Institutional Quality and the Manufacturing Subsector Growth Nexus: Empirical Evidence from Nigeria

Abstract

This study evaluates the impact of institutional quality on the growth of Nigeria's manufacturing subsector over the period 1991-2024. After adjusting for loan interest rates, inflation rates, and currency rates, the study creates a composite Institutional Quality Index (IQI) using Principal Component Analysis of six governance characteristics and investigates its correlation with manufacturing subsector development (Msg). Due to the mixed integration order of the series, secondary time-series data from the World Bank, the Central Bank of Nigeria, and the researcher's calculations were analysed using descriptive statistics, correlation based and variance inflation factor diagnostics, Augmented Dickey-Fuller unit root tests, and the ARDL bounds testing procedure. The limits test confirmed a long-term equilibrium connection between the variables. The short-run findings show that institutional quality has a positive and statistically significant effect on the growth of the manufacturing subsector, while the long-run coefficient is negative but not statistically significant. The considerable and negative error correction term indicates that around 44% of the short-run disequilibrium is corrected within a year. Diagnostic tests verify that the model is normally distributed, free of heteroscedasticity and serial correlation, and structurally stable over the review time. The study comes to the conclusion that institutional quality improves Nigeria's manufacturing subsector in a transient rather than long-term manner and suggests extensive, long-term governance changes aimed at enhancing the working conditions of manufacturing firms.