FSFDI location factors

To set up “representatives” or “branches” in host country is called “greenfield investment”. In Repullo’s research (2000), in host countries with higher risk but looser deposit regulation, multinational banks prefer to set up “branches”, for overseas branches can directly use the capital and the brand name of its headquarters.

Through setting up overseas branches in host country and developing businesses and investment, the ability of profit earning is enhanced. In the following, we are going to introduce what the common factors that influence the location choice of FSFDI are.

The first two crucial factors that attract FSFDI are the financial development status and the host country’s potential of economic growth (Focarelli & Pozzolo, 2001). It is more likely to attract FSFDI if in the host country: (1) the average operating cost of financial institutes is high, (2) interest spread of lending and deposit is narrow, and (3) capital efficiency is low. Since it is comparatively profitable for foreign bankers to operate M&A in the host country, and furthermore, they could expand its market share after entering the host country (Xiang & Wang, 2007). On the other hand, according to Brealey and Kaplanis (1996), in consider of the potential of profit growth, multinational banks also tend to invest in those host counties with higher GDP.

Another factor is the “distance” between the host country and the home country.

Both “physical” and “psychological” distances are in considered, for instance, common languages, similar management systems or familiar cultures. Roberts and Arnander (2001) found that American bankers set up branches in London during 1950s to 1960s because of language and culture similarity.

Furthermore, Focarelli and Pozzolo (2005) claimed that strictly regulated banking system make foreign banks less accessible to the host country; hence, reducing the probability of entry. Nigh et al. (1986), Hultman and McGee (1989), and Forecarelli and Pozzolo (2005) also argued that deregulation of the host country bolsters up positive impact on foreign banks FSFDI willingness.

However, out of surprise, FSFDI is unlike the non-financial FSI which put great emphasis on host countries’ labor cost especially for foreign manufacturing firms.

When it comes to FSFDI, Shen, Liang and Hao (2009) indicated that the cost of labor is not an important factor for deciding foreign bankers’ entry.

In summary, the location factors that affect the willingness of FSFDI include: (1) the financial development status, (2) the host country’s potential of economic growth, (3) the “distance” between the host country and the home country, and (4) the regulation in the host country. Those are the factors that assumed by most of the researchers. Follow up, we would explain how Taiwanese bankers operate the common strategies of exploitation and exploration for the overseas branches.

2.2 Exploitation- customer relationship

Taiwanese banks may make use of existing client relationships and keep providing financial services for Taiwanese FDI firms, including production financing (funding for material purchase, funding for turnover), trading financing, and consumption financing (deposits, remittance, or wealth management) (Miller et al., 1998). Setting up overseas affiliates is one way to maintain specific customer information and enhance internationalized competitiveness (Hymer, 1976). In addition, bankers sometime receive commercial intelligence from their long-term customer relationships (Gray and Gray, 1981).

As a matter of fact, bankers assume great risk when making transaction (withdrawals) with clients. Bad debt might cost a bank a great deal of loss. Hence, banker needs to investigate client’s credit before making any withdrawal. This investigation is costly, especially for new clients. That is to say, the banks in the host country would ask for higher interest rate to those foreign firms building overseas subsidiaries in order to reflect the cost of credit investigation, thus increasing funding costs for those foreign firms. As a result, those Taiwanese firms prefer to borrow

money from Taiwanese banks. Local (Taiwanese) banks transferring existing client information to their overseas affiliates can decrease credit risk, provide lower interest rates for clients, and build up deeper the relationship between existing clients and the banks (Kogut & Zander, 1993; Almeida, Song & Grant, 2002).

To sum up, bankers follow their existing clients because of the following three reasons (Aliber, 1984):

(1) The service or the financial condition of banks in the host country is bad.

(2) The bank service in the host country is insufficient.

(3) The bank in home country is rather competitive and internationalize well.

2.3 Exploration- innovations in banking industry

2.3.1 The importance of financial innovation

Innovation is the critical factor to economic competitiveness; hence, there are more and more emerging markets encourage their countries to take “innovation” as their core strategy (Huang, 2009). The purpose of exploring the new environment is to gain the new resource that could be helpful for the long term growth. According to Barney’s resource based theory (1980) and Porter’s sustained competitive advantage theory (1980), they both agree with finding resources that is competitive or fitting the VRIO attributes (Barney, 1980): valuable, rare, imitable and organization. These kinds of resources are the key points to speed up a company’s growth whenever the growth is slow down.

2.3.2 The scarceness of innovation in banking industry

Reidenbach and Grubbs (1987) once conducted a survey about the innovation activities of banking industry. The research found that banks adopt innovation, but they are much less than manufacturers or the other service industries. The main reason is because banks don’t take innovation as the elements for development, and they don’t use systematical method to organize innovation activities. Nevertheless, they found banks adopting innovation have better performance than the other banks not adopting innovation. The quantity and level of demand to financial services in real economy are enlarging and improving in a fast pace; therefore, financial innovation is in need and that’s also how to bring the market into a brand-new period. (Lu & Qiao, 2008)

However, not every headquarters would initially adopt the innovation found by their overseas branches unless they find that the other bankers are doing so. That’s what Barden wrote: “innovation adoptions by other corporately related subsidiaries increase the likelihood that a subsidiary will subsequently adopt the innovation”, especially when it comes to the most prudent industry (Barden, 2012). In the research, Innovation in Multinational Subsidiaries, Phene and Almeida (2008) suggest that:

“subsidiary innovation depends both on the knowledge it is able to acquire from external sources and on subsidiary capabilities to absorb and utilize this knowledge”.

Firms may observe and learn overseas advanced technology and management knowledge through cross-border networking (Dunning, 1998).

Above all from 2.1 to 2.3 are the existed location factors and common strategies for overseas-branching. So far, those common strategic roles of overseas branches are decided according to different features of the locations. That is to say, the location of

the branch would determine its strategy. However, to focus only on the location is not enough, for it fails to notice that the competence of the overseas branch could also influence the position of the overseas branch. For instance, the overseas branches in the financial center but with different competences would result in playing different strategic roles. Furthermore, the locations might imply some other strategic meanings that cannot be only distinguish by whether there are Taiwanese FDI firms or not.

Therefore, we decide to reframe the generic roles of Taiwan overseas branches with the theory model of Bartlett & Ghoshal (1986).

2.4 Generic roles of foreign branches

Traditionally, the roles of subsidiary in host countries were based on their

capability to maintain and manage the local operations while dealing their relationship with headquarters (Brien, Scott and Gibbons, 2013). The theory of Bartlett and

Ghoshal (1986) is one of the examples with some modifications. To see Bartlett and Ghoshal (1986), in Tap Your Subsidiaries for Global Reach, there are different generic roles of foreign subsidiaries or branches for banks. The four roles, which are

“strategic leader”, “contributor”, “implementer” and “black hole”, are decided by the competence of the local organization and the strategic importance of local

environment.

Figure 2.1 Roles for overseas branches

Source: Bartlett and Ghoshal (1986)

Follow up Bartlett and Ghoshal, there are more researchers discuss the

importance of strategic roles of subsidiaries and build linkage with other issues. Gupta and Govindarajan (1991, 1994) have developed a study discussing the relationship of the strategic roles of subsidiaries and organizational knowledge. Based on the pattern

of knowledge flows, subsidiary roles then can be classified into four categories: (1) global innovator (high outflow, low inflow), (2) integrated player (high outflow, high inflow), (3) implementer (low outflow, high inflow), and (4) local innovator (low outflow, low inflow). Moreover, there is a study which re-conceptualized Bartlett and Ghoshal’s strategic roles of subsidiaries in MNEs with resource bundling perspective (Rugman, Verbeke and Yuan, 2011). Another conceptual study about the implication of Bartlett and Ghoshal’s strategic roles typology is a study discussing cultural environment and subsidiary’s resources and capabilities have effects on the strategic context of subsidiary (Qin, Ramburuth and Wang, 2011). Although there are many studies about “subsidiary roles”, most of them focus on the autonomy of the subsidiary. Few of them mentioned how could a subsidiary adopt innovation and bring the ideas back to headquarters in order to improve the innovation performance of headquarters.

Although there is difference between subsidiary and oversea branch, the Taiwanese banking industry, as one of an emerging market, is lacking the ability to set overseas subsidiary yet. However, the Taiwanese bankers are only capable of setting oversea branches as their first step of overseas expenditure. After the overseas banking of Taiwanese banking industry is getting mature, there is more likely for them to set subsidiaries. Thus, this research would adopt the typology of Bartlett and Ghoshal and apply it in banking industries’ overseas branches. Moreover, by

considering the difference of “branch” and “subsidiary”, which is that “branch”

compared with “subsidiary” would have more linkages with the headquarters, this research is to discover if the overseas branches in certain kinds of strategic roles would be able to adopt more innovations in the local market, and bring the ideas back to headquarters in order to improve the innovation performance of entire bank.

2.4.1 The strategic importance of local environment

The strategic importance of local environment depends on the company’s global strategy and the significance of the chosen country’s national environment (Bartlett and Ghoshal, 1986). Therefore, the importance could be determined by whether it’s a big market, whether it is a rival’s home market, or whether it is a technology

advanced country (Bartlett and Ghoshal, 1986). Furthermore, some researchers argue that local environment could be a knowledge pool; subsidiaries or branches can draw or contribute to the local environment (Almeida, 1996; Kummerle, 1997; Almeida, 1999; Frost et al., 2002; Phene and Almeida, 2003).In the case of banking industry, whether the place is a financial center could be one of the factors that decide the strategic importance of local environment.

2.4.1.1The roles of “strategic leader” and “black hole”

Among all, “strategic leader” and “black hole” are the two roles that both be set in strategically important environment. However, they are two different roles. Base on Bartlett and Ghoshal, “strategic leader” is highly competent. “Strategic leader” not only serves as a sensor for detecting innovation but also help to analyze the threats and opportunities in order to develop appropriate responses (Bartlett and Ghoshal, 1986). “Strategic leader” is like a subsidiary or branch with large amount of resource and knowledge flow that taken in the local environment (Gupta and Govindarajan, 1991), and also with high resource or knowledge inflow and outflow (Birkinshaw and Morrison, 1995).

On the other hand, “black hole” plays a totally different role. According to Bartlett and Ghoshal, “black hole’s objective is not to manage it but to manage one’s way out”. For instance, Philips in Japan, Ericsson in United States, and Matsushita in Germany are in roles of “black holes”, for those places are too competitive and expensive (Bartlett and Ghoshal, 1986). However, they are able to ensure and keep the companies’ global positions. The objective of “black hole” is to exploit its learning potential even if the local business potential is unreachable. Through observing the environment and sending the feedback to headquarters, the headquarters will digest and come up with useful ideas, or at least prevent the degradation of the global position of the company (Bartlett and Ghoshal, 1986).

To sum up, the roles of “strategic leader” and “black hole” compare to the other two roles, tend to have better possibility to adopt innovations in the local market.

Although they are competently different, they are set in a strategically important environment. Therefore, they are able to sense and observe the environment, and send back the information to headquarters and be beneficial to innovation adoption. By adopting the idea into Taiwan banking industry, we propose the following:

Proposition 1: The Taiwanese overseas branches in the roles of “strategic leaders”

or “black holes” are positively related to financial innovation adoption of the Taiwanese banks.

2.4.2 The role of “black hole” is dynamic

In the theory of Bartlett and Ghoshal, they emphasize the present status of the

company’s overseas subsidiaries or branches. The generic role model of Bartlett and Ghoshal seems to be static. However, in fact, if the competence of an overseas branch has been improved, the role of the overseas branch would change accordingly. The roles could be dynamic.

Therefore, although the role of “black hole” might make the branch lose at the first few years for not being competitive enough, and be considered as less fruitful strategy to the company (Bartlett and Ghoshal, 1986). The main reason for setting

“black hole” is to learn and explore the new environment and to grow in the following years. According to Bartlett and Ghoshal (1986), the status of an overseas branch in role of “black hole” is called “window status”, for the branch is not capable of competing with the other local firms. Therefore, the first step is to observe and accumulate its competence. Next step is to get into the blood stream of the local market and struggle for the market share. The task of the branch would later change from observation to winning the market share. However, the branch should only select and focus on the areas that are competitive and better than the other local firms (Bartlett and Ghoshal, 1986).

To see the case in banking industry, if a “black-hole” branch wants to improve its competence and manage way out of “black hole”, the premise is the attitude of the headquarters. Even the more individualized “subsidiary” would be controlled by headquarters to a contributing unit and often could only have limited range of strategic options in management (Taggart, 1998), not to mention the “overseas branch”. Some state-owned banks set lots of oversea branches in roles of “black holes”

but are reluctant to improve the branches. Namely, only if the headquarters allow their branch to adopt improvement, the “black-hole” branch could possible to change its

status.

The strategic role shift happens in relative to the three factors: (1) headquarters assignment, (2) subsidiaries’ or branches’ strategic resources, and (3) local environment (Birkinshaw, Hood and Jonsson, 1998). Furthermore, according to Zhang & Chen (2006), combining the factors of competence, resource and environment, firm growths could happen in a dynamic surrounding through spanning or interaction with others. Moreover, there are researchers also argue that the overseas subsidiaries or branches improve their competence by learning not only from themselves but also from others, like: customers, suppliers, or rivals (Lai and Weng, 2012). That is to say, an overseas branch in role of “black hole” despite less competent, there are opportunities in the environment, and through dynamic and flexible interaction, black-hole branch would grow and improve its competence. After the overseas branch has improved its competence, the “black hole” could gradually become “strategic leader” on the theory model of Bartlett and Ghoshal. Thus, we propose the following:

Proposition 2: Taiwanese Bankers who set “black holes” in those strategically important environments are to gain access to innovations, and after improving its ability, “black holes” would gradually turn into “strategic leaders”.

Conceptual Framework

Discuss the current

oversea-branching location and strategy choice factors of Taiwanese banking industry

Exploitation – follow the customer

Exploration – mostly choose Hong Kong and Singapore for lower risk

Reframe the generic roles of Taiwanese overseas branches with Bartlett and Ghoshal’s theory model

Horizontal Axis-Competence of Local Organization:

Proxies:

1. Branch’s age 2. Variety of services 3. ROE and ROA

4. Websites of overseas branches

Vertical Axis-Strategic Importance of the Local Environment:

the Index of Economic Freedom 2014 Compose the

The number of “Black hole”

and “Strategic leader” is not positively relative to

innovation performance for state-owned banks

The example of Hua Nan Bank Interview

3. RESEARCH METHODOLOGY

This research adopts the analytical approach, and it contains three parts. First part is to redesign Bartlett and Ghoshal’s model with selected proxies that serve as the measurement of competence of branches and strategic importance of local environment. Through analyzing the overseas branches of ten selected banks in Taiwan, we could get ten graphs indicating the roles of the oversea branches of each bank. The second part is to cross examine with innovation prizes which are serve as the evidence of innovation. So far, we are using secondary data to organize our findings. The third part is to conduct face-to-face interviews with two differentiated banks, and use the first-hand interview details to explain the propositions and the results of the graphs of certain banks.

3.1 The Generic Role Model of Bartlett and Ghoshal

To prove our propositions, we have to identify the generic roles of each overseas branch from each bank in the generic role model of Bartlett and Ghoshal (1986).

Therefore, we select ten representative Taiwanese banks. Furthermore, in order to determine the position of each overseas branch of these representative Taiwanese banks, we need to redesign the horizontal axis and the vertical axis of the model.

3.1.1 Horizontal Axis-Competence of Local Organization

For the horizontal axis, competence of local organization, we select four different proxies, which are the data of the existence time of each banks’ overseas

branches, the services offered by each overseas branches, the ROA and ROE of the bank within the six years to see their headquarters’ capacity of supporting, and also the evaluation of the websites of the oversea branches. Next step is to combine these three indicators and to quantify their scores.

a. Branch’s age

Firms would have better performance with time, for aging firms would be able to observe and gradually improve their level of productivity, profits, firm size, debt ratios and equity ratios (Coada, Segarra and Teruelb, 2010). Therefore, we suppose that the branches with older age would be able to improve their performance by observing the environment and competitors and attract more clients in order to become more competitive than those recently found branches. With the category variables, we ranked the branches’ age from 1to 4.

Table 3.1 Estimation of the category variables of existence time

Source: This research designed.

time of existence category variable

0 ~10 years 1

11~20 years 2

20~30 years 3

31~ years 4

b. Variety of services

The second indicator is the variety of services offered by each bank. Wan (2011) found that service and product variety have positive relation with the company performance. As a result, we suppose that branches with more services or products offered would be more likely to attract customers with different needs, and turned out to have better operating performance. That is to say, they could be more competitive

The second indicator is the variety of services offered by each bank. Wan (2011) found that service and product variety have positive relation with the company performance. As a result, we suppose that branches with more services or products offered would be more likely to attract customers with different needs, and turned out to have better operating performance. That is to say, they could be more competitive