Nigerian Journal of Banking and Financial Issues (NJBFI)

FINANCIAL DEVELOPMENT, INNOVATION INVESTMENT, INSTITUTIONAL QUALITY AND PRODUCTIVITY GROWTH IN NIGERIA

Abstract

This study investigates the short-run relationship between financial development, investment, institutional quality, and total factor productivity (TFP) in Nigeria using annual time-series data from 1991–2024 within an ARDL framework. Focusing on short-run productivity effects, the findings show that financial development significantly enhances productivity: a one-unit increase in lagged financial development raises TFP by about 0.017 units. Institutional quality strengthens this effect, as the financial development–institutional quality interaction increases TFP by approximately 0.088 units (significant at 1%). Investment produces the strongest direct short-run productivity effect, with a one-unit increase raising TFP by about 0.172 units. However, the investment–institutional quality interaction is negative but significant (−0.034), indicating possible short-run institutional adjustment costs. Human capital contributes positively with lag effects; a one-unit increase in lagged human capital increases TFP by roughly 0.147 units (significant at 10%). Trade openness shows no significant short-run influence. The error correction term indicates about 9.4% speed of adjustment toward equilibrium, but is statistically insignificant, suggesting weak long-run convergence. The model explains 58.5% of TFP variation (R² = 0.585) and satisfies diagnostic and stability conditions. Overall, productivity improvements from finance and investment are strongly dependent on institutional effectiveness and human capital development.