External Sector and The Performance of Manufacturing Sector in Nigeria

The reliance of the Nigerian economy especially, the manufacturing sector on inputs and raw materials from the external economies makes it imperative to study how the external sector has affected the performance of the sector. In order to achieve this purpose, data on trade openness, foreign direct investment, foreign debt and exchange rate of the naira to the US dollar were sourced from the World Bank data base and regressed on share of the manufacturing sector to GDP using Parsimonious Vector Error Correction model (VECM) method. The result of Johansen Cointegration Test showed that there exists a long run relationship or cointegration between external sector and the performance of manufacturing sector in Nigeria. The result of Parsimonious Vector Error Correction Model showed that trade openness and external debt have positive effects on the performance of manufacturing sector in Nigeria while foreign direct investment and exchange rate have negative effects on the performance of manufacturing sector in Nigeria over the period of investigated (1985 – 2020). The result further revealed very high speed of adjustment among the variables in the manufacturing sector in the changes in the long run dynamics. The model diagnostic test indicated that the variables conformed to basic assumptions of the ordinary least squares estimation. Based on the findings, the study concluded that the external sector has significant effect on performance of the manufacturing sector in Nigeria. Consequent upon these findings, the paper recommends; a review of trade policy to favour domestic production, wooing of foreign investment and proper utilisation of foreign borrowing as possible ways of improving the performance of the manufacturing sector and the Nigerian economy at large.