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FOREIGN
INVESTMENT AND FINANCIAL GROWTH OF COMPANIES IN INSURANCE SECTOR NIGERIA
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:
i.To
investigate the effect of foreign direct investment (FDI) on company’s
financial performance.
ii.To
explore the impact of multinational corporations on host country’s business
survivability.
iii.To find
out the relationship between foreign direct investment and economic growth in
Nigeria.
iv.To find
out the challenges to foreign direct investment in Nigeria.
v.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:
i.What is
the effect of foreign direct investment (FDI) on company’s financial
performance?
ii.Do
multinational corporations have impact on host country’s business
survivability?
iii.Is
foreign direct investment significantly related to economic growth in Nigeria?
iv.What are
the challenges to foreign direct investment in Nigeria?
v.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.
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