Foreign Direct Investment and the Nigerian Financial Sector Growth: Methodology

Foreign Direct Investment and the Nigerian Financial Sector Growth: MethodologyRegarding comparative advantages, innovative products, better intermediation technologies or superior management quality are among the frequently cited both by the eclectic theory of the multinational corporations (see Dunning 1979 and Gray and Gray 1981) for an early application to multinational banking and the internalization theory [Buckley and Casson. Some authors argue that these factors, however, are not very relevant in the case of financial FDI, or at least not permanently, because of the need to assume that financial firms have intangible assets which cannot be imitated, in a generally highly competitive sector, such as the banking system (Dufey and Giddy 1981) or because management quality can easily be transferred. Nonetheless, the case against the persistence of these competitive advantages is considerably weaker for emerging market economies, where the dominance of government-owned banks has generally resulted in low competition in the banking sector (Marichal 1997).
As concerns efficiency, the main factors mentioned in the literature are the size of the bank, its degree of internationalization and product and distribution channels. First, a large size enables banks to translate their scale efficiencies to foreign markets at a relatively low cost and to compete with local institutions even after taking into account the extra costs faced by foreign competitors (Terrell 1979; Tschoegl 1983; and Sabi 1988). The importance of size depends heavily on the kind of activity developed by the foreign firm in the host market. If the business model implies a duplication of costs, scale efficiencies will be difficult to attain. This is why some authors (for example, Casson 1990) argue that a model based on subsidiaries with a retail focus is unlikely to benefit from large gains in efficiency, while a branch model would if directed to wholesale or investment banking markets.
Second, the degree of internationalization is also relevant since banks with a large and geographically diversified customer base will be able to reduce transaction costs [Ursacki and Vertinsky 1992]. Thirdly, the use of their own distribution channels may imply large gains in efficiency, particularly in developing countries where the supply of certain banking services is generally poorer or sometimes nonexistent. In this case, subsidiaries oriented towards retail banking can certainly profit from product efficiencies. This is even more the case if foreign banks share the same culture and language with the host country since practically no change will be required in the products offered.
Finally, risk diversification is another important motive for financial FDI in the theoretical literature. Banks can diversify their income base by operating in a foreign country, obtaining gains in terms of their risk-return profile. The importance of these gains will be closely related to the extent of financial market imperfections, which render diversification by a final investor less worthy than diversification by banks’ local operations. In the case of financial FDI to emerging economies, informational and legal problems for individual investors may explain why banks prefer to operate locally in a foreign country. payday loans online