Foreign Investment And Financial Growth Of Companies In Insurance Sector Nigeria

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Foreign Investment And Financial Growth Of Companies In Insurance Sector Nigeria


Abstract


This work studies the foreign investment and financial growth of companies in insurance sector Nigeria in the wake of the unprecedented capital flight from the Nigerian economy during the recent global economic recession (the credit crunch). Data which are secondary data nature were obtained from statistical bulletins of the Central Bank of Nigeria. The expost-facto research design was adopted to determine the level of the impact for 25 Insurance industries for the period 2006-2010. The ordinary least square (OLS) estimation technique was employed using statistical packaging for social sciences (SPSS) computer software version 16.0 for statistical analysis. Results revealed that there is a non-positive significant impact of foreign direct investment on the equity capital of the Nigerian Insurance industry, there is a negative insignificant impact of foreign direct investment on the growth of the Nigerian Insurance industry and there is a negative insignificant impact of foreign direct investment on the total assets of the Nigerian Insurance industry. It is recommended therefore that the Nigerian Government should take more seriously the responsibility of creating an enabling environment for effective, value- adding foreign direct investment in the Insurance industry without losing the prerogative of sovereignty. It is also recommended that already existing foreign direct investment in Nigeria should be sustained and that Government should begin to look at foreign direct investment from a deeper perspective. The quality and structure of foreign direct investment should now be viewed from the perspective of investment in broader aspects of the economy (i.e power, manufacturing, banking, and export-oriented industries) and the use of local suppliers, rather than a lopsided focus on extractive industries.


Chapter One


Introduction

1.1 Background to the Study

Globalization has led to a rapid growth in the number of multinational enterprises (MNEs) that have been investing abroad in recent years. Foreign Direct Investment (FDI) has become enormously significant as the magnitude of international business has grown gradually during the last two decades. This development has occurred for several reasons, including the evolution and development of free-market economies around the world, the growth of international financial markets, the proliferation of regional integration between nations, and the numerous communication and technological developments that make managing far flung businesses easier. However, foreign direct investment possesses characteristics that make it highly sought after on the one hand and controversial on the other (Dinda, 2009; Nwankwo, Ademola and Kehinde, 2013).

Foreign direct investment is viewed as a major stimulus to the growth of the financial system in developing countries of which the insurance industry in Nigeria falls into. Its ability to deal with two major obstacles, namely, shortages of financial resources and technology and skills, has made it the centre of attention for policy-makers in low-income countries in particular (Korna, Ajekwe and Idyu, 2013).

According to (IMF, 2004) Foreign Direct Investment (FDI) occurs when there is an investment in a business organization by an investor from a foreign country. Usually, a business organization has FDI when the foreign investor owns not less than I0% of the ordinary shares of the business. This investment includes the purchase by the foreign investor of shares in the business organization located in another country.

In a broad sense foreign direct investment includes mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans. In a narrow sense however, foreign direct investment refers just to building new facilities (Adeleke, Olowe and Fasesin, 2014).

Macaulay (2012) asserted that Nigeria’s foreign investment can be traced back to the colonial era, when the colonial masters had the intention of exploiting our resources for the development of their economy. There was little investment by these colonial masters. With the research and discovery of oil foreign investment in Nigeria, but since then, Nigeria’s foreign investment has not been stable. The Nigerian governments have recognized the importance of FDI in enhancing economic growth and development and various strategies involving incentive policies and regulatory measure have been put in place to promote the inflow of FDI to the country.

In the context of the insurance industry, Augustine and Bamidele (2013) have remarked that the history of insurance industry in Nigeria could be traced to the British colonial trading companies that established agency offices in Nigeria, on behalf of insurance companies in the UK.

Shiro (2009) noted that since the enthronement of democracy in 1999, the government of Nigeria has taken a number of measures necessary to woo foreign investors into the insurance industry Nigeria. These measures, he noted, include the repeal of laws that are inimical to foreign investment growth, promulgation of investment laws, various oversea trips for image laundry by the President among others.

Baltabaev (2013) argues that the conflicting results of the impact of FDI on insurance company financial performance could result from ‘endogeneity problem’ in the sense that there could be bi-directional impact from FDI to financial performance and from financial performance to FDI. This argument flows from the work of Choe (2003) who employed granger causality test to demonstrate that company financial performance impacts more on FDI than FDI impacts company financial performance. Whether in fact FDI is negative or positive to organizational performance is an issue that remains open to empirical studies.


1.2 Statement of the Problem

The challenge of most developing economies like Nigeria today is their overdependence on foreign capital which does not bring positive impacts only but negative impacts as well.

In spite of the laudable benefits the Nigerian insurance sector stands to derive from the inflow of foreign capital (FDI) and its attending contribution to economic growth, improvement of the living standard of the people and the provision of social amenities, the problem arises as to what extent the Nigerian insurance sector and indeed the entire economy should depend on foreign direct investment.

In recent years, firms from Asia, the US and Europe invested heavily in equities and bond markets in Nigeria. But as institutional investors around the world battled to provide cushion for their credit markets which was thrown into unprecedented deficit as a result of the global credit crunch or financial meltdown, they had to pull out their funds from Nigeria. Financial analyst say the implications of this capital flight is that local businesses in Nigeria may take a much longer time to recover because firstly local firms lack the financial muscle to cover the vacuum created by these multinationals, and secondly the FDIs will not return immediately even when the global financial market may begin to pick-up or stabilize.

Dependency theorist has also focused on how FDI of Multinational Corporation distorts business financial performance in developing nation economies. In the view of these scholars, distortion includes the crowding out of national firms, rising unemployment related to the use of capital intensive technology and a marked loss of political sovereignty.

Typically, multinational corporations in developed countries have actually become a threat to host countries as they are now subversive and exploitative. Interestingly there are some arguments about whether FDI is really beneficial or not and how significant this benefit is to insurance business financial performance in Nigeria is largely unclear.

Moreover, many of the studies on foreign direct investment (FDI) were done outside Nigeria. These studies particularly focus on economic growth. Research on impact of foreign direct investment (FDI) on company’s financial performance are very few. In Nigeria, most of the available studies about foreign direct investment (FDI) such as Otepola (2002); Onu (2012); Nwankwo, Ademola and Kehinde (2013); Adeleke, Olowe and Fasesin (2014) explored the link between foreign direct investment (FDI) and economic growth.

These researches were also theoretical studies whose findings were subjectively based on researchers’ personal opinions. It is noted that the past studies did not give adequate attention to the impact of foreign direct investment (FDI) on company’s financial performance, as well as highlighting effective management of foreign direct investment (FDI) strategy that can stimulate better organization performance. Hence, the undertaking of this research work will fill in the gap by critically exploring the impact of foreign direct investment (FDI) on company’s financial performance with a special reference to some selected insurance companies in Lagos State.


1.3 Objectives Of The Study

This study is being conducted with the following objectives:

  1. To investigate the effect of foreign direct investment (FDI) on company’s financial performance.
  2. To explore the impact of multinational corporations on host country’s business survivability.
  3. To find out the relationship between foreign direct investment and economic growth in Nigeria.
  4. To find out the challenges to foreign direct investment in Nigeria.
  5. To provide plausible recommendations on how to improve company’s financial performance in the face of FDI activities.

1.4 Research Questions

This study will be guided be the following research questions:

  1. What is the effect of foreign direct investment (FDI) on company’s financial performance?
  2. Do multinational corporations have impact on host country’s business survivability?
  3. Is foreign direct investment significantly related to economic growth in Nigeria?
  4. What are the challenges to foreign direct investment in Nigeria?
  5. How can government policy improve company’s financial performance in the face of FDI activities?

1.5 Research Hypotheses

The researcher intends to test the following hypotheses at 0.05 level of significance:

Hypothesis 1:
  • Ho; There is no significant relationship between foreign direct investment and company’s financial performance.
  • HI;There is a significant relationship between foreign direct investment and company’s financial performance.
Hypothesis 2:
  • Ho; Foreign direct investment do not have positive relationship with the growth of the Nigerian insurance industry
  • HI; Foreign direct investment have positive relationship with the growth of the Nigerian insurance industry.

1.6 Scope of the Study

The emphasis of this study is on twenty five (25) Nigerian insurance company. The period 2006-2010 covers the aspect dealing with our data for statistical analysis. The time period has been selected considering that it offers recent time series observations and it constitutes a period of structural changes for the Nigerian insurance sector.


Chapter Three


Summary of Findings, Conclusion and Recommendations

5.0 Introduction

This chapter summarizes the various research results which emerged from the study. The results are aligned with the respective objectives and hypotheses set out in chapter one of the dissertation. Conclusions are drawn and necessary recommendations made based on the research findings.


5.1 Summary of Findings

The major thrust of this study was to ascertain the level of impact; foreign investment has on the Nigerian Insurance sector in the wake of the unprecedented capital flight that occurred during the recent global economic meltdown (The credit crunch). The research work basically sought to determine the amount and impact of cumulative FDI inflows that came into the Nigerian Insurance sector from the year 2006 to 2010 and to
ascertain the extent to which foreign direct investment impacts on the liquidity position and total assets of Nigerian banks within the same period.

On the whole, three (3) null hypotheses and research questions were raised, tested and verified. This was done using the simple regression analysis. The statistical package for social sciences (SPSS) computer software version 16.0 was also used. Results were obtained using both the student‟s t-test and the standard error tools of analysis.
Corresponding with the three (3) objectives of the study earlier set out in chapter one, the following major findings were made:-

  1. Foreign direct investment capital inflows that came into the Nigerian money deposit banks were about N32.9 billion for year 2006 to 2010. This represents a 44% positive but insignificant percentage of the total capital base of the entire Insurance sector for this period. The regression coefficient of FDI was positive but insignificant (as shown by tc value of 1.17) implying that FDI has an insignificant positive impact on the capital base of the Nigerian Insurance sector.
  2. The liquidity position of the Nigerian Insurance sector from year 2006 to 2010 was high but experienced a declining trend. Foreign direct investment for the period was found to have a negative insignificant impact on the liquidity position of the Nigerian Insurance sector (as seen in t-test value tc = -0.031). The implication of this is that changes in liquidity of the Insurance sector do not necessarily depend on changes in foreign direct investment.
  3. Lastly it was found out that the total asset size of the Nigerian banks rose steadily in value from year 2006 to 2010 ranging from N7,172,932.1 in 2006 to N17,522,858.2 in 2009. Foreign direct investment however, had a negative insignificant impact on the total assets (as shown by the coefficient of FDI tc= -0.2

5.2 Conclusion

Based on the findings of this research work enumerated in section 5.2 above which states that:

  1. Foreign direct investment has an insignificant positive impact on the financial performance of the Nigerian Insurance sector.
  2. Foreign direct investment has a negative insignificant impact on the growth of the Nigerian Insurance sector.

The research work concludes therefore that foreign direct investment (FDI) does not have a significant positive impact on the Nigerian Insurance sector. In order words, the sustainability and growth (development) of the Nigerian Insurance industry is not necessarily a function of foreign direct capital injection. Put in another way, growth in the Insurance sector is not necessarily made possible by the increase in the flow of foreign capital. The Nigerian Insurance sector perhaps, depends largely on other sources of capital rather than the foreign capital for its growth and sustainability. This conclusion is consistent with the findings of other studies conducted in the past with respect to the impact of FDI on sectoral composition of the Nigerian economy in particular, and other developing economies in general.


5.3 Recommendations

Based on the issues raised above and in line with the findings of this work, the following recommendations are therefore necessary:

(1) That the Nigerian Government should take more seriously the responsibility of creating an enabling environment for effective, value–adding foreign direct investment, particularly in the Insurance sector, without losing the prerogative of sovereignty. What this mean is that Government should step up efforts in attracting foreign direct investment into the sector by ensuring that investor confidence is protected. This can be done through:

  • Providing visionary government that puts the interest of the average Nigerian first and not those of political parties, politicians or a few already wealthy rent seekers.
  • Establishing and supporting a culture of business ethics and integrity through effective regulation. Foreign direct investors and their investments should be subjected to more rigorous and effective regulation in order to avoid cases of capital flight especially during times of financial crisis. Corruption poses a fundamental risk to Nigeria and its governance. This has kept many foreign firms from investing in the country. But with effective regulatory framework put in place, corruption and other related issues will be addressed.
  • Ensuring policy consistency. This is essential if we are to obtain long-term benefits from foreign direct investment; foreign investment policies that change at the whim or caprice of every newly elected government will not do the nation any good. This is because they generate needles disputes that weaken investor confidence and raise questions about the sanctity of contracts – one of the basic tenets of the rule of law.

(2) Foreign direct investment capital inflows brought into the Nigerian Insurance sector and the economy generally must be sustainable. For foreign direct investment to be sustainable, it must create wealth not just for foreign investors, but also for Nigerians. The time is long past when foreign investment in Africa was all about extracting wealth while leaving Africans poorer than they were before the investors arrived. It is recommended that government should come out with policies that encourage wealth creation and generation by Nigerians from within the economy (squeezing wealth from foreign investments by Nigerians) so as to avoid overdependence on foreign capital. Today, foreign investment must create economic and social value for the host country, even as foreign investors certainly have a right to run viable businesses. But as we have seen in the global financial crisis, there is a difference between viable business and the unchecked greed that created much of the mess the world is in today.

(3) The Government should look at foreign direct investment now from a deeper perspective than just that of the quality of dollars or how many companies that comes into Nigeria as foreign investment. We must look at the quality and structure of foreign investment and we must address the question of whether FDI automatically catalyses development. It is widely believed that FDI is essential for development. It certainly can play a key role in development provided certain conditions are met, as has been the case in the Newly Industrialized Countries (NICs) of Asia. But there is also significant empirical evidence that FDI complements, but does not substitute local factors that are essential for development. In any case, the present global economic crisis has led to a downturn in FDI flows worldwide including Nigeria. The ways in which foreign investment can contribute concretely to development include the diffusion of technology into the host country‟s economic system, strategically targeted foreign investment in the real economy (power, manufacturing), export-oriented industries, service industries and the use of local suppliers, rather than a lopsided focus on extractive industries.


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