ABSTRACT
Internationalization is a key strategy in some
Nigerian banks for growth and greater profit opportunities. This development
had led banks to embark on international expansion by opening subsidiaries
abroad. Banking reforms especially recapitalization policy, increased
regulatory controls, stiff competition in the domestic market, reduced market
share, has impacted on the profitability of commercial banks in Nigeria. This
study examined commercial banks internationalization and business outcomes in
the banking industry in Nigeria with particular reference to selected banks
that have subsidiaries in foreign countries.
The study adopted survey research design. The
target population comprised of 17200 top level managers of the five top commercial banks with wholly owned subsidiaries outside
Nigeria and a stratified random sampling technique was used to select
the sample size of 793. Data were collected using a self-administered
structured questionnaire and validated for the
study. Cronbach Alpha reliability for
major constructs ranged between 0.84 and 0.91. The response rate was 96.8%. The
data collected were analyzed using descriptive statistics, hypothesis one and
two were tested using simple regression and hypothesis three and four were
tested using Pearson correlation statistics.
The findings revealed that commercial banks
internationalization had a significant relationship on business outcomes in the
banking industry in Nigeria. Results indicated that location
choices of internationalized Nigerian commercial banks had significant effect
on business outcome (F1/766 = 31.725; R2 = 0.345; p< 0.05. Government policies on
internationalization had significant effect on the business outcome of an
internationalized commercial bank (F1/766
= 101.152; R2 = 0.117; p< 0.05). Commercial banks
motives for internationalization had significant relationship with business outcome (r=0.318; p< 0.05). Entry Mode had a significant
relationship with business outcome of an internationalized commercial bank (r=0.778;
p< 0.05).
The study concluded that internationalization
resulted to positive business outcomes as internationalized banks benefited from
growth in profitability, market share, increase in asset base and
capitalization. The study recommends that banks seeking opportunities in
foreign markets must conduct detailed feasibility studies to understand
barriers to entry, factors that affect location choice, influence of government
policies and select entry mode that ensures it can constantly compete in the
foreign market.
CHAPTER
ONE
INTRODUCTION
1.1 Background to the Study
The
banking sector in Nigeria witnessed phenomenal growth following the 2004
consolidation that increased minimum capital requirement from N2billion to
N25billion. The opening up of the Nigerian economy through various structural
reforms, and trade liberalization led to setting up of many banks in Nigeria.
These banks had inadequate capital base and were unable to play the role
expected of them in economic development. In 2003 there were 89 banks and in a
period of 10 years, precisely 2013, the number has reduced to 23. Over the same
period, Nigerian banks automated its operations to serve their customers more
effectively and efficiently and to keep pace with global technological
advancement. As part of the reforms, the Central Bank of Nigeria (CBN) grouped
the banks into international, national and regional banks and cancelled the
universal banking policy. The reason was for banks to operate according to
their capacities (Alade, 2014). Prior to that categorization, most banks
developed strategies for growth that included expanding local branch networks
and opening offshore branches.
In
the Nigerian banking industry, Citibank, Ecobank, Stanbic IBTC, Standard
Chartered and Ned bank have their roots outside the shores of Nigeria.
Citibank, Ecobank, Stanbic IBTC, Standard Chartered have been in Nigeria
since 1989, Ned bank was granted license in 2013 and only started
operations in 2014. Nigerian commercial banks started their foray outside the
shores of the country in 2002 with United Bank for Africa (UBA) and Guaranty
Trust Bank (GTB) opening branches in two countries in Africa. Six years later,
10 Nigerian banks that scaled the hurdle of consolidation followed the
footsteps of UBA and GTB thereby creating a situation in the banking sector
where the number of Nigerian banks with branches in other countries especially
African countries outweighs that of international banks operating in Nigeria. Internationalization
refers to the process of increasing involvement in international operations
(Asika, 2006). The merits of internationalization accrue to both the expanding
banks and the recipient banking system. The main benefits for the parent
company would be risk diversification and greater profit opportunities for
shareholders. The recipient banking systems, on the other hand, would benefit
through increased intermediation and improved efficiency resulting from technological
advancement, reduced interest rates and efficiency improvements due to
increased competition.
Internationalization has been a reservoir of skill, equipment, efficiency and
technological transfers, mainly from advanced countries to emerging markets;
this is based on the premise that local firms in emerging markets gain from the
foreign direct investment externalities through improved efficiency, labour,
exports and global integration (Brouthers & Hennart, 2007).
The
banking sector is a catalyst and engine of growth in the Nigerian economy and
growth in this sector is expected to continue at a faster rate given the growth
prospects, and the various transformation policies of the Federal Government.
As a result of the financial reform policy of the Central Bank of Nigeria,
especially the consolidation policy, there has been a marked increase in the
internationalization activities of Nigerian banks. Four top commercial banks namely United Bank
for Africa (UBA), Access Bank, GTBank and Zenith Bank combined are operating in
more than 20 countries in the African continent as well as presence in UK,
China, France and USA (Ebimo, 2014). Ebimo (2014), further observed that
despite the economic crisis and increasing stringent controls and monitoring by
regulators, Nigerian banks are determined in their foreign market entries with
fresh decisions about offshore expansions made regularly by bank boards and
management. The growing regional integration among developing economies is
providing a veritable platform for firms in these economies to explore the
inherent benefits of internationalization. Business outcome refers to
accounting and non-accounting parametres employed to determine the success or
otherwise of an enterprise that has internationalized its operations. Such
accounting measures include return on capital employed, profit margin, sales
margin, market share and incremental deposit mobilized.
The
work of Hamzat and Ajila (2006) employed common indicators of performance
measurement that are largely accounting-based. This study will extend this
further by investigating the motive behind internationalization as a measure of
the outcome. For example, one of the motives of banks internationalization is
to follow their customers across various countries they operate in. This will
involve value chain marketing of the customers’ retailers, suppliers,
contractors wherever the customer establishes subsidiaries. In this case, bank
internationalization is motivated by maintaining existing client base.
Onafowora
and Onoye, (2006), Ezeoha (2007) opined that internationalization in Nigeria
dates back a few years ago when indigenous companies realized that the world is
becoming a global village and that moving with the trend would offer them more
opportunity and unlimited scope for growth. Nevertheless, there is no coordinated
approach that may help practitioners have a deep understanding of the
internationalization decisions of the productive and service sectors. Scholars
like Brouthers and Brouthers, (2001) had developed a globalization model for
manufacturing companies, these models were concentrated on western countries
and were not thoroughly verified in less advanced countries (Onafowora &
Onoye, 2006).
Contemporary
studies of internationalization and firm economic performance outcomes are largely
based on western countries. Studies explaining the relationship between
internationalization and business outcome as it relates to emerging markets
have been extremely few (Nachum, 2004). The work of scholars such as Fleury and
Junior, (2007), Contractor, Kumar and Kundu (2007), are largely based on firms
from emerging economies like Russia, India, China and Brazil
Based on the foregoing, this study provides an
insight on commercial banks internationalization and business outcomes in the
context of a country in sub-saharan Africa, Nigeria.
1.2 Statement of the
Problem
Globally,
many companies that are facing slow domestic growth are attracted to
internationalization to enhance business fortunes (Duysters, 2009). Greater
competitive pressures force firms to internationalize, and consequently firms
need to respond to new levels of complexity surrounding the diverse cultural,
institutional and competitive environment. In the manufacturing sector two
companies, Haier Group and Tata Group, provide ready examples. In 1984, a
renowned manufacturer of comprehensive household appliances in China, the Haier
Group, was close to bankruptcy as evidenced in declining turnover and high debt
profile. The trend of globalization and the rising interdependence of the world
economy since the late 1980s marked a turning point in the history of Haier
(Duysters, 2009). The company envisaged keen competition from foreign firms in
a hitherto (largely) protected domestic market. Haier thus restrategized changing
its focus from the domestic market to foreign markets.
Tata
Group is India’s largest business group deriving half of its earnings from
export and offshore production. The reason or motive for internationalization was
the desire to diversify and reduce dependence on a declining and stagnant domestic
market. Goldberg and Johanson,1990; Buch and Lipponer, 2004; Magri, Mori, and
Rossi (2005) postulated that commercial banks as service providers, establish
in foreign countries to increase market share, maximize profit and maintain existing clients who are
expanding to foreign markets. Furthermore, they also expand to exploit
ownership advantages that include technology, organizational skills, managerial
competence, and credit and marketing skills. It has been mentioned that the
first mistake companies make is in choosing the wrong motives to expand internationally
(Wenbo, 2007). Going abroad because the domestic market has little or no growth
is a bad reason. It has been suggested that failure in internationalization
initiatives could be as a result of adopting improper internationalization
strategy and process due to knowledge gap of the specific features and
developments in the extremely competitive global market.
Walmart,
the most successful retail operation in USA failed in Germany due to poor
management and total absence of analysis of the local market or culture of the
host country (Andreas & Andreas, 2003). Another object of concern is mode
of entry into foreign markets. There are different entry modes, the most common
are alliances and joint ventures, franchising, importing and exporting,
licensing agreements, wholly–owned subsidiaries, mergers and acquisitions (Luthans
& Doh, 2009). Why do Nigerian banks prefer subsidiary mode and not any
other entry mode, especially given the inherent risk and higher cost in terms
of resources and commitment of finance? The Central bank of Nigeria in 2012
discouraged Nigerian banks from shoring up the capital base of their foreign
subsidiaries due to the pressure it places on the balance sheet of parent
banks. The apex bank had insisted that the parent (Nigerian) banks should
either raise capital to recapitalize their foreign subsidiaries in the host
countries or exit such foreign subsidiaries in the event of failure to raise
capital.
Due
to slow recovery of the capital market, Access bank has to divest from its Cote
d’ivore subsidiary. Aside the substantial investment in internationalization by
companies globally, there has been a limited acceptable ways to determine
business outcomes and methods of measurement and this limitation could lead to
defects. As a result many researches use financial metrics such as sales,
profit, and balance sheet size as a form of measuring firm business outcomes. Nevertheless,
non- accounting and qualitative methods can replace accounting methods as
objective measures of outcome (Brothers and Hennart, 2007). It is suggested in
this study that other than the usual measures of internationalization outcome,
motives behind the internationalization would be used to measure business
outcome.
1.3 Objective of the Study
The
general objective of this study is to examine the relationship between
commercial banks Internationalization and business outcomes in the Nigerian
banking industry in the context of domestic economic reform and liberalization
of trade. The specific objectives are to:
1.
examine the effect of location choices
in internationalization of Nigerian commercial
banks have on business outcome;
2.
identify how government policies on
internationalization in the banking sector affect business outcome;
3.
determine the relationship between
motives behind decision of Nigerian commercial banks to internationalize and
business outcome and
4.
evaluate the relationship between entry
mode into foreign markets and business outcome.
1.4 Research Questions
1.
How does location choice on
internationalization of Nigerian commercial banks affect business outcome?
2.
How does government policies on the
internationalization of commercial banks affect business outcome?
3.
What is the relationship between the
underlying motives and reasoning behind internationalization of commercial
Banks in Nigeria and business outcome?
4.
What is the relationship between entry
modes adopted by Nigerian commercial banks in internationalization and business
outcome?
1.5 Hypotheses
The hypotheses of this study were tested
at P < 0.05 level of significance
H01 Location choices of
internationalized Nigerian commercial banks does not have significant effect on
business outcome.
H02 Government policies on
internationalization do not have significant effect on the business outcome of
an internationalized commercial bank.
H03 The commercial banks motives for
internationalization does not have significant relationship with the business
outcome
H04 There is no significant relationship
between entry mode and business outcome of an internationalized commercial
bank.
1.6 Scope of the Study
In
terms of geographical area, the five commercial banks chosen all have head
offices in Lagos, Nigeria and the study will focus on internationalization
activities within the African continent. In this study, the researcher did not
focus on merchant banks or foreign banks
operating in Nigeria such as Citibank, StanbicIbtc, Standard Chartered bank but
on indigenous banks with origin from Nigeria with subsidiaries outside Nigeria
and listed on the local bourse. The banks selected are Access bank, First bank,
Gtbank, Zenith Bank and UBA.
1.7 Significance of the Study
Society: Banking is a crucial
sector to the welfare of all business entities and the society at large. The
society comprises of equity investors and the banking public who are consumers
of banking services, equity investors would earn good returns on their
investments owing to internationalization activities of commercial banks while
consumers can conveniently access banking services no matter where they are.
Industry and Management
Practice: For
industry players, the findings are very useful as it educates players on how to
successfully internationalize to respond to competition from international
banks for the developing economies of sub-saharan Africa. Managers of commercial banks could through
this study get an insight on how best to construct investment portfolio among
other industry firms.
Academic Relevance: The study would be useful in generating new
knowledge and opening new frontiers as such academics would find a source of
reference for future research.
For
students, it will provide fresh insight into the phenomenon of international
expansion by commercial banks. The study is original in view of the fact that
it adds to the literature, the factors that determine foreign expansion by
banks from an emerging economy, in this case, Nigeria. The findings shall
constitute an important body of knowledge for students and also enhance their
understanding of the subject.
Stakeholders and
Government: Policy makers would find the result useful in
policy formulation and implementation in ensuring that conducive environment
that supports indigenous banks to internationalize is created.
1.8 Operationalization
of Variables
The
variables in this study are location, entry mode, motivation and government
policies
Y
= f(X)
Y = Dependant
Variable – Business Outcomes
X = Independent
Variable – Factors that influence Internationalization
X = (x1,
x2, x3, x4)
Where
Y = Business Outcome
x1 = Location Choices
x2 = Government Policies (home and host country)
x3 = Motive for Internationalization
x4 = Entry mode
Y = f(x1,
x2, x3, x4)
Y = f(x1).................................................(1)
Y = f(x2).................................................(2)
Y =
f(x3).................................................(3)
Y =
f(x4)............................................... (4)
Model
specification
The Specific models are
Y = a0 + β1 x1+
e...................................H01
Y = a0 + β2 x2
+e....................................H02
Y = f(x3) …….......................................H03
Y = f( x4) ………...................................H04
Where
Y = Business Outcome
x1 = Location choice
x2 = Government Policy
x3 = Motive for
Internationalization
x4 = Entry mode
e =
error term
a0
= intercept of the model
β1
– β2 are the coefficients of the respective
component of Internationalization.
1.9 Operational
Definition of Terms
Business Outcome: Business
outcome which can also be referred to business performance indicates how well
an enterprise performs as a result of internationalization of its operations
and is an essential factor in measuring organization success. Business outcome
will be measured in this study by quantitative and qualitative methods. Such
quantitative methods will be accounting-based such as percentage contribution
of foreign subsidiaries to turnover, profit, total assets and deposits.
Qualitative methods will incorporate motives of the bank for foreign expansion
and how well it was achieved.
Location choices: refers
to the factors that influence choices that banks make in deciding in which
market or country to invest in. It refers to all the key factors of production
such as geographical location, transportation and traffic, culture and history,
and political legal system.
Mode of Entry: is
the formal arrangement that guarantees seamless establishment of a bank’s
presence and the transfer of bank’s products, innovation and services,
information technology platform, human resources, management and organizational
skills into a foreign country. It is the implementation stage of a bank’s
internationalization process in which the firm relying on its own resources,
such as capital, techniques, brand or management experiences through various
investment modes to penetrate target country or region.
Motive for
Internationalization: Focuses on the reason behind the
decision by a bank to internationalize. In general, the progresses of economic
advancement and integration, technology innovation and intensified competition
motivate the internationalization of banks.
Government Policies: The
policies of home and host countries that act as incentive or disincentive for
internationalization such as trade reforms, liberalization and political
support of the government.
Commercial Banks:
refers to banks licensed to accept deposit from customers, which may be
individuals or corporates and provide a payment transmission service, savings
and loan facilities. It is different from a merchant bank to the extent that a
commercial bank is retail for basic
banking needs, whereas merchant banks is wholesale for high net worth individuals
and large companies. Commercial banks operate several branches while merchant
banks maintain a branch or very few branches in major cities.
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