Multinational Corporation Expansion: Citigroup Company Investment in Nigeria - Case Study Example

Multinational Corporation Expansion A Case Study of Citigroup Company Investment in Nigeria Citigroup Company is a US-based global banking corporation established from a merger between Travelers’ Group and Citigroup divisions in 1998. The company offers financial and banking services to governments, individuals, corporations, businesses and investors. Some of the products and services offered by Citigroup Company include consumer banking, private equity, investment research, wealth management and corporate banking. Some of its popular brands include Banamex, Citibank, CitiInsurance, Smith Barney, CitiMortagage and CitiFinancial. In Africa, the Bank is well established in Egypt and South Africa. The bank should consider opening a consumer franchise bank in Nigeria. This is because the country has a promising economy owing to its relative political and macroeconomic stability. Nigeria is Africa’s most populous nation with a highly untapped market of approximately 165 million people. This makes the country’s population too large to be ignored compared to 50 other African markets. Business entry in Nigeria would be easy for the company due to its large size and established competitive advantage. The Nigerian financial services are also conforming to some aspects of American banking systems. For instance, the extant delineation of Nigerian commercial banks’ margin lending practices is similar to the United States’ jurisdictions on international banking. This makes it easy for the bank to extend the American financial culture in establishing itself in Nigeria. Additionally, only 25.4 million Nigerians have access to banking services, leaving almost 60 percent of the population in need of banking opportunities (Awosedo and Lewers, 2007). Dimensions of International Finance The prominent dimensions for international dimensions for international finance include financial systems, balance of payment and exchange rates. Financial Systems These portray the monetary and macroeconomic relations between investment partners. The financial systems should provide a means of payment preferred by the resident country. The financial systems are controlled by international financial institutions such as the World Bank, government institutions such as Nigerian Finance ministry, private participants such as insurance companies in Nigeria, and other regional institutions such as the African Development Bank. The company will face competition from both banking and other financial institutions including more that 1000 community financial institutions, numerous mortgage firms, pension schemes, discount houses and more than 100 bureaux de change. The Nigerian financial system is largely controlled by the government which tampers with the market mechanism. The government’s intervention institutes economic safeguards and ensures financial stability with minimal influence from external investors. This implies that most of Citigroup’s activities will be regulated by the Nigerian federal laws. This may negatively affect business and create unfair competition with local companies as they will be favored by the local laws. Additionally, the company faces a big challenge of efficiently managing and controlling the financial systems in Nigeria owing to the rampant corruption the country is facing. Exchange Rate This analyses the rate at which the one currency would be exchanged for another. Most of the transactions will be based on the local Nigerian currency. The banking experience that the company possesses over Nigerian financial institutions will enable it to adjust to the adverse effects of currency value changes (Rosenberg, 2003). However, the appreciation and depreciation of the currency affects banking activities. Balance of Payment The financial system is unstable and not in the required condition to support the real sector development, with most financial institutions still recovering from the recent global financial crisis. In addition to having an impact in the overall account balance of the company, balance of payment crisis is evident in Nigeria (Dwyer and Paula, 2009). The balance of payments can result due to the mismanagement of the resident government. Political divisions especially in Nigeria have led to the increase in spending in the hiring of security personnel and armory, thus increasing the overall expenditure relating to this country which leads to a deficit. Economic Trends and Impact of Globalization The prominent factors that propel globalization can be discerned as technological revolution, democratic system of governance, and economic liberalization (Ocampo, 2003). Globalization offers opportunities for Nigeria to create more wealth through export-led growth, gain access to new investment ideas and technologies, and expand her international trade in goods and services. This stabilizes her economy. This is advantageous to Citigroup Company as the environment is secure and stable for investing. Globalization reduces the trade barriers that exist between most nations; opening the door for international business relations. However, intensification in globalization has led to the unequal distribution of wealth lowering the demand for banking and related services. Globalized nations are also prone to economic shocks, especially in Nigeria where most of the national income arises from export of crude oil. Integration of the global markets because of globalization tends to transmit shocks across international countries at a high rate. This implies that the banking business in Nigeria will be adversely affected in the global change of financial systems. The situation is worsened by the fact that Nigeria has not developed any mechanisms to absorb such shocks. Globalization has also led to cultural transmission among nations. This may make some Nigerian residents to develop a negative attitude towards a foreign company and a consequent preference to local companies. Efficient employees are also a significant aspect of successful management of companies. Education and training will be a compulsory strategy during establishment of business operations in Nigeria. The global economic trend in 2012 is the global volatility, with the effects of the extreme macroeconomic risk carrying no weight. Nigeria experiences slow economic growth and high unemployment. Most of the efforts have been diverted towards exploitation of mineral resources and maintenance of the national security which is currently at a slumber state. The main economic trend that the company utilizes in its investment activities, in Nigeria, is the growing appetite for risk as the country possesses a history of political instability. The economic stability of the country is also questionable. However, the potential of the business environment that characterizes the country neutralizes these challenges. Nature of Nigeria’s Exchange System and its Effect on Citigroup Company Nigeria maintains a flexible exchange system whereby the country’s currency value changes with the changing international exchange rates. The dual exchange rate system was scrapped by the Nigerian government in 1999 leading to adoption of Autonomous foreign Exchange Market. This introduced the uniformity of price and foreign exchange transactions. The arbitrage opportunities that are created due to the presence of overvalued rate in collaboration with market determined rate were eliminated. Transparency was also enhanced as more institutions gained control powers towards exchange rate system. Flexible exchange system will enable the company plan, invest, dampen and absorb the impacts of economic shocks, thus preempting the possibility of balance of payment shocks. The nature of the Nigerian exchange system will enable the company apply its monetary policies for other purposes such as stabilization of employment conditions and research (Eichenbaum and Rebelo, 2004). Flexibility in exchange systems will also allow the company adapt and stem any negative impacts of depreciation or appreciation which are common in the Nigeria. However, the flexible nature of the Nigerian exchange system exposes the nation to high liability dollarization, strong negative effects on the balance sheets, and financial fragility. In addition, the system exposes the financial sector to foreign exchange volatility. The stability of the local financial institutions is an eminent factor in the maintenance of growth and market sustenance of the company. Effect of Balance of Payments on Management of Citigroup Company The overall balance of payment for any country should balance after inclusion of all forms of payment (Dwyer, et al, 2009). Imbalances can, however, occur due to surplus or deficits. In case of surplus, the bank should reduce the lending rate to regulate the amount of money circulating. This is the time when the bank experiences high rates of deposition of currency and increased business. The bank should increase the rate of borrowing from Nigerians to reduce the amount of money in circulation. This money is then banked or invested in other activities that can provide the required funding during deficit periods. During deficit times, the company can increase funding to the financial institutions and individuals to cater for their spending needs. Impact of Nigerian Foreign Exchange Market on International Business Operations Exchange rates are determined by the supply and demand of goods and services. With a free floating exchange system, the Nigerian exchange system has an advantage of being self regulating. The government intervenes minimally in the regulation of the system. The market is affected by the international and local market forces that impact on the demand of the company’s services (Hill, 2009). Low exchange rates imply that the demand for banking services will decrease leading to reduced business operations. However, most of the impact in the international market swing would be absorbed by the economy through a rise in the exchange rates. The free floating exchange rate nature of the Nigerian financial system poses difficulties due to its unpredictable nature. Any contracts that the company may indulge in are liable to changes in the exchange systems between the US dollar and Nigerian Naira. Fluctuation in exchange rates will make foreign investment expensive, leading to losses. Recommendations and Conclusion The company should improving its corporate governance and transparency. The company should offer viable work opportunities to the Nigerian residents fairly. The company should focus on those strategies that can transform the Nigerian economy from consumer status to that of producer. The company should also explore diversity in service delivery to attain competitive advantage over local companies. In conclusion, the application of the stipulated recommendations will boost the company’s chances of extending its operations in Nigeria and ensure general expansion. References Awosedo, O., & Lewers, R. (2007). Regulatory forbearance, prompt corrective action and th Nigerian banking system. Manchester: University of Manchester. Burnside, C., Eichenbaum, M., & Rebelo, S. (2004). Government guarantees and self-fulfilling speculative Attacks. Journal of Economic Theory, 119: 31-63. Dwyer, G. P., & Paula T. (2009). The financial crisis of 2008 in fixed-income Markets. Journal of International Money and Finance, 28(8): 1293–1316. Hill, C. W. (2009). International business: Competing in the global marketplace. Boston: McGraw-Hill/Irwin. Ocampo, J. O. (2003). Globalization and development. Washington: The World Bank. Rosenberg, M. R. (2003). Exchange-rate determination: Models and strategies for exchange rate forecasting. New York: McGraw-Hill. Read More