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Factors Influencing the Foreign Entry Mode of Asian and Latin American Banks
Meng-Fen Hsieh
Department of Finance
National Taichung Institute of Technology
E-mail: mfhsieh@ntit.edu.tw
Chung-Hua Shen* Department of Finance,
National Taiwan University e-mail: chshen01@ntu.edu.tw
* Corresponding author: Dr. Chung-Hua Shen, Professor, Department of Finance, National Taiwan University, Taiwan. Address: No. 1, Sec. 4, Roosevelt Road, Taipei, 10617 Taiwan (R.O.C); E-mail: chshen01@ntu.edu.tw.
Factors Influencing the Foreign Entry Mode of Asian and Latin American Banks
The majority of past studies on the foreign market mode of entry have focused
on manufacturing industries. Although some studies have explored the entry mode
decision of the banking industry, most of them have adopted the case study method,
and systematic studies have been relatively few. This study intends to fill this gap
through an investigation of 7,041 Asian and Latin American bank branches covering
the period from 1999 to 2005.
The analytical results demonstrate that both Asian and Latin American banks are
market seekers. However, Latin American banks are not customer followers. In
addition, the larger the scale of the bank or the greater the net interest margin, the
more likely it is that high control entry modes will be adopted. By contrast, in
countries in Asia with a greater cultural distance, banks tend to establish low control
entry modes to avoid uncertainty. This does not apply, however, in the case of Latin
America.
Keywords: Entry Mode, Cultural Difference, Market Seeking, Customer Following,
Financial Service
JEL: G21, M16
1. Introduction
Over the last two decades, there has been a surge in direct investments in the banking
sectors of emerging markets. During the same period, there has been a growing body
of literature on the motivations and determinants driving banking FDI, and several
factors have been identified that can explain why a bank goes abroad and enters a
specific country. For instance, foreign direct investment in banking is correlated with
the degree of bilateral trade and FDI between the host and home country (Grosse and
Goldberg, 1991; Brealey and Kaplanis, 1996; Williams, 1998; Yamori, 1998). Second,
the host and source countries’ characteristics related to profitability and risk have
been found to be important drivers of a bank’s decision to penetrate a foreign market
(Focarelli and Pozzolo, 2000; Galindo, Micco, and Serra, 2003)
However, much of the above literature does not specifically address FDI in
emerging markets, apart from Demirgüç-Kunt and Huizinga (1999), Claessens,
Demirgüç-Kunt, and Huizinga (2001) and Van Horen (2007). These authors adopt
count data or aggregate data to analyze the differences and similarities between
developing and high-income country foreign banks. Demirgüç-Kunt and Huizinga
(1999) and Claessens et al. (2001) find that the efficiency and profitability of banks
are affected by a variety of determinants, including the bank characteristic of
ownership, as well as macroeconomic conditions. Van Horen (2007) finds that foreign
banks in developing countries are much larger in low-income countries in terms of the
numbers of bank branches and assets.
Grosse and Goldberg (1991) (GG hereafter) assess the extent of the foreign bank
presence in the United States and indicate its distribution by country of origin.
Esperanca and Gulamhussen (2001) extend GG’s model of the effect of home country
factors on foreign bank expansion by conducting a study on the multinational
companies with a presence in the U.S., with banking assets or the number of offices
for each home country being adopted as their independent variables. While the use of
large-scale aggregate data may provide us with a big picture, it may not explain which
patterns of foreign activities are chosen by individual banks.
By neither focusing on aggregate nor count data, another stream of the literature
concentrates on the internationalization process or the entry modes of banks. Due to
the micro and macro effects on bank branches which vary with time, being removed
from the aggregate data, the aggregate or count data may not be able to trace the
reasons behind the specific branching decision. Although the majority of past studies
on the foreign market mode of entry have focused on manufacturing industries (see
Bhaumik and Gelb, 2005), with the increased prosperity of the services industry, the
internationalization of service firms has attracted the attention of a growing number of
researchers (Andersson, 2002; Blomstermo, Sharma, and Sallis, 2006; Bouquet,
Hébert, and Delios, 2004; Dawson, 2001; Godley and Fletcher, 2001; Lindblom and
von Koch, 2002; Ochel, 2002; Roberts, 1999).
More recently, the focus of many studies has become the foreign market entry
mode of specific industries, such as the hotel industry (Gannon and Johnson, 1997),
retailing (Andersson, 2002), technical consulting (Sharma and Johanson, 1987),
tourism (Björkman and Kock, 1997), and financial services (Álavarez-Gil et al., 2003;
Grosse, 1997; Hellman, 1994). However, most studies on financial firms’ foreign
market entry modes have been based on case studies, and there have been very few
empirical studies involving large samples.
For example, Hellman (1994) explored the motivations and entry modes of six
Finnish banks and insurance companies, while Álavarez-Gil et al. (2003) investigated
the entry mode of five Spanish banks and insurance companies in Latin America.
Álavarez-Gil et al. (2003) found that the major FDI motivation was to follow
customers mostly Latin American banks beginning with a representative office (low
control) prior to the nineties and to be followed by a relatively high control mode of
entry in the internationalization process initated in 1998, consisted in covering the
group into a franchise, such as a branch or a subsidiary or else a merger or acquisition
(high control).1 Cardone-Riportella et al. (2003) examined the internationalization
patterns followed by Finnish and Spanish financial service firms. However, no
conclusive evidence was found in either market.
Moreover, the studies of Hellman (1994), Álavarez-Gil et al. (2003) and
Cardone-Riportella et al. (2003) used correlation coefficients to express the
relationship between customer following or market seeking and the mode of entry.
However, the approach they adopted may have failed to predict the change in entry
mode. Furthermore, the influences of individual banks or firms in terms of their
specific capabilities or resources were not considered. When a high control mode of
market entry is adopted, it is necessary for the bank’s headquarters to commit more
resources and experience to the success of the venture.
Even though, Cerutti, Dell'Ariccia and Martinez-Peria (2007) examined the factors
influencing the operations in Latin America and Eastern Europe of the world’s top
100 banks for the year 2002, Asian countries were not covered. In addition, due to
only a single year being adopted, it was not possible to detect whether the
international behavior of banks has changed with the passing of time.
1 Blomstermo et al. (2006) make clear definitions on high and low control mode: High control entry
modes (e.g. wholly owned subsidiary, majority owned subsidiary, etc.) demand more resource
commitment abroad, and the foreign-going firm is exposed to a higher degree of uncertainty. Low
control modes (e.g. licensing, different types of contractual relationships, etc.) require a more limited
resource commitment, thus reducing the uncertainty exposure of the foreign-going firm. The high
control entry mode offers the highest mode of integration/control, whereas low control entry modes,
such as cooperative agreements, offer the lowest (Anderson and Gatignon, 1986; Erramilli and Rao,
1993; Vandermerwe and Chadwick, 1989).
Hsieh, Chang and Wang (2008), by contrast, focused on a single Asian country.
They analyzed the determinants of 123 Taiwanese bank branching decisions covering
a time period extending from 1995 to 2005. They found that Taiwanese banks are
financial market seekers, but not customer followers. In addition, the larger the scale
of the bank or the greater the cultural distance between the home country and the host
country, the less possible it is that high control entry modes will be adopted. However,
banks with more international experience will be more likely to adopt high control
entry modes.
This study, by means of a more comprehensive dataset, extends Hsieh et al.
(2008)’s study through an investigation of 7,041 Asian and Latin American bank
branches covering the time period from 1999 to 2005. Asian and Latin American
banks are used as a research sample due to these two groups of countries accounting
for over 75% of all international capital flows.2 Van Horen (2007) also finds that 27%
of all foreign banks in developing countries are owned by a bank from another
developing country. This highlights the need to increasingly focus on developing
countries.
This study intends to explore the foreign market entry mode of Asian and Latin
American banks and to look into the factors that influence that entry using objective
data and a more complete framework. Specifically, this study uses 7,041 overseas
branches of Asian and Latin American banks as its research sample in exploring the
influence of the economic and financial market environment of the host country, the
cultural distance between the host and home country, as well as the resources of banks,
on the choice of foreign market entry mode. What are the factors that influence the
2 See Hsieh, Yang, and Vu (2009), “Do Herding Behavior and Positive Feedback Effects Influence
Capital Inflows? Evidence from Asia and Latin America,” International Journal of Business and Finance Research (forthcoming).
Asian and Latin American banks’ foreign entry mode? Are they market seeking or
customer following? These questions are intended to be answered in the following
sections.
Thus, the purpose of this study is to construct a more complete framework than
that in extant research, which will serve as valuable reference to practitioners. In
Section 2 of this study we review the relevant literature and build research hypotheses,
and in Section 3 we present the method, data, and empirical models used in this study.
The empirical results are provided in Section 4. Finally, the conclusions and
implications are presented in Section 5.
2. Literature Review
2.1 Entry strategy
This study adopts the eclectic paradigm (Dunning, 1980) to explore the choice of
foreign market entry mode. The eclectic paradigm comprises many important theories,
such as transaction cost theory, internalization theory (Buckley and Casson, 1976), the
comparative advantage and factor endowment theory of international trade, and the
resources-based theory of the firm, which provides a comprehensive framework for
the analysis of FDI. In addition, the eclectic paradigm is also suitable for small and
medium-sized enterprises (SMEs) as well as service industries (Brouthers, Brouthers,
and Werner, 1996).
The eclectic paradigm argues that the foreign market entry mode is influenced by
three factors, namely, the ownership advantages of a firm, the locational advantages
of a market, and the firm’s internalization advantages. When all these three
advantages are superior, firms will choose to enter the prospective market using the
mode for which the firm has a higher degree of control.
To be specific, Dunning separated ownership advantage into asset advantage (Oa)
and transaction advantage (Ot), where the former refers to the tangible or intangible
assets of a firm, such as the scale, technical or managerial capabilities, and where the
latter refers to the advantages gained from multinational operations, such as
experiences accumulated or economies of scale. The locational advantage refers to the
attractiveness of a host country and includes the market seeking and competition
within that country. The internalization advantage refers to the benefits generated as a
result of reducing transaction costs by replacing the market mechanism with an
internal hierarchy.
Many studies have sought to verify the eclectic paradigm using empirical data.
Generally speaking, most studies confirm that the ownership, locational and
internalization advantages can explain the choices among foreign market entry modes.
More recent research suggests that the internationalization pattern of service
firms is explained by one of the two phenomena referred to as “market seeking” or
“customer following” (Erramilli and Rao, 1990; Marjhgard and Sharma, 1998;
Grönroos, 1999).
2.2 The internationalization of financial service firms
There are many studies that have explored the process and the factors
attributable to the success of the internationalization of firms (Wiedersheim-Paul,
Olson, and Welch, 1978; Johanson and Vahlne, 1990, etc.). However, the first to adopt
financial firms as a research topic was probably Aliber (1976), who explained the
growth of multinational banks in terms of the different levels of efficiency among
countries. According to the comparative advantage theory, the banks that enjoy a
comparative advantage in the banking industry will offer more competitive financial
products, and will therefore be more competitive in international markets.
Furthermore, banks engage in foreign entry to increase the bank’s profitability, within
an acceptable risk profile and risk diversification goals. Focarelli and Pozzolo (2000)
find that banks prefer to have subsidiaries in countries where expected profits are
larger, owing to higher expected economic growth and the prospect of reducing the
local banks’ inefficiency. Gray and Gray (1981) also applied the eclectic paradigm to
the research of the transnational operation of banks.
Rugman (1981) argued that the internalization theory can be applied to
multinational banks, and concluded that the reasons for internalization include low
marginal costs, market intelligence advantages, the information provided by the
headquarters in the home country, reputation, regulations (e.g., deposit insurance and
foreign exchange regulations), transaction costs, growth and risk reduction. Cho
(1986) developed a growth model of multinational banks using the eclectic paradigm,
and empirically verified that the bank’s scale of operations in the home country,
differences in loan interest rates, the market size of the host country, and so on, are the
main factors that facilitate the growth of multinational banks in the host country.
2.3 Development of hypotheses
This study attempts to build a comprehensive model to explain the foreign
market entry mode of banks. In short, this study classifies the factors influencing the
market entry mode mentioned by existing studies into three categories: the local
environment of the host country, the advantages of a bank, and the cultural distances
between the host and home countries. For example, Dunning (1989) argued that four
factors influence the internationalization process of service firms, namely, the
“attributes of the product” which Dunning (1989) classified into the “advantages of
the bank,” the competitive behavior of local banks and the political and legal
environment belonging to the “local environment of the host country.”
For a second example, Erramilli (1992) investigated the factors influencing the
entry mode, as well as the legal restrictions, country risks, market size, and
availability of cooperative partners which Erramilli (1992) classified into the “local
environment” that we adopt in this study. As a last example, in a study by Li and
Guisinger (1992), the influential factors include the market size, the market
characteristics ( the “local environment of the host country” in this study), the cultural
distance (the same as in this study), the competitive advantage, the scale and
opportunities of the bank (the “advantages of a bank” in this study), and so on, and all
can be classified into proper categories in the framework proposed by this study (see
Figure 1).
(Insert Figure 1 about here)
Cultural distance represents the extent of the cultural differences between the host
and home countries. Cultural distance influences the internalization of an enterprise in
many ways. For example, during the initial phase of internationalization, some firms
choose to export to psychologically-close countries first. After accumulating
international experience, they then extend their reach to psychologically-distant
countries (Buckley, Pass, and Prescott, 1992; Johanson and Vahlne, 1990;
Wiedersheim-Paul et al., 1978).
Based on the logical reasoning of transaction cost economics, when the cultural
distance is high, it is more difficult to monitor and to communicate with the overseas
unit. That is, the cost of using organizational or hierarchical mechanisms will be
higher than the cost of using the market mechanism. Therefore, firms will tend to
enter the foreign market with a low control mode. For example, Gatignon and
Anderson (1988) demonstrated that, the higher the recognized cultural distance
between the home and host countries, the more that firms will tend to adopt a low
control entry mode, because a low control mode is also a more flexible mode for
withdrawal when the firm is unable to adapt to the host country. In addition, Erramilli
(1991) also empirically demonstrated that market similarity is an important factor that
influences the foreign market entry mode. Furthermore, Esperanca and Gulamhussen
(2001) found that the closer the cultural distance between the home and host country,
the more that foreign banking is attacted to the host country. Therefore, this study
proposes that the higher the cultural distance, the more likely it is that a low control
mode of foreign market entry will be adopted.
H1: Other things being equal, the cultural distance between the home and host
countries will be positively associated with the likelihood of adopting a low
control entry mode.
There are many dimensions used to describe the environment of the host country,
and it is impossible to discuss all of them in a single paper. This study thus intends to
focus attention on the economic, financial, and competitive attractiveness of the host
country. In view of the available data, the market’s seeking (a strategic motive driven
by the large scale of the local economy), customer following (a strategic motive
driven by greater home country investment or exports into the host country) and the
degree of oligopoly in the host country were selected for the purposes of this study.
Dunning (1988) argued that firms tend to invest in foreign countries with larger
market scales. Moreover, multinational enterprises are likely to originate in countries
or regions with access to large and wealthy domestic markets (Vernon, 1966; Buckley
and Casson, 1976). Along a similar line of reasoning, Wengel (1995) has empirically
found a positive relationship between the size of the home country and foreign bank
expansion. In other words, the larger the market, the more attractive the market will
be to the firm, and therefore firms will use a high control mode to enter the market in
order to generate profits. For example, Brouthers et al. (1996) explored the impact of
ownership and locational factors on the entry strategy of U.S. computer software
firms, and found that the more ownership and locational advantages a firm has, the
more likely it is that it will adopt a high control mode. Therefore, this study proposes
that the greater the market seeking, the more likely it is that a bank will adopt a high
control entry mode.
Furthermore, Anderson (1993) pointed out that the internationalization can be
seen as a way of maintaining a relationship with original clients that are now abroad,
and also as a way of searching for new clients. In addition, the more two-way trade
that takes place between the home country and the foreign country, the greater will be
the presence of banks from the home country in the foreign country (Sabi, 1988;
Goldberg and Johnson, 1990; Brealey and Kaplanis, 1996; Yamori, 1998). Therefore,
this study proposes that a high control entry mode is positively associated with a
customer following strategy, which is represented by the amount of home country
investment or exports into the host country. This leads to the following two
hypotheses:
H2: Other things being equal, host market seeking will be positively associated
with the possibility of adopting a high control entry mode.
H3: Other things being equal, customer following will be positively associated
with the possibility of adopting a high control entry mode.
Different foreign market entry modes represent different types of control
exercised by firms in relation to their foreign operations, different levels of resources
committed, and different levels of risk (Anderson and Gatignon, 1986). Therefore, the
choice of foreign entry mode strategy also depends on the resources of the firm. Asset
specificity is thus an important factor that influences the foreign entry mode. Existing
studies indicate that, the more specific the asset is, the higher will be the value of that
asset, and the more tacit the asset is, the more appropriate it will be to adopt a high
control mode (Teece, 1986; Hill , Hwang, and Kim, 1990; Kim and Hwang, 1992).
Due to the limited availability of secondary data, this study does not measure the
degree of product differentiation or asset specificity of sample firms. However, it is
reasonable to speculate that, generally speaking, a larger-scale bank is more likely to
have advantageous products and specialized assets. Therefore, this study uses the
scale of the banks as a proxy for product differentiation and asset specificity.
The scale of a bank can also be a proxy of its management capability. The larger
the bank and the more resources it has, it can be argued that its risk taking capacity
and management capability will be greater. Therefore, as argued in regard to their
foreign experience, larger banks will be more likely to enter foreign markets with a
high control mode. For example, Buckley and Casson (1976) and Yu and Ito (1988)
argued that the larger firms are more likely to enter foreign markets by resorting to
FDI through wholly-owned subsidiaries or joint ventures than the smaller firms.
Hennart (1991) also argued that larger scale firms with more assets are generally more
capable of integrating and managing risk.
H4: Other things being equal, the scale of banks will be positively associated with
the possibility of adopting a high control entry mode.
3. Methodology
3.1 Data description
The data on the establishment of overseas branches by Asian and Latin
American banks cover the period from 1999 to 2005, given that those years are
available for the entry strategy information. The research sample includes different
types of overseas entry modes, such as representative offices, branches, subsidiaries,
and mergers and acquisitions for Asia and Latin America’s banking industry.
Financial data are obtained from BankScope. The entry strategy information is
gleaned from the database of Global Banks Foreign Expansion, which is
hand-collected by the research team of Professor Shen. Furthermore, the information
on cultural distance is based on Hofstede (1983). The macroeconomic data is obtained
from World Development Indicators (WDI). The financial and macro variables are
matched with the entry strategy with a one-year lag.
3.2 Empirical models
According to the concepts and research assumptions developed in this study, the
empirical model is set up as follows:
Entry Mode = β0 Constant + β1 Cultural Distance +β2 Market Seeking
+β3 Customer Following +β4 Bank Scale +ε
There are two approaches used to measure the entry mode, i.e., the dependent
variable. Setting up an office is treated as one, while a representative office and
branch opening belong to numbers two and three, respectively. A subsidiary and
headquarters are classified as numbers four and five. The greater the number, the
higher that the degree of control over the entry mode will be. In this scenario, an
ordered Probit is used to estimate the model’s coefficients.
As regards the cultural distance, this measure is constructed by Hofstede (1983).
The calculation method is as follows:
4/}/){(4
1hom, i
ieiijij VIICD ∑
=
−=
Here, ijI is the score for the ith cultural dimension in country j, while iV is the
variance of the i th cultural dimension. The higher the score, the higher that the
cultural distance will be.
As for market seeking, our study separates this variable into economic and
financial developments. The former includes the GDP growth rate for the host country,
and GDP per capita (Cerutti et al., 2007; Choi, Tschoegal, and Yu, 1986; and
Goodnow, 1985), while the latter covers the private credit claims against GDP ratio
(Levine and Zervos, 1998; Hermes and Lensink, 2004; Shen and Lee, 2006), broad
money against foreign reserves and stock market capitalization against the GDP ratio.
As for customer following, two proxy variables are adopted by this study, namely,
the export amount (home country) against GDP ratio, and the foreign direct
investment outflow (home country) against GDP ratio. It is worth noting that
Álavarez-Gil et al. (2003) adopted three variables to measure “customer following”.
They are the total investment amount of the home country, the total export amount of
the home country, and the index of liberalization in the host countries. Nevertheless,
the third indicator should be classified as the market seeking variable.
Finally, as for the bank advantage, this study uses three variables, namely, the
scale, net interest margin and the return on assets (Goodnow, 1985; Terpstra and Yu,
1988).
4. Analysis of the Empirical Results
4.1 Descriptive statistics
Table 1 and Table 2 report the descriptive statistics for Asian and Latin
American banks. The average entry modes are 2.74 and 2.59, respectively, showing
that banks in these two regions mainly set up representative offices and branches to
establish a foreign presence. The difference is that Asian banks are able to accept
expansion in a country with a larger cultural distance; the average value is 2.16 for the
Asian banks, while that for Latin American banks would be 1.58.
Furthermore, the degrees of economic and financial development in the case of
the Asian banks’ foreign expansion in the host country are higher than those of the
Latin American banks. For example, the GDP growth rate for the former is 3.74%;
and 2.57% for the latter. In addition, the private credit claims against GDP ratios for
the host country are 126.63% and 106.17%, and the stock market capitalization ratios
are 134.89% and 94.64%, respectively.
As regards the customer following variables, the average export amount against
GDP for the home countries is 45.74% for the Asian sample. However, the same
indicator falls to 24.27% for the Latin American banks, indicating that Asian banks
are more likely to be customer followers. The same situation applies to the FDI
outflow against GDP ratio variable, which is 5.72% for the Asian sample, and
likewise higher than the one for Latin Amercia of 2.86%.
However, there is no conclusive pattern for banks having an advantage. While
Asian banks possess larger scales ($27,295 vs. $22,451 millions) and higher returns
on assets (0.34% vs. 0.25%), they are accompanied by a lower level of interest rate
margin. (2.10% vs. 6.36%).
4.2 Empirical results
Tables 3 and 4 provide the empirical results for Asian and Latin American banks,
respectively. Hypothesis 1 proposed that the home country bank will adopt a low
control entry mode when the cultural distance is greater. The empirical results of
Table 3 show that the coefficient of cultural distance is significantly negative, which
is consistent with our expectation. This means that the higher the cultural distance, the
more likely it is that banks will tend to adopt the low control entry mode, such as by
setting up representative offices. In doing so, banks will be able to maintain a higher
degree of flexibility and to withdraw from the host country when something goes
wrong (Gatignon and Anderson, 1988; Erramilli, 1991; Esperanca and Gulamhussen,
2001; Hsieh et al., 2008).
Nevertheless, the coefficient of cultural distance for Latin American banks
results in the opposite sign, which is significantly positive. This seems to reflect that
the Latin culture is full of adventure.
As regards the market seeking variables, it is found in Table 3 and Table 4 that
banks in the two regions are mainly market seeking in terms of the economic and
financial development of the host country. For example, the coefficients of the GDP
growth rate, private credit claims and broad money against foreign reserves, are all
significantly positive. This result shows that when the market is larger and more
attractive to banks, a higher control mode will be adopted. This finding strongly
supports our Hypothesis 2 and is consistent with the findings of Terpstra and Yu
(1988), Wengel (1995) and the others (Vernon, 1966; Buckley and Casson, 1976;
Hsieh et al., 2008).
However, in regard to the stock market capitalization variable, a measure of
direct finance, the coefficients for the Asian and Latin American banks appear to
depict the opposite situation. The variable appears to exhibit a significantly negative
sign for Latin America, thus matching the theoretical expectation that direct finance
(the stock market) should play a complementary role to indirect finance (banking). In
other words, in their foreign expansion, banks should adopt a more conservative
branching strategy under the financial system with a larger scale of stock market.
However, a significant positive sign applies to the Asian sample. This result may
indicate that in Asia there are parallel developments between direct and indirect
finance during the sample period.
In regard to customer following, the coefficients for the exports and FDI
outflows for Asian banks are both significantly positive in terms of the entry mode,
meaning that more investments abroad make it attractive for banks to adopt an entry
mode with a higher degree of control. This result supports our Hypothesis 3.
Nevertheless, the results for Latin American banks are quite the opposite. While this
result supports our Hypothesis 3, it also supports the negative relationship between
the exports and the foreign banking presence as evidenced by Esperanca and
Gulamhussen (2001), and Hsieh et al. (2008). This same result also implies that
exports are preferred by risk-adverse investors during the internationalization process.
As regards the bank advantages, the coefficients of bank scale and the net
interest rate margin are both significantly positive in the two regions, showing that the
larger banks will adopt the entry mode with a higher degree of control. This result
supports our Hypothesis 4 and also confirms the existing studies that indicate that, the
more specific the asset is, the higher will be the value of that asset, and the more tacit
the asset is, the more appropriate it will be to adopt a high control mode (Teece, 1986;
Hill et al., 1990; Kim and Hwang, 1992).
5. Conclusions and Policy Implications
Most past studies on the foreign market entry mode focused on manufacturing
industries. Although some of them examined the entry mode decision of the banking
industry, the majority of them adopted the case study method, and systematic research
was relatively rare. This study has sought to fill this gap by investigating a sample of
7,041 Asian and Latin American bank branches covering a time period from 1999 to
2005. The purpose of this study is to construct a more complete framework than that
in extant research. What, then, are the factors influencing the Asian and Latin
American banks’ foreign entry mode? Are they market seeking or customer following?
These questions have been answered in this study.
It is found that the cultural distance, market potential of the host country,
customer following and bank advantages are the factors that influence the foreign
entry mode of Asian and Latin American banks. For Asian banks, the higher the
cultural distance, the lower will be the entry mode adopted by banks. This, however,
is not true for Latin American banks.
As regards the market seeking, it is found that banks in the two regions are
mainly market seeking in relation to the economic and financial development of the
host country. Furthermore, Asian banks are also customer followers, meaning that
more investments abroad make it attractive for banks to adopt an entry mode with a
higher degree of control. As for the bank advantage, it is found that the larger banks
will adopt an entry mode with a higher degree of control.
As part of the financial services industry, when faced with global competition
banks may be unable to satisfy their global customers by providing standard services.
Therefore, the globalization of the banking industry faces more difficult challenges
than the manufacturing industry. The results of this study could serve as valuable
reference for banks in choosing their entry mode.
Specifically, the different entry modes represent different degrees of control, asset
commitments and risks. Thus, the entry mode should be highly correlated with the
complexity of the local environment, the company’s experience as well as its
management ability. Bank managers could adopt an entry mode with a high degree of
control, such as setting up a branch, a subsidiary or engaging in merger and
acquisition activity when sufficient international experience has been accumulated
and they are capable of managing foreign branches. On the contrary, if banks are
planning to enter a less familiar environment, an entry mode with a lower degree of
control, such as a representative office, could be considered to avoid the operational
risks associated with a new market.
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