Determinants of Foreign Financial Institution Expansions

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2.2 Determinants of Foreign Financial Institution Expansions

With the accelerated pace of global economics growth, the international investment trend has shown the signs of scale of globalization. Many financial institutions are facing an important challenge to develop strategies and approaches to expand to all over the world with the aim to increase the number of income sources and profits.

Hill and Hoskisson (1987) believed when institutions expand globally, the adopt methods would be differed depends on their strategies, and the results will be varied according their methods. Sullivan (1994) employed three measures concerned with performance, structure and attitude, as well as nine indicators to evaluate the degree of internationalization. He suggested institutions should apply multiple measurements to ensure the degree of internationalization. Contractor et al. (2003) reached the three-stage theory of international expansion and found an inverse relation between the degree of internationalization and performance at the first stage, positive relation at the middle sage, and inverse relation, again, at the last stage, or so-called the

“S-Curve” theory. Lin (2001) believed the diversification strategy and the degree of internationalization might be helpful on increasing the overall operating income, bank's financial performance, however, does not see the similar impact. Ramaswamy (1995) noted that the company should apply financial performance indicator to show their oversea operating performance with value chain activities, and obtain the relative competitive advantage with cost reduced and core competitiveness made. Chang et al.

(2010) examined that Taiwan's commercial banks do not have significant improvement on operating performance, but have better enhancement in risk control to the degree of internationalization. In addition, she considered the performance had inverse relation with oversea sales and diversification strategy.

Multinational financial institutions can be considered as an international enterprise. Start from the local and develop by owning or control through the overseas branches to engage in international matters in order to expand the scale of business from local operation toward global enterprise. Multinational financial institutions generally contain four characteristics. First, the creation of multinational organization would be derivation. In other words, it will see the multinational investment as outward expansion tool with sufficient capital and the appropriate scale of operation as premise. Second, the base operations of multinational financial institutions should be supranational, meaning establishing various types of branches in different countries and regions. Then, the business multinational financial institutions operate should be less native, so they will achieve the expansion purpose and business

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diversification when operating. Last, the strategy of multinational financial institutions should be globally in order to involve with the international investment activities.

The academic research often referred the theory of international trade, such as gravity model and comparative advantage theory, as well as the theory of international business, such as Follow the Customers hypothesis and eclectic theory when institutions considering about the oversea expansion. They analyzed in the light of the country of its origin, the oversea host country, and multinational financial institutions themselves to determine the factors of expansion. The gravity model of bilateral trade and economic scale with geography and culture relation analyzing was first introduced by Tinbergen (1962). Di Giovanni (2005) stated that overseas investment is proportional to the size of the economy, but is inversely proportional to the geographical distance under the gravity model. The author also believed the information, trading activity, degree of financial deepening and common language will stimulate bank to adopt cross-border mergers and acquisitions action. The comparative advantage theory analyzed the market size, trade and economic development, inflation, exchange rate and general economic factors between the home country and the host country's to decide whether the bank would adopt overseas expansion strategy. Esperanca and Gulamhussen (2001) used single host country bank expansion to overseas territory as the study model and found the larger the scale of the financial markets of the home country, and the greater the motivation of the local financial institutions would like to go overseas. Focarelli and Pozzolo (2005) indicated when the market shown good economic growth, stable exchange rate and continued expansion of the financial markets, then the banks of OECD countries would be willing to invest cross-nationally.

Williams (2002) shown that Follow the Customers hypothesis could be regarded as a defensive expansion to avoid interruption and assure adhesion with customers.

Additionally, Grosse and Goldberg (1991), Esperanca and Gulamhussen (2001), Huang and Nguyen (2004) and Chou et al. (2009) also agreed with the same hypothesis. However, Seth et al. (1998) studied loan activities of six foreign banks in the United States and found some customers of these foreign banks didn’t limit from their original home country. As a result, the application of the hypothesis still showed some conditions and limitations. Dunning (1977) argued the multinational corporations could compete with the host country enterprises when three advantages are satisfied, namely uniqueness, location and internalization-incentive in the eclectic theory. Piscitello (2003) pointed out the unique advantages included assets size,

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volume of deposits and loans, financial performance, degree of internationalization and product differences. The location advantages included the economic size of the host country, the level of development of the financial industry, the whether the location is at the international financial center, regulatory environment, as well as the degree of economic and trade exchanges between two countries, plus the internalization advantages of the local country. Outreville (2007) research found the asset size, cultural, and human capital of the world's top 50 financial institutions had indeed a significant impact to their internationalization degree under the analysis of the location advantages.

In addition, the overseas expansion motivation could be further analyzed from the overall and individual environment. First, we can look at the regulatory factors impact in the overall environment. Levine (2002) suggested the good regulations could strengthen the financial environment and economic development, and be the excellent support for corporate to develop overseas. Slager (2006) believed the regulations on either host or original home country could impact overseas expansion behavior of multinational financial institutions. As for the economic environment, Goldberg and Johnson (1990) stated that conditions of economic development, such as trade volume and GDP, on both host and original home countries could affect banks strategies on going abroad. Chou et al. (2009) discovered the expansion and investment behavior of multinational banks at China, Taiwan, and Hong Kong had a positive relation on GDP of original home country. Finally, we examine the motivation to go overseas on the social, cultural and technological environment factors. Sebastian and Hernansanz (2000) researched the advances of Spanish banks in Latin America and found geographically adjacent, similar to the common language, history and culture were contributed to the development of overseas business.

Outreville (2007) indicated the quality level of human resources was also the key factor for multinational financial institutions to consider going overseas, other than culture itself. Slager (2006) showed information technology could have two effects on degree of internationalization on banking sector. First, the information technology could shorten the processes of branch operations and investment, and provide services at regional centers. Second, information technology could reduce the monitoring cost of overseas expansion, and then consolidate its business scale.

We also look at different aspects on individual circumstances, for example industry competition, customer demand and supplier bargaining that could influence multinomial national institutions to invest overseas. The industry competition contained existing competitors, potential entrants, and substitute products. Buckley

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(1988) believed that strong organizational structure is the competitive advantages of a company, and it could be best utilized by foreign direct investment and market internalization. Piscitello (2003) used financial indicators as the proxy variables to the model, and discovered the financial scale and overseas expansion had a positive relation. As for the customer demand, many studies showed empirical description on multinational financial institutions had a positive and significant impact with Follow the Customers hypothesis when expanding overseas. In addition, the difference between borrowing and lending rates of financial institutions would affect their overseas expansion decisions. Aliber (1984) indicated financial institutions had higher motivation to overseas development when their affiliated countries having lower capital costs and spreads. Slager (2006) also believed seeing as the main source of profit for banks was coming from interest income; it would motivate the local banks to adopt overseas expansion strategy when the home country spreads became narrower.