Foreign Investment and Financial Growth of Companies in Insurance Sector Nigeria

Foreign Investment and Financial Growth of Companies in Insurance Sector Nigeria

Chapter One of Foreign Investment and Financial Growth of Companies in Insurance Sector Nigeria

INTRODUCTION

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.

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.