Business Environment, Legal Institutions, Economic Performance
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PROJECT TOPIC  : BUSINESS ENVIRONMENT, LEGAL INSTITUTIONS AND ECONOMIC PERFORMANCE

IN NIGERIA

PROJECT PROPOSAL/CHAPTER ONE

1.1 BACKGROUND OF THE STUDY
The question of how business environment, institutions and development outcomes are interlinked and affect each other has recently become a “hot topic” in the international debate on development (Jutting, 2003). A review of the cross-sectional studies shows that while there is a consensus in the literature that institutional quality matters for growth, the literature is quite ambiguous about the relative importance of “institutions” (Sachs, 2003).

There is an overall acknowledgement in literature that institutions matter and have a direct impact on growth. Rodrik et al. (2002) found in a study that the “estimated direct effect of institutions on incomes is positive and large” (p. 11). Besides an observed direct impact, most studies also acknowledge an indirect impact on growth and economic development. Institutions can lead to an increase in investment, to a better management of ethnic diversity and conflicts, to better policies and to an increase in the social capital stock of a community. All these factors have a recognized positive influence on growth. Therefore, most of the studies suggest a strong and robust relationship between institutional quality and growth and development outcomes (Jutting, 2003).

However, in Nigeria, the role of business environment and institutions in the development of the Nigerian economy has not been fully addressed and the impact has not been fully felt. The real sector in Nigeria has been experiencing a stunted growth and its contribution to gross domestic product has remained low. For instance, the manufacturing sub sector as a whole remains small, accounting for only 6.6 per cent of GDP in 2000, 2.7 per cent of GDP in 2005 and 12 per cent of employment (World Bank, 2002; CBN, 2005). The production indices {using 1990 as a base year (100)} also indicated that while agriculture and services experienced modest growth from 103.5 and 101.5 to 133.6 and 297.0 between 1991 and 1999 respectively, manufacturing sub sector recorded a decline from 109.4 to 92.3 in the same period. It is also sad to mention that capacity utilization in the manufacturing sub sector declined from about 70.1% in 1980 to just 45 per cent in 2004 (CBN, 2004).

Banks in Nigeria are highly liquid but they believe that lending to the manufacturing sub-sector is very risky and increasing credit to the manufacturing sector is not justified in terms of risk and cost (Olorunsola, 2001). The business environment, in general, is very risky and uncertain so firms may not be able to service debt. Apart, the judicial system is reportedly inefficient and banks cannot easily enforce contracts.

Consequently, banks charge high interest rates, demand high levels of collateral and make few loans of more than a year in term. In addition to the above, high interest rate in the Nigerian financial system is a reflection of the extremely poor infrastructural facilities and inefficient institutional framework necessary to bring about substantial reduction in the risk associated with financing an extremely traumatized economy (World Bank, 2002).
Against this background, the study attempts to establish an empirical relationship between the Nigerian business environment, legal institutions and other macroeconomic variables, including interest rates and institutional reforms.


1.2 PROBLEM STATEMENT
According to conventional economic wisdom, capital should flow from developed countries where it has lower returns on the margin to Africa and other developing areas where it has significantly higher marginal returns. Also, economic activities are supposed to be stimulated in a country where there is sound and stable macroeconomic environment coupled with the respect for rule of law.

Unfortunately, this is not the case as capital flows to Africa have been low, unstable and concentrated in a few sectors and a few countries. There are many reasons for this phenomenon. First, both in terms of perception and reality the business environment in Africa and Nigeria in particular has not been friendly. The economy is still marred by structural rigidities with weak judicial system.
Furthermore, many African countries are yet to take the proactive action and establish the preconditions, policies and strategies needed to attract more beneficial international capital and increase local investment. Indeed, the market has failed, at least in the conventional sense, to allocate capital to Africa. The inadequate inflow of capital to African countries results not just from market failure but also from a fundamental policy failure, institutional inadequacy and failure.

As with sound macroeconomic policies, the norms governing human interactions, including organizational entities, procedural devices, and regulatory frameworks constitute an important determinant of capital flows. For African countries to increase capital flows significantly, to make them sustainable and minimize financial crises, they must adopt appropriate macroeconomic policy measures.

They need to understand how to strengthen the process, sustain the outcomes of macroeconomic policies to create a more attractive environment for investment and production. They must also establish strong institutions and improve the quality of existing ones. In particular, Nigeria needs to develop institutions that enforce property rights and the rule of law so as to minimize uncertainty about returns on investment.

This study examines the implications of macroeconomic policies on business environment and its subsequent effect on economic performance in Nigeria. The role of the legal system and institutions in the growth process of the country would also be considered.

1.3 JUSTIFICATIN FOR THE STUDY
A vital component of any move towards better economic performance is a perfect understanding of the business environment. This study is significant in the followings ways:
a. it would reveal the impact of business environment and legal institutions on economic performance;
b. it would also make comparism of Nigeria economy with some advanced economies thereby providing the a yardstick upon which to assess the impact of business environment on economic performance.
c. it would also be an invaluable tool for students, corporate organisation and individuals that want to know more about the impact of business environment on economic performance.

1.4 OBJECTIVES OF THE STUDY
The major purpose of this study is to examine business environment factors in Nigeria with respect to perceived uncertainty.
The specific objectives are as follows:
(i) To examine the nature of Nigeria’s business environment over the years;
(ii) To evaluate the structure and pattern of legal institutions in Nigeria;
(iii) To examine the impact of business environment and legal institutions on Nigeria’s economy;
(iv) To make suggestions as to how the problem of growth instability in the country can be solved via policy recommendations.

1.5 SCOPE OF THE STUDY
These days, there is a general awareness about the role of business environment and legal institutions in the economic performance of countries especially developing countries. This research work shall strive to contribute to this recognition and understanding by examining the performance of Nigerian economy in relation to the business environment and existing legal institutions.

Due to the technicality that is involved in establishing the relationship between business environment, legal institutions and economic performance, the empirical investigation shall be based on the knowledge and experience of people in the management field only. The survey shall be conducted among, economics, banking, accountancy and management students and lecturers, bankers, financial analysts, etc. The survey shall be conducted in Lagos State only because of the period of time given for the study to be completed.

Although, there are internal and external business environment, this study shall focus on external environment neglecting the internal environment because it does not have any relevance with the subject matter – the economic performance of the nation.

1.6 RESEARCH QUESTIONS
The study would examine the following questions:
1. What is the nature of business environment in Nigeria over the years?
2. How is the legal system in Nigeria structured?
3. How do the business environment and legal institutions affect the economic performance of Nigeria
4. How could the problem of growth instability be solved in Nigeria considering the state of the business and the legal structure?

1.7 STATEMENT OF HYPOTHESIS
The hypothesis to be tested in the course of this study is stated below:
H0 - that there is no relationship between the business Environment, legal institution and economic performance of Nigeria.
H1 - that there is relationship between the business environment, legal institution and economic performance of Nigeria.

1.8 OUTLINE OF CHAPTERS
This study shall contain five chapters. The first chapter shall contain the background of the study,
the statement of the problem, the objectives of the study, the research questions etc that would guide the study.
Chapter two would present the literature review on the subject matter. The chapter shall also present the theoretical framework which shall examine the theoretical relationship between institutions and economic performance. Institution here shall be used to cover economic institutions and legal institution.
The methodology to be adopted in the study would be stated in chapter three. This shall include the research design, the population of the study, sampling and sampling technique, validity of the research instrument, method of data analysis etc.
Chapter four shall focus on data presentation and analysis. The data collected through the questionnaire shall be presented using both univariate and multivariate tables. Simple percentages shall be computed for the responses and interpretations shall be made thereon. The last chapter – chapter five, would present the summary of the study, highlighting the major findings of the study. The conclusion of the study shall be made based on its finding and appropriate recommendations shall be suggested.


REFERENCES
CBN (2005), Central Bank of Nigeria: Annual Report and Statement of Accounts, p.47.

CBN (2004), Central Bank of Nigeria: Statistical Bulletin, p.62.

Jutting, J. (2003), “Institutions and development: A Critical Review”, Technical Paper No 210 Produced as part of the research programme on Social Institutions and Dialogue.

Olorunsola, J. A. (2001), “Industrial Financing in Nigeria: A Review of Institutional Arrangement”, Central Bank of Nigeria: Economic and Financial review, March, No 1, Vol. 39: 40-72.

Rodrik, D, A. and Subramanian F. T. (2002), “Institutions Rule: The Primacy of Institutions over Integration and Geography in Economic Development”, IMF Working Paper, WP/02/189, International Monetary Fund, Washington, D.C.

Sachs, J. (2003), “Institutions Don’t Rule: Direct Effects of Geography on Per Capita Income”, NBER Working Paper, No. w9490, February.

World Bank (2002), World Development Report 2002: Building Institutions for Markets, Oxford University Press, Oxford.

 

 

 

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