model results showed that in the short-run capacity utilization rate stimulated growth as it contributed a change of 0.024827K units in real gross domestic product per unit of time which was desirable. Gross fixed capital formation and exchange rate also contributed positive effects to economic growth while labour contributed negative effects to economic growth. The parsimonious model explained economic growth better in the short run than the over-parameterized model as indicated by the values of their adjusted coefficients of determination (R2) of 86.40 per cent and 78.12 per cent respectively while the long run goodness of fit was 62.41 per cent. Specifically, in the long-run the response of manufacturing capacity utilization rates to growth was negative. The result showed that the likelihood of increasing capacity utilization rates in the long-run to impact economic growth would depend on the stability of the determinants of growth which were gross fixed capital formation, labour force, exchange rate, which had a multiplicative impact on the dependent variable as shown by a F statistic of 14.6991. The underutilization of capacity in the Nigeria’s manufacturing industries was found to be as a consequence of excess capacity in the industry which is tantamount to wastage of valuable resources, low level of effective demand for domestic manufactures, poor electricity supply and, cut-throat taxation.