Taiwanese banking industry

Taiwanese banking industry is facing development obstacles. McKinsey &

Company (2004) once pointed out the optimum number of banks in Taiwan is ten.

However, so far, there are 39 Taiwanese banks and 30 foreign banks in Taiwan.

Taiwan's GDP is about 490 billion; therefore, “overbanking” is a general phenomenon in Taiwan. Due to the impacts of overbanking and the financial crisis, the GDP ratio of financial industry declined from 7.28% of 2004 to 6.51% of 2012. Besides, the over competition of the banks in Asia is also an obstacle for the banks in Taiwan from having wider interest spreads of loans and deposits.

There is still room for Taiwanese banking industry to improve in order to become more competitive than the other Asian nations. In GCI--The Global Competitiveness Index, Taiwan is ranked 24th in the financial market development, while Singapore is ranked first, and Hong Kong is ranked second. Overall, there are three major disadvantages of Taiwanese bank system, which are:

(1) Conservative authorities:

Because banking industry is closely relative to public benefit, the management of the local relative authorities tends to be more prudent and conservative. Despite trying to be more open in recent years, Taiwan’s banking industry comparing to international bankers is still lacking significant breakthroughs.

(2) Lack of financial innovation:

Due to the confined operating environment, the financial products and services are short of differentiations. Furthermore, this situation results in price competition, which blocks the development of profit gaining in Taiwan banking industry.

(3) Smaller financial scale:

The number of financial institutions in Taiwan is so much that the resources are dispersed when sharing out among banks. To be worse, the development of internationalization of Taiwanese banking industry is still inadequate; hence, it is hard to compete with the other international bankers.

As a result, the bankers in Taiwan tend to expend their overseas markets by setting up overseas branches in order to overcome the preceding problems.

1.2 The features of emerging market multinational firm

To view MSCI (Morgan Stanley Capital International) index, Taiwan is one of the emerging countries, but differentiate with the other emerging countries in the world. Unlike China or the BRICs, Taiwan is not an emerging market with big inner market. The supply is always larger than the demand. Therefore, instead of developing inner emerging market like China and the BRICs, Taiwan prefers to expand overseas markets by becoming emerging market multinational firms.

Emerging market multinational firms (EMMs) are referred to those which have headquarters in emerging countries, but their operating units are scattered in more than one country (Agtmael, 2007). According to Accenture plc., there are three outstanding advantages of EMMs:

(1) Although their structure is not yet mature, they are able to deal with dimensional risks, for they usually set up bolder, long-term expansion strategy.

(2) EMMs are good at turning the inferior conditions into their opportunities, for they are more flexible and more innovative.

(3) EMMs emphasize the importance of localization.

Therefore, Taiwan banking industry, as one of the EMMs, now seizes the chance and starts to expand overseas. Nowadays, outward foreign direct investment (FDI) by financial service industries grows with a soaring percentage.

The total Taiwanese outward FDI grew from 25 percent in 1994 to 50 percent in 2006 (Huang, 2010). Thus, from 1991 to 2006, the number of overseas affiliates of Taiwanese bank increased almost seven times from about 35 to 219 overseas affiliates.

1.3 Common FDI strategy choices

FDI consists of financial sector FDI (FSFDI) and non-financial sector FDI (non-FSFDI), and usually people take FSFDI as the narrow sense of banking industry sector FDI (Xiang and Wang, 2007).

Although most of the financial institutions can offer complete services to those multinationals firms, some scholars found that sometimes, the commerce banks in home country need to maintain present market share and clients source by performing FSFDI (Aliber, 1984). Therefore, it’s common to see in recent decade, the Taiwanese

bankers are eager to enter the emerging markets in South-Eastern Asia or China by setting branches there. That’s because bankers tend to set foreign affiliates, branches or subsidiaries, before or after their customers (Tschoegal, 2002).

Furthermore, the most important clients of Taiwanese banks, the information technology (IT) multinational enterprises (MNEs), have expanded aggressively overseas in South-Eastern Asia recently (Huang, 2010). The main reasons of setting overseas branches in South-Eastern Asia are not only to follow the customers but also to look forward to the prosperity of ASEAN (Liu, 1997).

However, for those countries, such as Vietnam, Myanmar or Thailand, so far are still lacking of the needs of sophisticated financial products or loans with greater scopes. Thus, the strategic importance of those countries compare to the other developed countries is ranked low. That is to say, if a banker only chooses the emerging markets to set overseas branches, it is less likely to have the possibility of product and service innovation for the organization.

On the other hand, there is another choice of FDI strategy. Many of the bankers choose to set overseas branches in Hong Kong, Singapore, these Asian financial centers. Furthermore, some of the state-owned banks, like Hua Nan Bank and Mega International Commercial Bank, set overseas branches in New York and London, these international financial centers.

Therefore, the research question of this study is to observe Taiwanese bankers’

FSFDI location and strategy choice in order to discover the other possible strategy choices. If the overseas branches are set to provide service to their existed FDI clients, then why would some of the bankers choose to set their branches in those

international financial centers, such as Hong Kong, London and New York? In addition, although the financial centers are strategically important, does every overseas branch set in financial center play the same strategic role?

1.4 Objects of study- overseas branches

As long as Taiwanese bankers receive the permission of both Taiwan government and the host country, they are allowed to set up overseas affiliates in the host country. Affiliates include subsidiaries, representative offices and branches.

Among these three types of affiliates, we choose the overseas branches as the objects of the research, and the reasons are as following:

Overseas subsidiaries are under the control of the host country government, and directly compete with local commercial bankers while maintain indifferent legal entities (Huang, 2010). However, the foreign subsidiaries might be set up by joint venture, or by the other strategic-alliance ways, which is complex, and comparatively rare in Taiwanese banking industry. Furthermore, usually, the headquarters of the bank in Taiwan might not maintain the power of control on the subsidiaries.

Representative offices, considered as the first move of international expansion, are used mainly for investigative purposes. Hence, these representative offices are not permitted to operate any banking functions.

Therefore, in this research, we put more focus on overseas branches. Due to overseas branches are supported directly by headquarters of the banks, and also these overseas branches are subject to perform deposits and to issue loans. The headquarters’

decisions and strategies would either directly or indirectly influence the generic roles of the overseas branches, and vice versa.

With specific objects and motivation of the research, in the remaining parts, we are going to examine the existed strategic choices of overseas-branching of Taiwanese banks. We have chosen ten sample banks in Taiwan which has at least one overseas branch, and the branch has been set up for at least three years. Then we analyzed those selected banks with empirical model and face-to-face interviews. Therefore, in Chapter 2, after reviewing the former related researches, we propose the propositions about the generic roles of the overseas branches and the relationship with innovation performance. In Chapter 3, there is an introduction of the determinants and procedures of creating the empirical model and cross-examination of the innovation evidences.

Then we find the general pattern of their strategies, and use the interview results to clarify our findings. The last sections would be result, discussion, conclusion and implication.

Chapter 2: Theoretical Background & Propositions

In this chapter, we are going to review the literatures and to explore the relationship of the strategic roles of overseas branches and their financial innovation performance. In the first section, we discussed about the current oversea-branching location and strategy choice factors of Taiwanese banking industry, which includes exploitation and exploration, two different strategies. And we discuss how the innovation happens in these two strategies. In the second section, we reframe the generic roles of Taiwanese overseas branches with Bartlett and Ghoshal’s theory model. There are four different roles of overseas branch in Bartlett and Ghoshal’s theory model. Furthermore, we would illustrate which roles are most likely to adopt innovations. Moreover, we try to examine whether the strategic roles of overseas branches would change with time.