AN EXAMINATION ON THE IMPACT CURRENCY TRANSLATION ON THE PROFITABILITY OF FOREIGN COMPANIES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The complex business landscapes of emerging nations like Nigeria provide challenges for multinational firms in resolving internal divisions and external disputes (Shehu, 2019). Manufacturing in Nigeria has indeed played a significant role in the country's economic growth since the early 1900s (Ubesie & Ezeagu, 2022). This sector encompasses several other industries as well, such as marketing, logistics, real estate, agriculture, and energy. Several foreign companies have been conducting business operations in Nigeria for a number of decades, despite the evolving legal and economic conditions within the country. The development of employment and the delivery of essential products and services to citizens have also been greatly benefited by the sector. Businesses in Nigeria are placing less emphasis on dealing in foreign currency since it affects transaction price, profitability, resource allocation, and investor sentiment. Given the current situation where the Nigerian Naira has depreciated against the US dollar, reaching as high as N650, it becomes increasingly difficult for companies to operate efficiently and maintain cost-effectiveness. According to certain stakeholders, a weak Naira reduces competitiveness, thus the movements of the currency rate have garnered public attention. Foreign currency and exchange rate swings have been attributed to the sluggish performance of Nigerian businesses, therefore it is imperative to delve into this matter. According to Adebiyi (2016), currency stability holds particular significance when it comes to providing loans to countries that heavily rely on imports, such as Nigeria. When multiple currencies are involved in international commerce, the fluctuation of exchange rates becomes a significant factor as it impacts the fiscal intermediation process of multinational corporations (Danish, 2018). As a professor, it is important to understand that no nation operates in isolation. Therefore, it becomes necessary to utilise foreign currencies when engaging in international business. 

Thus, the rate of exchange is a dynamic macroeconomic factor that influences business activities (Adetayo, 2016). Interest rates, fads, and the possibility of new legislation may all have an impact on the demand for a country's currency, thereby influencing the value of that currency (Berger & Bouwman, 2020). Despite the government's best efforts, it is evident that the Nigerian Naira has experienced a decline in value when compared to the U.S. dollar over the past few years. The Naira experienced an increase in value, rising from N8.0378 to N85.98 during the period from 1990 to 1999. In the subsequent years, there was further depreciation observed. Specifically, in 2010, the value declined to N151.51, followed by N162.30 in 2011, and N156.15 in 2012. The values of N158.05 in 2013, N175.85 in 2014, and N232.40 in 2015 all demonstrate a consistent trend of depreciation that was initiated in 2013. The exchange rate on December 31, 2016 was N300.757, whereas on August 20, 2022, the rate was N660.The situation has since gotten only worse. To this end, this study seeks to examine the impact of currency translation on the profitability of foreign companies in Nigeria. 

1.2 Statement of the Problem 

As multinational corporations expand their operations globally, they are increasingly exposed to currency fluctuations, which can have both positive and negative impacts on their financial performance (Chen & Lee, 2017). Foreign companies operating in Nigeria encounter the difficulty of converting their financial statements from their reporting currency (typically the currency of their home country) to the local currency, the Nigerian Naira (Olayiwola, 2018). This process, referred to as currency translation, is imperative in order to adhere to local accounting standards and to provide stakeholders with precise financial information (Igwe, 2016). 

Nevertheless, it is important to note that fluctuations in exchange rates between the reporting currency and the Nigerian Naira have the potential to cause significant volatility in the financial results of foreign companies (Ademola & Oyinloye, 2020). On one hand, a depreciation of the Naira relative to the reporting currency can inflate the reported revenues and profits of foreign companies when translated into their home currency (Afolabi & Oladipo, 2016). However, it is important to note that an appreciation of the Naira can lead to a contrasting outcome, resulting in a decrease in reported revenues and profits (Udeh & Onyishi, 2019). 

This volatility in reported financial results due to currency translation can pose challenges for foreign companies in Nigeria (Babalola & Olajide, 2017). According to Olatunji (2022), it may have an impact on their capacity to make well-informed strategic decisions, precisely evaluate their financial performance, and effectively handle investor expectations. Furthermore, it has the potential to influence the comparability of financial statements over time, thereby posing challenges for stakeholders in accurately assessing the company's performance (Omolade, 2020). 

Moreover, it is worth noting that currency translation effects can also have a significant impact on the competitiveness of foreign companies operating in Nigeria (Akinola & Akintoye, 2018). Fluctuations in profitability due to currency translation may impact pricing decisions, investment strategies, and overall market positioning, thereby potentially influencing the long-term sustainability and growth prospects of the company (Olayemi & Olawuyi, 2016).

1.3 Objectives Of The Study

The study generally focus on the examination of the impact of currency translation on the profitability of foreign companies in Nigeria. The study will specifically analyze the effect of real effective exchange rate, parallel exchange rate, interest rate inflation rate, and money supply on profitability of foreign companies in Nigeria.

1.4 Research Question

The study will be guided by the following questions;

What is the effect of real effective exchange rate on profitability of foreign companies in Nigeria?

What is the effect of parallel exchange rate on profitability of foreign companies in Nigeria?

What is the effect of interest rate on profitability of foreign companies in Nigeria?

What is the effect of inflation rate on profitability of foreign companies in Nigeria?

What is the effect of money supply on profitability of foreign companies in Nigeria?

1.5 Statement of Hypotheses

Ho1: Real effective exchange rate has no significant effect on the profitability of foreign companies in Nigeria.

Ho2: Parallel exchange rate has no significant effect on the profitability of foreign companies in Nigeria.

Ho3: Interest rate has no significant effect on the profitability of foreign companies in Nigeria.

Ho4: Inflation rate has no significant effect on the profitability of foreign companies in Nigeria.

Ho5: Money supply has no significant effect on the profitability of foreign companies in Nigeria.

1.6  Significance Of The Study

The findings of the study are of great importance to help researchers, corporate managers, shareholders and academicians in thrift international financial management. The findings of this research will draw more personal insight in understanding foreign exchange risk management and increase knowledge in this area. 

This study will be valuable to the government as it will help better understand the variation of the exchange rate and the financial performance implications and devise appropriate procedures, policies, and ways to mitigate the exchange rate risk. Lastly, this work would serve as a base to other researchers who tend to quest for more understanding on the topic under study.

1.7   Scope of the Study

This study covers on the impact of currency translation on the profitability of foreign companies in Nigeria. The study will cover five(5) international companies in Nigeria. The study will analyze the correlation between the independent variable(real effective exchange rate, parallel exchange rate, interest rate inflation rate, and money supply), and the dependent variables(profitability). The study made use of secondary data, and shall cover a period of 10years from 2000-2018. 

1.8 Limitation Of The Study

Like in every human endeavour, the researcher encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. More so, the researcher simultaneously engaged in this study with other academic work. As a result, the amount of time spent on research will be reduced.

1.9  Definition Of Terms

Exchange Rate: In finance, an exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency.

Profitability: This is the degree to which a business or activity yields profit or financial gain.

Financial Performance: Financial performance refers to the ability to leverage operational and investment decisions and strategies to achieve a business’ financial stability. It is the measure of a bank’s achievement of its financial goals guided by its financial objectives and benchmarks.