Impact of human capital on Domestic investment in Nigeria

Impact of human capital on Domestic investment in Nigeria will be the focus of the research work.



1.1     Background to the Study

The early neo-classical theory of economics had placed much emphasis on the exogenous growth rate of nations. Factors such as the growth rates of population, the structure of the labour force, and the rate of technological change were assumed to determine the long-run equilibrium growth rate. In this wise, classical economists agreed that capital accumulation increased economy’s growth rate in the medium term, but that the steady growth is constrained by rate of growth of the labour force (Enyekit, Amaehule and Teerah (2011). This gave rise to the emphasis on human capital development, which presupposes investments, activities and processes that produce vocational and technical education, knowledge, skills, health or values that are embodied in people. It implies building an appropriate balance and critical mass of human resource-base, and providing an enabling environment (through healthcare) for all individuals to be fully engaged and contribute to goals of an organization or nation (Erhuna, 2007).

Economic growth theories agree that the quality of human resources have a significant impact on economic growth. This body of thinking is of the opinion that the quality and quantity of labour determine production by virtue of it being a factor of production. Moreover, improving the quality of the labour force yields implicit, non-economic output related to the generation of ideas and decisions, which have a significant positive impact on investment, innovation and other growth opportunities (Turnosvky, 1999). Anyanwu, Adam, Obi and Yelwa (2015) maintain that the development of human capital has been recognized by economists to be a key prerequisite for a country’s socio-economic and political transformation. Among the generally agreed causal factors responsible for the impressive performance of the economies of most of the developed and the newly industrializing countries is an impressive commitment to human capital formation (Adedeji and Bamidele, 2003; World Bank, 1995; Barro, 1991). This has been largely achieved through increased knowledge, skills and capabilities acquired through education and training and the provision and sustenance of a general state of wellness by all the people of these countries. Thus, human capital is an important factor used in converting all resources to mankind’s use and benefit (Ogujiuba, 2013).

Apart from the educational dimension of human capital development, the health sector has also been found to contribute significantly to the growth potential of economies (Oni, 2014; Timothy et al., 2014). Thus, healthcare in human capital development analysis is viewed both as consumption and as an investment good that yields indirect utility through increased productivity, fewer sick days and higher wages (Bakare and Olubokun, 2011). This is because illness and disability reduce hourly wage substantially, with the effect especially strong in developing countries where a higher proportion of the workforce is engaged in manual labour. This is in line with Greenberg’s (1998) submission that when a substantial proportion of a country’s population is ill with infectious diseases for five to six months each year, substantial economic growth and development is very difficult to achieve. Thus, education and health readily contribute to the improvement of the labour force in any economy.

Existing literature have laid emphasis on the role of human capital development in economic growth. However, much has not been done to establish how the development of human capital, especially in developing countries, such as Nigeria, has influenced investment decision. By investment, we mean real gross private domestic capital formation. Adegbite and Adetiloye (2013) explained domestic investment as the acquisition of income-producing assets within the economy rather than abroad; and, according to Iyoha (2004), one of the most important characteristics of investment is its variability. In fact, the amount of investment in any typical economy is highly volatile from year to year, and decade to decade. According to Samuelson, this capricious, volatile behavior of investment is understandable when we come to realize that profitable investment opportunities depend on new discoveries, new products, new territories and frontiers, new resources (both human and material), new population, higher production; and improved human skills also influence investment (Iyoha, 2004). While short-term investment is encouraged by external sources of fund, long term investment is driven more by domestic forces, which include, among other things, well developed human resources capable of creating, coordinating and sustaining a viable economy that would attract investors. Investing in human capital development is therefore critical as it is targeted at ensuring that the nation’s human resource endowment is knowledgeable, skilled, productive and healthy to enable the optimal exploitation and utilization of other resources to engender growth and development through investment.

In fact, analyses on human capital development and domestic investment are anchored on the fact that today’s shift to a knowledge-based economy requires more intelligent and healthy people than ever. It was Toffler (1991:400) who wrote that “But the most acute shortage facing less developed countries is that of economically relevant knowledge.” He explained that the 21st century path to economic development and power is no longer through the exploitation of raw materials and human muscle but, as we have seen, through application of human mind. Thus, with knowledge increasingly central to the economy, nations must consider how they might best acquire or generate this resource so as to make their economy more rewarding and attractive to both domestic and foreign investors.

Today, economies shift from the use of expensive cheap labour (the use of large pools of cheap unskilled labour) to the use of few highly skilled workers. Here, better technology, faster and better information flows, decreased inventory, or streamlined organization can yield savings far beyond any that can be squeezed out of hourly workers (Toffler, 1991). That is why it may be more profitable to run an advanced facility in Japan or the United States, with a handful of highly educated, highly paid employees, than a backward factory in Chad or Burundi or even Nigeria that depends on masses of badly educated low-wage workers. Thus, cheap labour, in the words of Humberto Colombo, “is no longer enough to ensure market advantage to developing countries.” On the other hand, a well-developed workforce would not only produce more effectively and efficiently, but would also serve as added incentive to investors who rely on the availability of skilled manpower. This is made evident by the fact that human capital constitutes the most valuable resource of a country: physical capital and natural resources are passive factors of production while human resources are active factors of production (Todaro and Smith, 2003). Remarkably, Nigeria, as a nation, has expressed commitment to the development of its human potentials through the financing of education and health, and has witnessed the churning out of large pools of graduates from the various institutions of higher learning and other skill acquisition centres in the country. However, questions still remains as to whether human capital development in the country has actually contributed significantly to the growth in domestic investment in the Nigerian economy. This study therefore stems from the researcher’s deep interest to investigate how the development of human capital in Nigeria influenced domestic investment in the country.


1.2     Statement of the Study

          The close connection between economic performance and human capital has led to the formulation and popularization of human capital theory as well as endogenous growth theories, which explain that there are substantial economic effect of education and health on the micro and macro-economic levels. In line with the above, various regimes in Nigeria have expressed their commitment towards developing the nation’s human resource through education and health. However, the link between the development of human skills in Nigeria and investment in the country has not been elaborated. Investors have always been attracted by, among other things, the availability of productive human resource that can effectively contribute to, and coordinate other economic resources. But the development of human capital in Nigeria has always been described as sub-standard, producing poorly equipped graduates, with little or no employable skills (Nzekwe, 2008; Oni, 2014). Nzekwe (2008) stressed that over 70 percent of Nigeria’s graduates lack employable skills, with investors and employers spending huge sums to have these graduates trained and ready to take on responsibilities- a situation that could make the Nigerian labour force unattractive, and stifle investment in the country. This, therefore, created the need to investigate, empirically, the impact of human capital development on domestic investment in Nigeria over the period 1980 to 2014.


1.3     Research Questions

          This study seeks to find answers to the following research questions:

  • To what extend has human capital development influenced domestic investment in Nigeria?
  • Is there long-run relationship between human capital development and domestic investment in Nigeria?
  • What is the direction of causality between human capital development and domestic investment in Nigeria?


1.4     Objectives of the Study

The broad objective of this study is to determine how human capital development influenced domestic investment in Nigeria during the period 1981 to 2014. Specifically, the study will seek:

  • To determine the extent human capital development influenced domestic investment in Nigeria;
  • To establish if there is long-run relationship between human capital development and domestic investment in Nigeria;
  • To ascertain the direction causality between human capital development and domestic investment in Nigeria.


1.5     Research Hypotheses

          The following hypotheses were formulated to guide the study:

  • H0: Human capital development does not have significant influence on domestic investment in Nigeria.
  • H0: There is no long-run relationship between human capital development and domestic investment in Nigeria.
  • H0: There is no causal relationship human capital development and domestic investment in Nigeria.


1.6     Significance of the Study

          The findings of this study would be of immense benefit to various members of the society. The findings would be of importance to policy makers, the education and health sectors, economic and political analysts, members of the public and the academics. First, the study would be policy makers. The findings would enable them become abreast with the realities concerning human capital development in Nigeria, and make evidence-based policies and programmes. The findings would also equip economic and socio-political analysts in their quest to x-ray economic issues as affected by the social and political dimensions of the polity

Moreover, the findings of this study would be of importance to members of the public. The findings would enable them understand the nature of the development of the nation’s human resources, and how far these efforts have gone in enhancing investment in Nigeria. The findings would also serve as a clarion call to even members of the public to participate and monitor the human capital development process in Nigeria.

Furthermore, this study, being an academic research work, would serve as an addition to the available stock of knowledge in this field, and serve as a basis of reference to future researchers and students in this or related fields.

1.7     Scope of the Study

          This study focuses on investigating the impact of human capital development on the domestic investment in Nigeria. The study is limited to the time period of 1981 to 2016. The study would specifically consider variables such as government spending on both education and health (as exogenous variables) and growth in domestic investment in Nigeria (as the dependent variable). The study would also assess the impact of interest rate on domestic investment in Nigeria. The study would employ time series econometrics, which involves unit root test for stationarity of the time series data, test for co-integration, vector error correction estimation, and test for causality.


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