Economic Indicators | Business Investment Decisions
Since 1999 Nigeria has experienced a profound level of structural, political and economic changes that have made it one of the emerging markets in Africa. The Nigeria financial system has outgrown the level it used to be, now the system accommodate excellent investment opportunities that ranges in different asset classes, including public equities, debt, and private equity. Strong economic growth and macroeconomic stability are important pre-requisites before investors will consider plunging into a market.
The need for foreign capital to supplement domestic resources is felt by the developing economies, in view of growing mismatch between their capital requirements and saving capacity. Furthermore, many developing countries view foreign capital as a key element in their development strategy against the other forms of foreign financing as it aids in upgrading technology in hi-technology concentrated industries. Foreign capital generates employment in the host country when a multinational enterprise directly employs a number of host country citizens.
A viable private sector is an important economic agent for stimulating growth. The macro-economy should provide the necessary environment conducive to sound investment. Without this, the private sector is unlikely to make its full contribution to development. A non-conducive economic environment, or one with indicators that significantly distort private sector decision making, will have a negative impact on profit.
Scholars View On Economic Indicators And Business Investment Decisions
An academic scholar by the name Iyoha had in 1998 said that private investment can be affected on a great dimension when you consider the factors as the following;
(i)macro-economic instability,
(ii) macroeconomic policy (in other words either monetary, fiscal, or exchange rate),
(iii) incentive structure,
(iv) uncertainty and irreversibility,
(v) and credibility of policy reforms.
Business investment in Nigeria will include foreign private investment (foreign direct investment and foreign portfolio investment), and domestic private investment.
The chief motive or objective of business investment is profit maximization, thus investors are careful to study an economy critically, by studying certain indices of the macro-economy before investing their funds. These indices are very crucial to profit maximization and hence vital to the decision making of the business investor.
Since these indicators or economic barometers are carefully monitored and studied before investment decisions are taken, these indicators on the other hand should have an impact on the decisions of the investor. An economic barometer is therefore economic indicator that helps to predict the health or condition of an economy. There are certain indices that indicate economic pressures or wellness. There are also some variables that cannot be ignored when it comes to measuring the state, condition and health of an economy.
Numerous additional measures or variables are collected and used to understand the behavior of an economy. In the United States, for example, these additional measures include: the index of leading economic indicators (provides an idea where the economy is heading in the near future); retail sales (indicates the strength of consumer demand in the economy); factory orders, especially for big-ticket items (indicates the future growth in output, as orders are filled); housing growth (usually, significant increase or housing can as well be considered as a sign positive growth with reference to the future); it reflects on the consumer confidence index (this information refers to how consumers make decide to either buy durable or non-durable goods, pay or not pay for services, or buy a new home).
However, some of the variables tracked are more or mostly harmful than the ones listed, they include the following:
- aluminum production,
- steel production,
- paper or the paperboard production,
- industrial production,
- hourly earnings,
- weekly earnings,
- factory shipments,
- orders for durable goods,
- new factory orders,
- new-home sales,
- existing-home sales,
- inventories,
- initial jobless claims,
- married and jobless,
- help-wanted advertising,
- purchasing manager’s survey.
Economists and financial observers (investors) use observations on numerous variables to understand the behaviour of an economy.
Business Barometers – Economic Indicators | Business Investment Decisions
Business barometers – The term ‘barometer’ is also widely used though quite loosely in business statistics. Sometimes the term is used to mean simply an indicator of the present economic situations as the average Nigerian may find himself soon after the sound of the so called “second tier” whose implications are hardly clear to the average citizen. A times barometer is defined as indicators used to ascertain future conditions. The following are some of the macro and micro factors that may usually serve as business barometers in investment decisions:
- The Gross National Product and rate of growth
- Employment situation
- The wholesale prices of essential commodities
- The consumer prices indices
- Industrial production in the national economy
- Exchange rate of the naira
- Disposable personal income of workers
- Volume of bank deposits and currency in circulation
- Consumer credit facilities
- Bank charges and the lending rate
- Bond yields
- Stock/shares prices
- Availability of raw materials
- Agricultural yield in a given year
- National Calamities
- population growth rate,
- interest rate,
- economic growth rate etc.
- Capital formation.
- Balance of payment
- government expenditure
- fiscal and monetary policy
- inflation rate
- foreign exchange reserves,
- domestic credit to the private sector
- the incremental capital output ratio
With the level of underdeveloped in the Nigerian capital market, one way by which the private sector can be financed for investment is through retained profits, other avenue for funding come from the following; (i) bank credit and (ii) foreign sources. There other three avenues, the flow of bank credit to the private sector is the most important source of investible resources. The effects of variations in bank credit and capital flows are similar in that both tend to increase investment because of their impact on the expansion of financial savings The desired levels of investment by the private sector are obviously affected by the varying levels of credit allocated by the government between the public and private sectors.
Economic Indicators On Public And private Investments
Public and private investments are closely related in developing countries. If scarce physical and financial resources that would otherwise have been available to the private sector are used by the public sector, crowding out can occur. Similar outcomes will emerge if the private sector produces marketable output that competes with public output. Sources of finance for public sector investment would also affect private investment negatively be it through taxes, assurance of debt or inflationary finance. If public and private investments are substitutes the coefficient of adjustment of private investment would become smaller as the rate of public investment increases; conversely, complementarities would imply a faster response of private investment.
In imperfect credit markets – a characteristic of developing countries – firms may face credit constraints or higher financing costs as creditors raise interest rates to compensate for the increased risk of default. Reduced investment will be the outcome of the financial pressures. An indirect way in which the increase in the real value of firms’ foreign debt affects investment is the tightening of credit markets. As the net worth of firms falls, the quality of the portfolios of their domestic creditors also falls. Banks and financial intermediaries may be forced to reduce their exposure by cutting their loans, and hence squeezing investment.
Devaluation may also reduce investment by depressing aggregate demand. It has been out that if investment has significant import content, the expansion of output is likely to be a necessary (but not sufficient) condition for expanding investment. Devaluation has the capacity to substantially affect any investment you may have made, this is because the interest rates will likely increase and will be different from what it should be, also capital goods that are imported using forex will also be affected.
Expectations of devaluation represent a transitory disincentive to invest. Pending the deprecation, the real interest rate is high and investment low. Devaluation is never appreciated by most business people, because when it’s effect takes place, it discourages investment. The effect on interest rates, however, depends on capital mobility. When capital is relatively immobile, and investment requires a high proportion of imported capital goods, an anticipated depreciation occurs.
There are demographic variables that effectively affect business decision making, these variables includes age of the individual, education of such individual, income, and as well as the marital status of the individual. The knowledge of how will be highly useful to the financial advisors as it will help them advise their clients regarding investments which are appropriate with respect to their demographic profile. There is ample evidence which shows that investment choice depends on and is significantly affected by demographic variables.
The study about the impact of exchange rates on investment can be divided into two groups. The impact of exchange rate volatility on investment is seen as the first of the two studies, while the level of exchange rate and individual investment can be regarded as the second study. In every economy, it is easy to see that exchange rate exposure are regarded as a domestic channel, the other two channels are the (i) export channel, (ii) imported input channel.
In general, home currency depreciation would have negative impact on investment through the domestic market (wealth effect channel). Depreciation lowers the purchasing power of producers, and results in a decrease in investment. On the contrary, depreciation of exchange rates has a positive impact on investment through the export exposure channel. Currency depreciation enhances the international competitiveness which helps increase export revenue, the marginal profitability, and the firm’s investment. However, a depreciation of exchange rates has a negative impact on investment through the imported input price. A rise in imported cost induced by home currency depreciation decreases the marginal profitability and investment. The responsiveness of investment to exchange rates is a country-specific phenomenon.
A rise in real per-capita income implies that per-capita income rises faster than prices. If preferences do not change, then a rise in real per-capita income will increase consumption. Because of diminishing marginal utility, an increase in consumption will drive down the marginal utility per dollar spent on the last unit consumed. When real per-capita income rises, perhaps due to an increase in productivity, then consumption spending will usually increase as well. The implication is that for normal and luxury goods, such as vacation travel and restaurant meals, a rise in real per-capita income will cause demand to increase.
Real per-capita income is an average measure of a person’s inflation-adjusted income in a particular country. Since no country has a perfectly equal distribution of income, real per-capita income always overstates material living standards for the poorest in society. Policies that promote growth in real per-capita income do not always reach the poorest in society. In fact, the disparity between the world’s richest and poorest people has been rising. Gains in real per-capital income are generated by improvements in productivity. Productivity is in turn linked to business investment. Countries with relatively strong business investment tend to have more rapid gains in real per-capita income.
Real per-capita disposable personal income is derived from national income accounts. If we subtract personal taxes and inflation, and divide by population, we then have real per-capita disposable personal income.
An increase in real per-capita income, perhaps due to a rise in productivity, will cause consumption spending and aggregate expenditures to also increase. An increase in aggregate expenditures will cause the aggregate demand curve to shift outwards.