AN EVALUATION OF THE EFFECT OF INFLATION ON THE SUSTAINABILITY OF INFANT FACTORIES IN NIGERIA (EVIDENCE FROM PRESIDENT TINUBU ADMINISTRATION). 

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Inflation has persistently plagued the Nigerian economy for an extended period. Inflation is a well-established phenomenon in the global economy and is not inherently negative. However, the situation in Nigeria is particularly serious and has the potential to disrupt the entire economic structure if not effectively addressed. This issue has resulted in a decrease in the ability to buy goods and services, a lack of motivation for actual investment, an imbalance in the country's international payments, and a high level of unemployment.

Inflation, as defined by Ibekwe et al. (2017), refers to a continuous rise in the overall price level of products and services. This phenomenon has significant consequences for the economic stability and progress of a nation. In Nigeria, inflation has been an enduring problem, impacting all sectors of the economy. The manufacturing industry, particularly newborn factories, which are newly founded manufacturing enterprises in their early phases, is very susceptible to inflationary pressures. In 2022, inflation reached its highest level in 40 years, with a consumer inflation rate of 9.1 percent. Despite the reduction in rates in 2023, the industrial industry is still experiencing the repercussions of inflation as we enter 2024. Inflation is the gradual increase in prices of goods and services over a period of time. It is generally considered to be normal when it is around 2 percent. It is projected that inflation will persist above average levels throughout 2024, resulting in increased production costs and diminished earnings. Consequently, this will impede the growth potential of the fledgling factories. 

The manufacturing industry is highly dependent on raw resources, which are susceptible to the volatility of the global market and are scarce due to labour and transportation difficulties. With the escalating prices of these resources, the manufacturing cost of items likewise surges, compelling businesses to make necessary adjustments to their pricing. Moreover, elevated inflation rates also result in heightened financing rates, so augmenting manufacturing costs and constraining the expansion potential of newly established factories. Inflation significantly affects the labour market. With the increase in inflation, firms are compelled to raise compensation in order to attract and retain proficient employees. The rise in overhead expenses results in a subsequent decline in profits for infant manufacturing.

Nigeria's economy exhibits a significant reliance on oil earnings, rendering it vulnerable to variations in global oil prices. Furthermore, economic concerns have been worsened by structural issues such as insufficient infrastructure, political instability, and corruption. Since assuming office in May 2023, President Tinubu has implemented measures to stabilise the economy and tackle inflation. Nevertheless, the persistent high inflation rates continue to be a substantial worry, affecting many economic activity, such as the manufacturing sector. Infant factories, which refer to recently founded manufacturing enterprises, play a vital role in promoting economic diversification, generating employment opportunities, and driving technical progress. These manufacturers frequently encounter many obstacles during their first phases, such as restricted financial resources, insufficient infrastructure, and market rivalry. Inflation introduces an additional level of intricacy by augmenting the expenses of primary resources, workforce, and other essential elements, so posing a risk to the viability and expansion of these enterprises. This study aims to assess the impact of inflation on the long-term viability of baby industries in Nigeria, specifically focusing on the evidence from the administration of President Tinubu.

1.2 Statement of the Problem

Infant industries are of great importance in Nigeria. These industries commonly arise in areas other than oil and gas, such as manufacturing, agriculture, technology, and services. According to Ayobami (2023), they serve as avenues for fresh growth, aid in the creation of jobs, and foster innovation and productivity improvements throughout the economy. Infant industries, being in their early developmental stage and having limited capacity, frequently encounter obstacles that jeopardise their sustainability and ability to compete. The issues encompass limited availability of reasonable financing, insufficient infrastructure, elevated operational expenses, and obstacles in market entry (Ekarika, 2023). Consequently, they necessitate government intervention in the form of protection and tailored assistance measures to flourish and expand.

One of the most direct effects of inflation on baby factories is the sudden increase in input expenses, such as the costs of raw materials, energy, and transportation (Jenkins, 2023). With the increasing prices of commodities like metals, energy, and agricultural products, manufacturers are confronted with elevated costs in procuring resources and conducting their operations (Ayobami, 2023). Unless corporations are able to transfer these costs to customers by raising prices, this can lead to a reduction in profit margins. Manufacturers are facing the challenge of increasing manufacturing costs, which will lead to a decline in profit margins unless they make pricing adjustments or improve operational efficiencies. 

A study conducted by Ore et al. (2022) reveals that inflation-induced reduction in purchasing power has a direct effect on customer demand for goods and services, including manufactured products. Consumers may give higher importance to necessary purchases rather than spending on non-essential products. Additionally, individuals can choose to delay significant expenditures or select more affordable options (Adbenego, 2021). Manufacturers see a reduction in sales volumes when there is a decline in consumer demand. When inflationary pressures arise, causing consumers to have a decreased willingness or ability to spend on non-essential goods, businesses face a decline in orders and a slower rate of inventory turnover (James, 2019).

Objectives of the study

The primary objective of this study is to critically evaluate the effect of inflation on the sustainability of infant factories in Nigeria (evidence from President Tinubu administration). Specific objectives of this study are to:

To evaluate the extent of inflation on the operational costs of infant factories.

To assess impact of inflation on the demand for products manufactured by infant factories

To identify the challenges faced by infant factories as a result of inflation under President Tinubu administration.

To provide solutions based on the findings to support the growth and sustainability of infant factories in Nigeria.

1.4 Research Questions

The following research questions which are in line with the objectives of this study will be answered in this study:

What is the extent of inflation on the operational costs of infant factories.?

What is the impact of inflation on the demand for products manufactured by infant factories?

What are the challenges faced by infant factories as a result of inflation under President Tinubu administration?

What are the solutions based on the findings to support the growth and sustainability of infant factories in Nigeria?

1.5 Research Hypotheses

To determine the effectiveness of this study, the following research null hypotheses will be formulated to guide the study and it will be tested at 0.05% levels of significance.:

Ho: Inflation does not have a significant impact on the demand for products manufactured by infant factories.

Ha: Inflation has a significant impact on the demand for products manufactured by infant factories.

1.6 Significance of the study

The report offers comprehensive insights into the precise issues that infant factories encounter as a result of inflation. Gaining a comprehensive understanding of these problems is essential in order to determine the factors that influence the long-term viability of these businesses. The study illuminates the various challenges that new manufacturing firms confront in an inflationary climate by analysing the impact of inflation on production costs, consumer demand, and access to capital. The report will provide a fundamental reference point for politicians, infant factories, students, and scholars.

The study emphasises the practical consequences of macroeconomic policy on newly established industries. The research provides vital insights into the impact of current economic policies on new firms by specifically examining the period under President Tinubu's administration. This information is vital for policymakers and stakeholders, as it emphasises the necessity of making policy modifications that can provide stronger support for the manufacturing sector in the face of elevated inflation rates.

In the end, future academics will use it as a comprehensive analysis of the existing scholarly literature. As a result, other students who are interested in studying this subject will have the chance to use this work as reliable resource that can be thoroughly assessed. 

1.7 Scope of the study

Broadly, this study focus is to critically evaluate the effect of inflation on the sustainability of infant factories in Nigeria (evidence from President Tinubu administration). Specifically, this study seeks to evaluate the extent of inflation on the operational costs of infant factories and identify the challenges faced by infant factories as a result of inflation under President Tinubu administration. Further, this study will focus on identifying challenges faced by infant factories as a result of inflation under President Tinubu administration and it also seeks to provide solutions based on the findings to support the growth and sustainability of infant factories in Nigeria.

1.8 Limitations of the study

Like in any human attempt, the researchers encountered several small limits during the investigation. The primary constraint was the scarcity of comprehensive literature on the topic, as there is a paucity of data for an evaluation of the effect of inflation on the sustainability of infant factories in Nigeria (evidence from President Tinubu administration). Therefore, a substantial investment of time and effort was required to find the suitable materials, books, or information and collect data. 

Moreover, this study is limited by its limited sample size and restricted geographical reach, namely concentrating just on Nigeria. Hence, the findings of this study cannot be extrapolated, thereby necessitating additional investigation. 

Furthermore, the researcher's limitations were predominantly attributable to budgetary restraints, as they are a student and lack a means of financial support. The research location's high transportation costs, impacted by current inflation in Nigeria, made it difficult to afford transportation fees.

In addition, the researcher encountered a time limitation as a result of the necessity to do this research while simultaneously meeting the responsibilities of attending lectures and engaging in other educational pursuits.

1.9 Definition of terms

Inflation: Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.

Purchasing power: Purchasing power refers to the amount of products and services available for purchase with a certain currency unit.

Standard of living: Standard of living is the quality quantities of goods and services available to the total number of people living in a geographical area at a particular time for some time.

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