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Brunel Business School – Doctoral Symposium 4th & 5th March 2010 Student First Name: Ernest Student Second Name: Asimenu Copyright subsists in all papers and content posted on this site. Further copying or distribution by any means without prior permission is prohibited, except for the purposes of non-commercial private study or research, as defined in the Copyright, Designs and Patents Act 1988, or as otherwise authorised by statute. To obtain permission, please contact the author of the relevant paper in the first instance or email [email protected] with details of your request. Brunel Business School – Doctoral Symposium 4th & 5th March 2010 “The impact of foreign entry in the banking sector in the SSA Region: The case of Ghana” Abstract The study examines the impact of foreign entry in the banking sector in the SSA region with a special emphasis on Ghana. This study stems from the curiosity of the researcher to understand Foreign Direct Investment (FDI) in Ghana and how local and national banks have coped with the influx of foreign banks in the country. More specifically, the thesis will examine the impact of foreign direct investments in the banking sector. The current study aims to fill the gap in the area of the foreign entry impact in banking providing a new model for FDI decision-making process in banking. The model comprises the theories related to FDI and other theories in International Business. Keywords: Foreign Direct Investment (FDI), Banking, Ghana and Globalisation 1. Introduction A well functioning financial and banking system is undoubtedly one of the most important developmental drives of economic growth in a country. This is even more significant for the economies that have adopted the International Monetary Fund (IMF) and the World Bank assisted Structural Adjustment Programmes (SAP) aimed at reversing many years of economic decline and eventually promoting economic growth through enhanced trade liberalisation. Financial deregulation, developments in telecommunication and IT technology and globalisation of capital markets are benchmarks which have encouraged foreign direct investments (FDI) inflows in the banking sector in recent years (Moshirian, 2001). In the past few years, the expansion of banking across frontiers has been explosive. 1 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 The entry of foreign banks is expected to increase competition and the level of service available in host countries. On the other hand, it is essential for host nations to protect local banking interests for fear of complete foreign domination. 2. Research Aims and Objectives (WHAT?) This study aims to broaden the understanding of financial markets’ liberalisation and the impact on the Ghanaian economy. Specifically, the objectives of this research are twofold. First, it evaluates the impact of contextual issues derived from the implementation of SAP in Ghana during the period 1983–2008. Second, it examines the extent of the rapid inflows of FDI in the Ghanaian banking sector. To meet the research aim and objectives this study is guided by the following research questions: • How have the economic, social, political, legal and competitive environments been transformed since regulatory reform process in 1983 in Ghana? • Why are investors keen to invest in Ghana and what are the expectations of foreign banks entering Ghana? • How do the initial and post entry strategies of foreign banks differ and what are the reasons for their differences? • 3. How has the world recession affected the flow of FDI into Ghana? Educational and Practitioners Benefits The author believes that this research is important in two ways. First it contributes to the literature by filling the research gap since little or no work has been done in this area. Second, the author believes that this study would be useful to researchers, practitioners, academics, policy makers, existing business organisations, and provide useful information to foreign investors planning to operate in Ghana. This research is structured as follows: 2 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 The first part introduces the thesis and sets out the main aims and objectives. The second part includes three literature review chapters which frame the design of the research instrument; Part three will discuss the summary of the research methods. Part four includes the empirical results chapter. The final part sets out the discussion of the results which includes the conclusions and the limitation of the thesis. 4. Literature on Foreign Direct Investment (FDI) FDI is sometimes thought of as originating from American firms (Lipsey, 2001). Nonetheless Wilkins (1970) argue this goes far back to 2500 BC, when Sumerian merchants found in their foreign commerce that they needed men to be based abroad to receive, store and to sell their goods. In the mid seventeenth century, English, French, and Dutch mercantile families sent relatives to America and the West Indies to represent their families. In time American colonist found their own foreign trade and that it was enviable to have correspondents, agents etc in important trading centres to sell American exports. In conceptualising the journey of FDI from the past to the present, it is important to look at how FDI in the world economy has contributed to world production and employment today. According to United Nations (2000b) in the late 1950’s when a large stock of FDI was owned by US firms, International production might have represented about 2% of the world output, by the late 1970’s to early 1980’s this had reached 5%. As US firms operations abroad reduced in the 1980’s countries such as Germany and Japan increased. By the late 1990’s when growth picked up the world wide production was up at 8%. According to the IMF (International Monetary Fund) and OECD (Organisation for Economic Cooperation and Development) definitions direct investment as a category of international investment reflects the objective of a resident in one economy (the direct 3 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 investor) obtaining a lasting interest in an enterprise resident in another economy (the direct investment enterprise). The lasting interest implies the existence of a long-term relationship between the direct investor and the direct enterprise and a significant degree of influence by the investor on the management enterprise. Direct investment has a combination of relationship building between the investor and all the enterprises involved. To understand why banks invest abroad Grubel (1977) explains this by using the “follow-the-customer” hypothesis. The modern view of this hypothesises emphasises the active role of banks in the host country banking sector, banks apply their comparative advantage in management technology and marketing know how in foreign countries at next to no marginal cost. Clarke et al (2003) studies that the link between foreign entry with other foreign direct investment are often seen as supporting the argument that banks follow their customer’s abroad. The globalisation debate makes it easier for others to follow as failure to follow the customer may make others to make inroads on capturing the domestic market. According to authors such as Balough and Scaperlanda (1983), Karvis and Lipsey (1992), Mody and Wheeler (1992) and Mody and Srinivasan (1998) they argue that the host country market size plays an important role in attracting FDI, especially when the host country market allows the development of economies of scale for import substituting investment. 5. Background Information on the Ghanaian Banking Sector (WHERE?) Amidst the global recession and domestic growth slowdown in the past couple of years, the Ghanaian Banking sector has witnessed a phenomenal growth in FDI inflows. BobMilliar (2007) et al claim that the banking sector in Ghana has emerged from a severe financial and reputational damage resulting from economic recession and government debt 4 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 during 1980’s and 1990’s, to a more enviable and a rapid growing sector in the economy. The recent growth of the banking sector is primarily due to the deregulation of the banking sector, economic and political stability, and the government’s private sector initiatives, making the sector not only a business-friendly environment to attract significant foreign capital injection but also the “financial hub” of the Sub-region. The Bank of Ghana 1 has endorsed the enforcement of statutory requirements, more stringent supervision and the licensing of capital requirements. The bank of Ghana has licensed 27 banks; these include a range of nonfinancial institutions, including several community Banks established to mobilise rural savings (Appendix 1 shows a list of Banks in Ghana). A quite remarkable feature of the sector is the level of ownership by the private sector, directly or through the capital market when compared with the level of state ownership seen in other financial sectors in other African countries (Bob-Milliar et al., 2007). The overall banking sector according to BMI (2009) is relatively sound, albeit subject to greater risk than previous years. This milieu signifies the continuation of the following trends; with the expectation in the increase in the population of Ghana, it is envisaged more bank branches will be opened to formally accommodate the proportion of the unbanked population. In March 2009, there were 642 branches, up by 32.1% y-o-y from 486 in the previous 12 months (BMI 2009). 6. Research Methods (HOW?) The data on which this study will be based will be collected from both primary and secondary sources in Ghana and online. Data will be gleaned from books, periodicals, newspapers and journal articles. The official documents that are to be used in this study will 1 Bank of Ghana would be referred to as BoG 5 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 be obtained from public sources including official documents from Ghana Central Statistics Office (CSO), Institute of Statistical, Social and Economic Research (ISSER), Ghana Export Promotion Council (GEPC), Ghana Investment Promotion Council (GIPC), the World Trade Organisation and the International Monetary Fund. These documents will be used to uncover patterns, policies, and developments in the banking sector. The comparative element of the study across different groups of banks enables the research to provide greater insight into the behavioural differences between domestic and foreign banks. While many authors focused on empirical examination of foreign bank entry effects only a few researchers centre their attention on qualitative assessment and scarcely has anyone attempted to combine both methods. Using both qualitative and quantitative research methodology enables triangulation of the results and further providing substantial evidence of the findings. Inductive research approach proves to be complementary to the initial deductive approach where results of statistical analysis are corroborated with findings of semi-structured interviews. The character of the research allows for enough flexibility so that rigorous empirical analysis provides explanatory results of between group differences while more open interview based research offers explanatory as well as exploratory findings. 7. Conclusion Despite the increased globalisation in the provision of financial services, economist have found it difficult to present to policymakers with compelling empirical evidence of the impact of foreign entry in SSA region. This stems largely from a lack of comparable data and the modest level of foreign entry that has occurred until recently. However this study promises to channel a new orientation in the development of Ghanaian macro economic 6 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 framework in both fiscal and monetary policies areas. Fiscally the study shall dwell on FDI as a source of revenue to achieving balance of trade equilibrium. 7 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 References Balough, R.S., and Scaperlander, A (1983), “Determinants of U.S. Direct Investment in the EEC”, European Economic Review, 21, pp. 381-93 Bank of Ghana Quarterly Bulletin April - June (2009) www.bog.gov.gh Accessed on 06/02/2010 Bob-Milliar, G.K and George, M Developments in The Ghanaian banking sector www.Ghanaweb.com Accessed on 17/01/2010 Business Monitor International (BMI) (2009) The Ghana Business Forecast Report Q4 Clarke, G; Cull, R; Peria; M.S.M and Sanchez S.M (2003) Foreign Bank Entry: Experience, Implication for Developing Economies, and Agenda for Further Research. The World Bank Research Observer pp 25-59 Dages, G. B., Goldberg, L. and Kinney, D. (2000), `Foreign and Domestic Participation in Emerging Markets: Lessons from Mexico and Argentina', FRBNY Economic Policy Review, September 2000, pp. 17-36 Demirguc-Kunt, A. Levine, R. and Min, H. G. (1998), `Opening to Foreign Banks: Issues of Stability, Efficiency and Growth', mimeo, Washington D. C.: World Bank Glaessner, T. and Oks, D. (1994), `NAFTA, Capital Mobility, and Markets Volatile? ' mimeo, Washington, D. C.: World Bank Grubel, H.G (1977), `A theory of multinational banking', Banca Nazional del Lavoro Quarterly Review, No. 30, pp. 349-364 Kravis, I.B., and Lipsey R.E (1992), “Source of Competitiveness of the U.S. and of its Multinational Firm,” Review of Economics and Statistics, 74, 193-201 8 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 Levine, R. (1996), `Foreign Banks, Financial Development and Economic Growth', in C. E. Barfield (ed.), International Financial Markets: Harmonization Versus Competition, Washington D. C.: AEI Press Lipsey, R.E (2001) “Foreign direct investment and the operations of Multinational firms: Concepts, History and Data. National Bureau of Economic Research Mody, A., and Srinivasan, K (1998), “Japanese and U.S. Firms as Foreign Investors: Do they March to the Same Tune?” Canadian Journal of Economics, Vol. 31 Mody, A., and Wheeler, D (1992), “International Investment Location Decision: The Case of U.S. firms,” Journal of International Economics, 33, pp. 57-76 Moshirian, F. (2001), `International investment in financial services', Journal of Banking and Finance, No. 25, pp. 317-337 Papi, L. and Revoltella, D. (1999), `Foreign Direct Investment in the Banking Sector: A Transitional Economy Perspective', Development Studies Working Paper, No. 133 (November), Centro Studi Luca D'Agliano United Nations: Measures of the Transnationalisation of Economic Activity, New York and Geneva, United Nations Conference on Trade and Development, 2000b. Wilkins, M (1970) The Emergence of Multinational Enterprise: American Business Abroad from the Colonial Era to 1914, Cambridge, MA, Harvard University Press, 1970. 9 Brunel Business School – Doctoral Symposium 4th & 5th March 2010 Appendix 1 List of Banks in Ghana (Register of licensed Banks as at June 2009) Central Bank Bank of Ghana Universal and Offshore Banks Barclays Bank of Ghana Limited Universal Banks Access Bank (Ghana) Limited Agricultural Development Bank Amalgamated Bank Limited Bank of Baroda Banque Sahelo-Saharienne Pour L'investissement Et Le Commerce Cal Bank Limited Ecobank Ghana Limited Fidelity Bank Limited First Atlantic merchant Bank Limited Ghana Commercial Bank Limited Guaranty Trust Bank (Ghana) Limited HFC Bank (Ghana) Limited Intercontinental Bank (Ghana) Limited International Commercial Bank Limited Merchant Bank (Ghana) Limited National Investment Bank Limited Prudential Bank Limited SG-SSB Limited Stanbic Bank Ghana Limited Standard Chartered Bank Ghana Limited The Trust Bank Limited Unibank Ghana Limited UT Bank Limited Zenith Bank (GH) Limited Other Banks ARB Apex Bank Limited Source: www.bog.gov.gh Accessed 05.09 PM 18/01/2010 10