EFFECTS OF FOREIGN DIRECT INVESTMENT ON COMMERCIAL BANKS IN NIGERIA (2010-2021)
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Background of the study
Various classifications have been made on Foreign Direct Investment (FDI). For instance, FDI has been described as investment made so as to acquire a lasting management interest (for example, 10 percent of voting stock) and at least 10 percent of equity shares in an enterprise operating in another country other than that of the investor’s country (Mwillima, 2003). Policy makers believe that FDI produces positive effects on host economies. Some of these benefits are in the form of externalities and the adoption of foreign technology (Alfaro et. al, 2006). According Alfaro et. al, 2006, multinational enterprises (MNEs) diffuse technology and management know-how to domestic firms. When FDI is undertaken in high risk areas or new industries, economic rents are created accruing to old technologies and additional management styles. It has been theorized by development economists that the integration of developing countries with the global economy increased sharply in the 1990s with changes in their economic policies and lowering of barriers to trade and investment. Most countries strive to attract foreign direct investment (FDI) because of its acknowledged advantages as a tool of economic development. Africa and Nigeria in particular joined the rest of the world in seeking FDI as evidenced by the formation of the New Partnership for Africa’s Development (NEPAD), which ahs the attraction of foreign investment to Africa as a major component. FDI is assumed to benefit a poor country like Nigeria, not only by supplementary domestic investment, but also in terms of employment creation, transfer of technology, increased domestic competition and other positive externalities (Ayanwale, 2007).
This study is based on the effects of foreign direct investment on commercial banks in Nigeria. Foreign direct investment (FDI) is essential in the banking sector, and it is an investment which investors from other countries invest or set up in another country's business and the foreign investor as a legal right or control on the company profit. In this study, we examine the impact of foreign direct investment commercial banks in Nigeria. All the commercial banks are listed on the Nigerian Stock Exchange. Data for the study was acquired from banks from the annual reports of the banks published on the Nigerian Stock Exchange covering the periods of research was seven years, 2010 to 2021. The reason for selecting those years is to capture the trend and have more robust information about the financial activities of banks under study. The data collected was analysed using quantitative research methods. We adored the Tobin Q method of analysis to test the effect of FDI commercial banks in the Nigerian Stock Exchange Market (Okere et al, 2019). This observation made that the inadequate corporate framework does not only lead to poor financial performance and risky financing strategy but has also led to various macroeconomic crises such as the East Asia crisis of 1997, the global financial meltdown of 2008 -2009 and Nigerian Financial Services Sector in 2010 – 2011. (Bello & Adeniyi, 2010; Eluyela et al., 2018a; Olumuyiwa & Oluwatosin, 2012; Umaru et al., 2015; Uwuigbe et al., 2018).
1.2 Statement of the problem
The banking sector is a crucial and essential component of an international financial system, so it comprises a primary source of corporate finance. Some well-functioning financial sector encourages the movement of physical capital, offering opportunities with income and channeling capital rapidly into a high return. Companies are required as corporate service providers to include an outlet and customers to save money not spent on usage. That is from the profits they generate in such a way that they can be supposed to expand credit services to businessmen as well as other enterprises. For example, the financial intermediation function of banks plays a significant role by providing funds from surplus spending units to deficit spending units for consumption and investment purposes in the economy.
Balsuburamanyan, and Salisu, (2010), defined foreign direct investment as one of the inputs which have to do with labour and capital. The author said that FDI is one of the primary forces driving economic development in an undeveloped country. FDI is the primary source of technology transfer as well as financial and workforce development to the receiving country and differentiates itself from another investment form in the states. Thirlwall (1994) refer to foreign direct investment as an investment of multinational companies or organization in developing countries. This investment does not only involve the transfer of funds, but it also includes a whole package of physical capital, techniques of production, managerial and marketing ability, product advertising and business practice for the maximization of global profits (Oji-Okoro et al., 2014). Financial performance has been perceived only through its ability to yield a profit; this view seen for a long time (Akintimehin et al, 2019; Otekunrin et al, 2018). The concept of financial performance is dependent on the users‟ perspective. Therefore, financial performance is not only seen through its ability to yield returns but as its user defines it. Aminu et al. (2015) studied the effects of board size and board composition on the performance of Nigerian banks, using the financial statements of five banks over nine years‟ period. The authors employed multivariate regression analysis and found that board size has a significant negative impact on the performance of banks in Nigeria (2015). (Adeniyi et al., 2012), Those studies can be grouped into two categories: Firstly, are studies that focused on the FDI and financial performance across countries and secondly, studies that focused on the FDI and financial performance in a country. Amos (2016) work on the effect of foreign direct investment on the performance of the banking sector in Ghana. While Korna et al., 2013) carried out a study on the impact of foreign direct investment on bank performance in Nigeria. Chee and Nair, (2010), research foreign direct investment and financial sector development (Festus, 2018; Hossain, 2015; Eluyela et al., 2019).
1.3 Objective of the study
The main aims of the research are to study the effects of foreign direct investment on commercial banks in Nigeria (2010-2021).
The specific aims are to:
- To examine the meaningful relationship between reinvested foreign earnings and financial performance of commercial banks in Nigeria.
- To assess whether foreign equity capital has a significant impact on financial performance of commercial banks in Nigeria.
- To determine the significant impact of board size on financial performance of commercial banks in Nigeria.
- To examine the meaningful relationship between firm size and financial performance of commercial banks in Nigeria.
1.4 Research Questions
The research question planned to be used to gain the aims of this research work.
- How does foreign Direct Investment affect the financial performance commercial banks in Nigeria?
- What is the impact of Foreign equity capital equity on financial performance of commercial banks in Nigeria?
- Does Board Size have a significant impact on the financial performance of commercial banks in Nigeria?
- What is the relationship between firm size and financial performance of commercial banks in Nigeria?
1.5 Research hypotheses
To answer the research questions raised above, the following hypothesis will be tested in the later section of this research work. These are:
H01: There is no relationship between foreign direct investment and the financial performance commercial banks in Nigeria.
H02: Foreign equity capital does not have a significant impact on financial performance of commercial banks in Nigeria.
H03: Board Size does not have a significant impact on the financial performance of commercial banks in Nigeria.
H04: There is no meaningful relationship between firm size and financial performance of commercial banks in Nigeria.
1.6 Significance of the study
The research work will be a source of information to policy makers; will broaden the knowledge of researchers as well as contribute to the existing literature on the subject matter by providing an expository analysis of the effect of FDI on commercial banks in Nigeria. This will enhance policy formulation and also address some of our economic challenges in general. It will also be an invaluable tool for students, academics, institutions and individuals that want to know more about the relationship between foreign direct investment and commercial banks in Nigeria.
1.7 Scope of the study
The research work focused on the effects of foreign direct investment (FDI) on commercial banks in Nigeria only, using time series data for a period of 12 years i.e (2010 – 2021) and equity capital, reinvested earning, firm size, and board size as variable for the analysis.
1.8 Limitation of the study
An academic research of this nature is bound to be constrained by a number of factors, such factors are as follows:
i. Financial constraint
ii. Time factor
In general this study is limited in scope to commercial banks in Nigeria alone, as it only focuses on the effects of foreign direct investment (FDI) on commercial banks in Nigeria. It is also limited in temporal scope to 12 years during the period of 2010 – 2021, the model estimated in this research work, made use of FDI as the only independent variable while equity capital, reinvested earning, firm size, and board size are used as the dependent variable to measure financial performance. If there was enough time and resources, the researcher would also examine the effect of FDI on other sectors of the economy of the nation in other to have a cross sector analysis.
1.9 Definition of terms
Foreign Direct Investment (FDI): Foreign direct investment is described as investment made so as to acquire lasting management interest for example 10% equity share in an enterprise operating in another country other than the investors country .
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