International Business Review 23 (2014) 1040–1048

Internationalization of Korean banks during crises: The network viewof learning and commitment

Joong-Woo Lee a, Hong Sun Song b, Jooyoung Kwak c,*a Department of Management, Inje University, Gimhae City, South Koreab Fund and Pension Division, Korea Capital Market Institute, Seoul, South Koreac Yonsei School of Business, Yonsei University, Seoul, South Korea

A R T I C L E I N F O

Article history:

Available online 6 July 2014

Keywords:

Business network

Crisis

Internationalization of banks

Internationalization process

Korean banks

Learning and commitment

A B S T R A C T

This study addresses the effect of crisis on bank internationalization from the perspective of network

theory. Employing the internationalization process (IP) model, we particularly examine the role of

learning and commitment in overseas expansion for banking services under stable and critical periods.

Following the IP model and business network approach, the study develops a theoretical view for

analysis of international banks from South Korea. South Korean banks are selected as they experienced

two global crises, one in 1998 and the other in 2008. Findings show that while the first crisis in 1998

stopped internationalization, the 2008 crisis stimulated firms to find new markets, especially in

developing countries. Different from the studies showing that commitment increases in stable periods

and decreases in crisis, this study contributes to the finding that experiencing earlier crises enhances

learning and increases commitment needed for expansion and strengthening of the business network.

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1. Introduction

Although service firms were relatively slow to globalize(Drogendijk & Hadjikhani, 2009), the recent growth of foreigninvestments in the service sector has been remarkable. Banks areone type of service firm actively going global. Establishing banks inforeign markets has often been regarded as a management strategyto increase flexibility during a crisis and is understood in thecontext of financial liberalization (Lee & Makhija, 2009). Othersargue that internationalization is a strategic challenge forinternational financial service firms (IFSFs) (Grant & Venzin, 2009).

There are several unique aspects to the process of internation-alization of financial service firms. Unlike manufacturing firms thatdeal in physical and tangible goods, service firms rely on intangibleand firm-specific resources tailored to the needs of individualcustomers. In addition, service firms are distinguished frommanufacturing firms in that they integrate production andconsumption simultaneously. In the process of internationaliza-tion, therefore, service firms prefer the wholly owned subsidiaryentry mode, which offers a high level of control and allows IFSFs toreplicate the entire value chain in host markets (Bouquet, Hebert, &

* Corresponding author. Tel.: +82 2 21236259; fax: +82 2 21238639.

E-mail address: jooyoung.kwak@yonsei.ac.kr (J. Kwak).

http://dx.doi.org/10.1016/j.ibusrev.2014.06.009

0969-5931/� 2014 Elsevier Ltd. All rights reserved.

Delios, 2004). These facts differentiate the foreign expansion offinancial firms from that of manufacturing firms, making theformer an interesting research topic in its own right (Engwall,1992, 1994).

Banking services are intangible, and transactions are tailored toeach customer (Bouquet et al., 2004; Ford, 1990). Although manybanking services now exist only online, the fundamental bankingservices—lending and borrowing—still require interaction betweena bank and a customer. Further, banks always cooperate withdomestic and international regulatory or non-regulatory units suchas credit rating institutions. Although the banking industry isliberalized in many countries, many aspects of its activities aremonitored and regulated by agencies. The ways in which varioussocio-political environments influence the conduct of businesshave long been a topic of scholarly attention (Keilor, Wilkinson, &Owens, 2005; Streeck, 1992). However, as Hadjikhani et al. (2008);Hadjikhani et al. (2008, 2013) point out, this topic has rarely beenconsidered in the context of marketing or business networks.Furthermore, this line of research has done little to elucidate thebehaviour of multinational enterprises (MNEs) in foreign markets.

Given the background, the effects of changes in the interna-tional business environment regarding the internationalization offinancial service firms constitute interesting issues (Hadjikhani,Hadjikhani, & Thilenius, 2014). The internationalization process(IP) model, mainly developed by Johanson and Vahlne (1977),

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048 1041

explains internationalization as a function of learning andcommitment, which are defined, respectively, as experience-driven knowledge acquisition and as the consequence of the size ofan investment and its degree of inflexibility (Forsgren, 2002;Johanson & Vahlne, 2009). Learning may be both general andspecific. Commitment may decline or even cease depending uponperformance and prospects.

Studies employing the IP model have explained internationali-zation behaviour with the general assumption of ‘‘stable’’ marketconditions (Bouquet et al., 2004; Eriksson, Johanson, Majkgard, &Sharma, 1997). In contrast, relatively few studies have attemptedto understand internationalization behaviour in unstable marketconditions (Hadjikhani et al., 2014; Van Heerde, Helsen, &Dekimpe, 2007). Because a crisis substantially affects transactioncosts, it may discourage internationalization, rendering a firm risk-averse. Alternatively, it may drive further internationalization inan effort to diversify risks. Thus, the relationship between crisisand internationalization is generally unclear, and it raises thefollowing question for this study: What have been the roles oflearning and commitment in the relationship between crisis andbank internationalization? Our study contributes to the under-standing of the IP model, especially with regard to internationalexpansion under turbulent conditions. There were two crises thatchanged Korean banks’ plans for internationalization: the Asianfinancial crisis in 1998 and the global financial crisis in 2008. Inorder to answer the question posed above, we approached theissue from a network perspective and conducted an aggregateanalysis as well as firm-level case studies.

This paper is structured as follows: in the next section, weprovide an overview of the theoretical ideas underpinning ourstudy. Then, we discuss our methodology, including the researchsetting, analytical approach, and data collection. We end with ourfindings and conclusions.

2. Relevant theories

2.1. The internationalization process model and international

financial service firms

The Uppsala internationalization process (IP) model is based onlearning and commitment and the relation between them(Johanson & Vahlne, 1977, 2006). As seen in Fig. 1, the centralquestion that this model addresses is how the learning andcommitment of an internationalizing firm affect its overseasexpansion, including sequential entry, establishment form, orfunctional management in the host market. The model is foundedon the causal relation between learning (or knowledge), commit-ment, commitment building, and the current activities of foreignexpansion (Forsgren, 2002).

Learning a

Commitme

● Local regula tion

● Local consumers

● Geographic locati

The I

Understa nding of home gover nment

pol icie s

Understa nding of loca l institutio nal constraints

Networking with manufacturi ng firms

Network Context

Fig. 1. A concep

The IP model assumes that foreign expansions are developedgradually as MNEs overcome uncertainties. The model alsoaddresses uncertainties and risks, but it is concerned primarilywith expansion strategies and path-dependence, usually aspresented under stable market conditions (Blomstermo, Eriksson,& Sharma, 2002; Engwall & Johanson, 1990; Eriksson et al., 1997;Johanson & Vahlne, 1977). Attempts to overcome uncertainties in aturbulent environment or in a crisis have rarely been investigated,except by a handful of studies, such as those by Van Heerde et al.(2007) and Hadjikhani et al. (2014).

Depending on the level of perceived risk from crisis manage-ment in bank services, the outcomes of the internationalizationprocess appear to vary. In terms of timing, for instance, one canobserve either the sequential establishment of overseas operationsor concurrent establishment. MNEs acquire knowledge and if theknowledge acquisition is low, they postpone the next investmentdecision until knowledge accumulation is high enough to make theperceived risks low. If MNEs are not strongly committed to the hostmarket, they would not run the risk of handling investmentdecisions simultaneously.

Regarding the form of overseas businesses, transaction-costeconomics explains that as firms have more knowledge (and thusface less uncertainty), MNEs are likely to choose greenfieldinvestments over acquisitions. Making greenfield investmentsrepresents a stronger commitment to the host market, given that itbecomes necessary for foreign entrants to justify more resourceinputs.

Compared to the timing and the form of overseas expansion, theissue of functional balance has received less attention. Functionalbalance is defined as a contribution to the host country relativelyequal on the value chain. If MNEs have asymmetric learning orpartial commitments, they will only develop in areas that theyknow or where they are committed. In fact, functional balance isoften desired by the host government. Many developing countriesare concerned with the possibility that MNEs exploit the largedomestic market but do not effectively transfer knowledge to thehost countries (Prahalad & Lieberthal, 2003). Lee, Abosag, andKwak (2012) found that, in the case of the Chinese automobileindustry, the Chinese government tended to favour foreignautomobile manufacturers that not only procured local supplies,but also established R&D facilities. In the banking industry, givenits sectorial characteristics, the functional balance may appear inthe form of positions between lending and borrowing, betweencorporate and individual customers, or between host and homecustomers.

Perceived risk is primarily a function of an MNE’s level ofknowledge and commitment in a foreign market (Forsgren, 2002).The risk arises from unknown local regulations, unfamiliar localconsumers, or disconnected local business actors, all of whichconstitute entry barriers for foreign firms. Specifically, the banking

nd

nt

s

ons

Develop ment of Ba nk

Estab lishments

● Se quent ial en try

● Establi shment fo rm

● Functi onal balanc e

nternationalization Process

tual model.

J.-W. Lee et al. / International Business Review 23 (2014) 1040–10481042

industry tends to impose high entry barriers. In his study ofSwedish banks, Engwall (1992) found that the entry barriersdesigned to protect the domestic industry, motivated by defenceand unemployment concerns, are reinforced not only by legalprocedures but also by duties, standardization rules, and othernon-tariff barriers. Therefore, the levels of learning andcommitment are critical in determining whether a bank’sinternationalization process follows the rule of incrementality.Given the entry barriers discussed in previous articles (Berg-strom, Engwall, & Wallerstedt, 1994; Engwall, 1994), learningand commitment are of particular importance in host countries,having a great bearing on relationships with local consumers,local business actors such as local banks, and local regulators(Engwall, 1992; Hadjikhani et al., 2008). Foreign banks are oftenlimited in their ability to make relationships with geographical orclient groups, because of the size of their operations, or theirfunding limits (on the supply side of the financial network).Occasionally, foreign banks face ‘‘all sorts of other barriers’’ whenentering into a market dominated by local national bankingnetworks (Engwall, 1992).

Given this constraint, when MNEs and local consumers, localbusiness actors, and local regulators are mutually committed tofuture business, this commitment can itself serve as a platform forlearning. Furthermore, the interaction that comes with a commit-ment creates new knowledge. Learning and commitment helpMNEs build trust and shared meaning in host countries,diminishing uncertainty, and improving the effectiveness of theinitial and subsequent expansions (Johanson & Vahlne, 2006).Through this mechanism, MNEs overcome what other studies havelabelled the ‘‘liability of foreignness’’ (Johanson & Vahlne, 2009;Zaheer, 1995).

2.2. Network view

In contrast to the financial perspective implying that financialliberalization induces foreign direct investment in the bankingsector (Thurbon, 2001; Yeyati & Micco, 2007), the IP modelsuggests that the internationalization proceeds in accordance withlearning and commitment, in the relationships between MNEs andother firms. Extending this idea, the levels of learning andcommitment may differ depending on changes in the internationalbusiness environment, as illustrated in Fig. 1, such as homegovernment policies, institutional constraints in host markets orthe existing networks (Hadjikhani & Thilenius, 2005; Hadjikhaniet al., 2008).

According to Johanson and Mattsson (1988), differences infirms’ internationalization behaviours are related to the variancesin the internationalization behaviours of other firms. In addition,the banking industry consists of banking networks, which includeboth central banks that connect depositors and borrowers and therelationships with other banks (Engwall & Johanson, 1990).Networking with other banks results in the exchange of financialresources and customers and, therefore, the generation of learningand commitment. For example, through continuous interactionwith local business actors, some MNEs have introduced innovativeproducts to local consumers (Akbar & McBride, 2004). Through thebusiness network, MNEs obtain ‘‘insidership’’ and proceed withposition building in a foreign market (Axelsson & Johanson, 1992;Johanson & Vahlne, 2009). To overcome the ‘‘liability of outsider-ship’’, foreign firms occasionally find help from firms in their homemarket networks that have connections in the host country(Johanson & Vahlne, 2009).

When the liability of foreignness changes to the liability ofoutsidership for foreign firms, learning and commitment areimportant. While market-specific learning is usually highlightedfor obtaining insidership, institutional knowledge helps firms

shorten the time to overcome the perceived cost of internationali-zation (Eriksson et al., 1997). This is particularly true in the bankingindustry, as banks are subject to government regulations. Theseregulations differentiate the levels and types of a bank’s resourcesand the knowledge necessary for internationalization. Under-standing the governmental policies, accordingly, is essential forinternationalization of IFSFs.

When banks penetrate and expand into new foreign markets,they need to access resources that other firms have already built inthe host market (Drogendijk & Hadjikhani, 2009). In this situation,adaptation to the local business environment is essential. Giventhat the banking industry is usually regulated by the government,it is critical to form relationships with not only the homegovernment but also the host government, as banks settle intoforeign markets (Hadjikhani et al., 2008). Absence of relationshipswith institutional business actors in the host country implies thatforeign entrants have insufficient knowledge about the hostcountry’s language, laws, and rules; this may constitute theliability of outsidership (Johanson & Vahlne, 2009).

Recent research has examined pre-clustered entry, defined asentry into an integrated network followed by clustering among thecore firm and the customer firms (Hatani, 2009). Pre-clusteredentry is most common in Japanese and Korean business groups butis also popular among industries that do not compete directly(Hatani, 2009; Nohria & Ghoshal, 1997). The pre-clustered firmstend to help each other with resource sharing for a substantial partof their sales revenue. As a way to relocate an existing network,pre-clustered entry has the advantage of overcoming the liabilityof outsidership, especially when learning by doing is costly, whenrapid internationalization is necessary (Delios & Henisz, 2000), orwhen high entry barriers exist for new foreign entrants (Lee & He,2009).

The IP model posits that learning and commitment are builtgradually and that uncertainties are overcome with time.Extending this logic, if a bank has experience with foreign marketentry, it is surely aware of the need to engage in relationshipbuilding in foreign markets and it is better at it than banks withoutany prior experience. Because learning is experiential andcommitment addresses specific relationships, learning and com-mitment in bank internationalization are affected by, or beginwith, an understanding of institutional networks and often involvethe assistance of firms in an existing network.

Overall, in Fig. 1, the above theoretical discussion is conceptual-ized into a model that specifies how the network context influenceslearning and commitment, thus determining the development ofbank establishments. We posit that better understanding of homegovernment policies, host government institutions, and existingnetworks particularly with the main client group will increaselearning and thereby commitment, leading to active developmentin bank establishments. This model is fundamentally different fromthe argument that financial liberalization drives bank internation-alization. In this model, learning and commitment bridge betweenthe current position of banks and their foreign entries.

3. Methodology

3.1. Research setting

This study aims to understand internationalization of banks instable and critical periods. Considering the goal of our research, wenecessarily adopted a research design appropriate for bothexploratory and qualitative study, as we are trying to answer‘‘how’’ and ‘‘why’’ questions (Ghauri & Grønhaug, 2010). Theexploratory and qualitative approach obtains ‘‘thick’’, in-depthinsights, which are particularly desirable for dynamically orientedstudies (Yin, 2003).

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048 1043

Our empirical study concerns the internationalization of banksin South Korea from 1997 to 2010. This setting offers an interestingcontext to examine how changes in the international businessenvironment affect learning and commitment in the banks’internationalization process. The banking industry in Koreaexperienced two external shocks, the Asian financial crisis in1998 and the global financial crisis in 2008. During both the shocks,the Korean economy experienced turbulence and a severe reces-sion. Interestingly, these shocks provided the stimulus for financialliberalization and, more importantly, bank internationalization.

More specifically, the internationalization of Korean banks canbe categorized into four periods before and after the crises: (1) pre-1990 (up to 1989), (2) the 1990s until the Asian financial crisis in1998 (1990–1997), (3) from the Asian financial crisis in 1998 untilthe global financial crisis in 2008 (1998–2007), and (4) after theglobal financial crisis (since 2008).

3.2. Data

Given the fact that the banking industry in Korea has beenoligopolistic, it is possible to identify the banks that pursuedoutward FDI. Before 1998, there were approximately 10 majornational commercial banks in Korea. After 1998, only six remained.There were several regional commercial banks, but these could notafford internationalization. We therefore excluded regional banksfrom our research.

The banking industry in Korea is structured as a set of bankswith one central bank, one export–import bank, and six majorcommercial banks. The six major commercial Korean banks are asfollows: the Korea Development Bank (KDB), Hana Bank (HNB), theIndustrial Bank of Korea (IBK), Shinhan Bank (SHB), Woori Bank(WRB), and the Korean Exchange Bank (KEB). A careful examina-tion of the characteristics of the banks does not reveal anysignificant outliers in the data on internationalization. The Koreanbanks have grown through mergers and provide a similar portfolioof financial products. The banks, except KDB, are the top five firmsin terms of market shares estimated by the size of loans.

To understand the big picture, we first conduct an aggregateanalysis. However the more important question is how Koreanbanks acquired knowledge and built commitments. Consideringthis purpose, the case study method was chosen for the second partof our findings as it will enable us to understand the dynamicprocess of networking and internationalization in a complexsetting (Ghauri & Grønhaug, 2010).

For the aggregate analysis and case study, we use both archivaldata and interview data. Archival data include the banks’ websitesor online sources related to investor relations as well as the banks’internal reports. We also contacted the six major banks, and fouragreed to meet with us. We asked the bank headquarters toarrange a meeting with the overseas subsidiaries at their‘‘strategically important’’ locations. Overall, 26 interviews wereconducted, including six in Beijing, three in Shenyang, three in HoChi Min City, two in Hong Kong, and 12 with the internationaloperations division at their headquarters. The following tablepresents a summary of our interviews.

Table 1.

Table 1Interview information.

Interviewed bank Business locations

(Number of interviewees)

Woori Bank Beijing (5) and Seoul (3)

Hana Bank Beijing (1), Shenyang (3),

and Seoul (3)

Shinhan Bank Ho Chi Min (3) and Seoul (3)

Korea Exchange Bank Hong Kong (2) and Seoul (3)

For the overseas interviews conducted from February toSeptember 2012, we identified and interviewed subsidiary headsand managing directors who led the entire process of internation-alization, including the initial and subsequent entries. They wereresponsible for strategic planning, negotiations with host govern-ments, and local marketing. Interviews were administered in asemi-structured format and were conditional upon data confi-dentiality and non-disclosure of the respondents’ identities. Allrespondents worked for the subject firms before 1995, and allworked in the banking industry before and after the time coveredby this study. They worked within the firm for more than 15 yearson average and thus have extensive personal experience inbusiness networking at the firm level.

During our interviews, four Korean banks responded that Chinawas ‘‘the most strategically important location’’ and that Beijingserved as a platform for sequential entries in China, a role formerlyfilled by Hong Kong. Therefore, we included Beijing and Hong Kongin our cases, which represent a developing country and a globalfinancial city. Interview data were cross-checked with peer banks;this was possible because, as all interviewed banks entered theChinese market through Beijing and Hong Kong, their headquartershad knowledge about the two locations. All interviewers wrote adaily interpretive analysis based on their interview notes. After theinterviews, interviewers met and compared what was written andanalysed. Necessary information was sorted out upon theagreement of all interviewers and any unclear data were identified.Such data were clarified or further information was obtained thenext day by phone or by additional interviews.

We also interviewed in Ho Chi Min City and Shenyang for thecase studies but could not cross-refer data at these locations.Nevertheless, the findings from Ho Chi Min City and Shenyangwere consistent with the Beijing and Hong Kong case studies, in thesense that bank establishment was affected by learning andcommitment, and networks played a significant role in enhancinglearning and commitment.

4. Findings

4.1. An aggregate analysis of internationalization of Korean banks

As stated earlier, the two critical periods for the Korean banksare the 1998 Asian financial crisis and the 2008 global financialcrisis. While internationalization continued as Korean banks grew,the 1998 Asian financial crisis damaged the banking system inKorea. As seen in Tables 2a and 2b, all six banks in our study wentthrough corporate restructuring; consequently, many offices andbranches were shut down. During the crisis and the followingyears, the Korean government did not want domestic banks to goabroad for fear of worsening the shortage of foreign reserves. Infact, excluding the entry of KEB into Hanoi (Vietnam) in 1999,which had already been underway before the crisis, no Koreanbank went abroad during 1999–2000. Overseas expansionresumed in 2000, when the global economy bounced back dueto the booming information and telecommunication (IT) industry.

Starting with the entry of HNB into Singapore in 2000,internationalization by Korean banks resumed. Because the hardline of the Korean government, although mitigated, did not changedrastically, foreign entries were based mainly on bottom-upinitiatives within the banks. During 1999–2007, a total of 19entries were executed. What is most notable during this period isthat Korean banks began to enter developing countries. Except forBeijing and Shanghai, most locations were manufacturing-orientedlocations in which Korean manufacturing firms had been operat-ing. This implies that the Korean banks were in step with Koreanmanufacturing firms, which had sought markets in developingcountries.

Table 2aEvent information: international expansion by selected Korean banks (Commercial oriented banking).

Location KDB HNB IBK SHB WRB KEB

Sydney S (1986)

New York B (1997) B (1979) B (1990) B (1989); S (1990) B (1976); S (1984) S (2004)

Los Angeles S (2006) B (1978) S (2004)

London B (1997) B (2006) B (1991) B (1980) B (1968)

Singapore B (1997) B (2000) B (1990) B (1980) B (1973)

Tokyo B (1991) B (1983) B (1991) B (1988); O (1988) B (1968) B (1967)

Hong Kong S (1986); O (1986) B (1994) B (1993) B (2006); S (1982) B (1980); S (2006) B (1967)

Paris B (1974)

Toronto B; S (2009) B, S (1981)

Moscow O (2008) S (2008) O (2008)

Amsterdam B (1979)

Shanghai B (1996) B, O (2008) B (1995) B (2003)

Frankfurt O (1979) S (1994) S (1992)

Beijing B (2008) S (2007) B; S (2008) S (2007) B (1996)

Seattle O

Osaka B (1986) B (1967)

Fukuoka B (1997)

Note: O denotes overseas office, B denotes overseas branch, and S denotes overseas subsidiary

J.-W. Lee et al. / International Business Review 23 (2014) 1040–10481044

During the early phase of the global financial crisis in 2008, theKorean government again regulated and deterred domestic banksfrom internationalization. Yet the policy stance within thegovernment differed substantially from what it had been 10 yearsearlier. The attempt at deterrence was transitory, and the Koreangovernment’s attitude was rather supportive and encouraging ofinternationalization. Most Korean banks, however, did not havesufficient knowledge of institutions in foreign countries and thus

Table 2bEvent information: international expansion by selected Korean banks (Commercial ori

Location KDB HNB IBK

Gaesung

Guangzhou B (2005)

Qingdao B (2003)

Tianjin S (2009); B (199

Shenyang O (2006) B (2005)

Yantai B (2006)

Suzhou B (2007)

Wuxi

Dalian

Ho Chi Minh O (2007) B (2008)

Hanoi O (2009)

Manila

Jakarta S (2007)

Bahrain

Dubai O (2008)

Mumbai

New Delhi O (2008)

Kuala Lumpur

Dacca

Phnom Penh

Toshkent S (2006)

Atlanta

Mississauga

Vancouver

Toronto

Thorn Hill

Burnaby

Coquitlam

Calgary

Mexico City

Panama

Santiago

Sao Paulo S (2006)

Dublin S (1997)

Budapest S (2002; 2009)

Almaty

Source: Information available via investor relations, provided by each bank.

Note: O denotes overseas office, B denotes overseas branch, and S denotes overseas su

entered where Korean manufacturing firms were already estab-lished. Using the long-term business relationship with Koreanmanufacturing firms, Korean banks came to understand localinstitutional constraints in targeted host markets.

Local institutions’ policy stances differed between developedcountries and developing countries. Although the movement forfinancial liberalization prevailed in developed countries even afterthe crisis in 2008, the U.S. and EU viewed negatively the acquisition

ented banking).

SHB WRB KEB

B (2004)

B (2008)

7) B (2008) B (1993); S (2011)

B (2008)

B (1995)

B (1995); S (2000) B (2006) O (2002)

B (1997) B (1999)

B (1995)

S (1992) S (1990)

B (1983) B (1977)

O (2009) O (2003)

B (1996)

O (2007) O (2008)

O (2009)

B (1996)

S (2007)

O (2009)

O

B (2010) B (1991)

B (1983)

B (1970)

B (2002)

B (1997)

B (2002)

B (2008)

O (2008)

O; B (1980)

O (2008)

O (2009) S (1998)

S (2008)

bsidiary

Table 4Learning and commitment building: WRB in China regarding consumer learning

and regulation learning.

Time Job description

November12, 2007 Initial entry into China

Number of s ubsidiaries

8 1543

65

95

259

134

103 108 113128 128 134 139

0

50

100

150

200

250

300

20132012201020082006200420021998199719901985198019751970

Growth

Retreat

Re-Ex pans ion

Fig. 2. Stages of bank internationalization in Korea. Note: Asian financial crisis in

1998 and global financial crisis in 2008.

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048 1045

of U.S. or European banks by banks from developing countries. Ithas been difficult for Korean banks to pass the criteria of largeshareholder eligibility as set by U.S. or EU institutions. The barrierto Korean banks has remained high up to the present, and entryinto developed countries is not easy.

In contrast, entry into markets in developing countries wasfacilitated. One of the attractive locations among developingcountries was China. Korean manufacturing FDI in China continuedto increase, and the size of the banking sector in China is huge, asevidenced by the fact that China owns the largest commercial bankin the world, the China Construction Bank. There were activeefforts to establish banks in China, given that Korean banks have abetter understanding of the local institutional constraints due toKorea’s geographic proximity and the Korean manufacturing FDIplus market potentiality. Expansion into other developingcountries, including Southeast Asian nations, was desired for thesame reasons.

The customers of Korean banks have been mainly Korean firmsthat went abroad. Accordingly, customer relations and thegeographic locations selected by Korean banks were closelyinter-related. Before 1989, only a few Korean manufacturing firmsmade overseas investments. The presence of these Koreanmanufacturing firms in global markets was quite limited, withexamples being limited to export posts or distribution offices.However, as Korean FDI became more popular, particularly indeveloping countries, and after the Asian financial crisis, banks alsobecame motivated to internationalize. Entry locations also differeddepending on the time period. Table 3 suggests that before theAsian financial crisis, Korean banks expanded mainly in developedcountries. Banks became more interested in expansion intodeveloping countries after the crisis, as they entered 32 non-OECD countries after 1997 (12 during 1997–2007 and 20 since2008), which is almost four times more than that of pre-1998entries.

To recap, there were two external crises in Korea, one in 1997–1998 and the other in 2008 (see Fig. 2). The first crisis discouragedbank internationalization by all Korean banks. Because Koreanbanks learned from this crisis, however, the second crisis hadunequal effects on banks’ internationalization. The timing of theresumption of internationalization differed among the banksdepending on their levels of restructuring and the ownershipchanges that each bank had to implement in the aftermath of thecrisis in 1998. Once overseas, however, the level of ‘‘being active ininternationalization’’ depended upon local learning and commit-ment. Those who were active in foreign markets carried outsequential entries, established wholly owned subsidiaries, andexpanded local customer bases. They also tried to maintain goodrelationships with manufacturing firms, jointly exploring newmarkets in developing countries. We examine this activity in thefollowing case studies.

4.2. Case study 1: internationalization by Woori Bank into China

The Asian financial crisis in 1998 significantly affected WooriBank (WRB) in several ways. WRB underwent organizational

Table 3Internationalization by WRB (Woori Bank).

Before 1989 1990–1996 1997–2007 Since 2008

Urban locations 7 1 2 1

Manufacturing

locations

1 2 4 3

In OECD countries 5 0 0 0

In non-OECD

countries

3 3 6 4

Source: Internal report provided by Woori Bank.

restructuring with a succession of new CEOs. As a result, itsinternationalization initiative lost consistency. Yet, as a domesticeconomic recession followed the crisis, the most important lessonfor WRB was the awareness that the financial service market inKorea is very small, saturated, and vulnerable to external shocks;these conditions warranted urgent internationalization.

The financial crisis in 2008, in contrast, provided momentumfor accelerating internationalization (see Table 3). The internalpush for internationalization became stronger. Pressure also camefrom international investors, who asked banks to explore newmarkets because the Korean banking market was nearly saturated.More importantly, they feared the possibility that the Koreaneconomy would again enter a recession. In order to integrate withemerging markets of high growth and with good market prospects,WRB focused on entries into non-OECD countries.

For these reasons, WRB looked to China for market potential.Before December 11, 2006, foreign retail banks were not allowed inChina. WRB entered China and established a wholly ownedsubsidiary on November 12, 2007, the earliest entrant amongKorean banks. From its initial entry in Beijing in late 2007 untilSeptember 2011, WRB opened 15 additional offices over less than 4years (see Table 4). While WRB in China continued to expand intolocations known for manufacturing, such as Dalian, Jiangjiahang,and Tianjin, it also increased its presence in urban consumptionareas. After establishing a wholly-owned subsidiary, it increasedseven branches and seven offices to cover as many service areas aspossible.

While Korean banks tended to be active in foreign expansion asa response to the unstable Korean macro-economic environment,WRB showed more impressive performance. A manager at WRB inBeijing stated:

January 28, 2008 Start of online banking

March 20, 2008 Approval of local retail banking

May 27, 2009 Start of debit card business

July7, 2009 Introduction of corporate loans

December 7, 2009 Introduction of private mortgage loans

March 23, 2010 Start of international settlement system

for Renminbi

April 27, 2010 Approval of financial derivatives business

May 6, 2010 M.O.U. with China Export Insurance

Company

September 19, 2011 Start of forward exchange business

November 16, 2011 Start of overseas advance payments

Source: Internal report provided by Woori Bank.

J.-W. Lee et al. / International Business Review 23 (2014) 1040–10481046

While many banks maintain good relationships with thegovernment, our bank had a change in the CEO position. Therefore,we had to institute a system of learning in the host market in ordernot to be affected by the change of the top management team.Another way to settle down in a turbulent environment is tobefriend the host government by showing a strong commitment. Itwas also fortunate for us that all CEOs were aware of the need toexplore new foreign markets, especially in developing countries.

The efforts of WRB to generate knowledge and commitresources are demonstrated by the extent of its active sequentialentries in China. Table 4 illustrates how WRB in China acquiredlearning and gradually built up its commitments. The first serviceintroduced by WRB to Chinese customers was online banking in2008, which is very popular in Korea. However, Chinese customerswere not as interested owing to their deep-rooted practice of cashtransactions. This was WRB’s first lesson, and after that it began tostudy its Chinese customers. The second attempt was theintroduction of a debit card in 2009 that can be used in Korea,targeting the increasing number of Chinese visitors to Korea. Thisturned out to be highly successful. In the same year, WRB alsointroduced private mortgage loans in China, aware that youngerpeople there wanted to purchase homes (owing to the real estatebubble) but lacked the cash to do so. These private mortgage loanswere welcomed by urban salaried residents.

At the same time, WRB in China continued learning about localregulations (see Table 4). The introduction of the debit card wasnot possible without an alliance with Union Pay, which is China’sgovernment-sponsored electronic transaction system, like the Visanetwork. More importantly, learning about local regulationsenabled WRB in China to expand its business network to includeChinese corporate customers. WRB said that the debit card successraised bank visibility among customers and convinced WRB of theimportance of local learning and commitment. Subsequently, WRBin China began to provide financial loans and introduced financialderivatives to corporate customers. The recent moves by WRB inChina obviously indicate that the bank began to attract Chinesefirms as major customers, possibly representing a shift in focusfrom serving Korean firms to serving Chinese ones. Thus, it hasbecome more integrated with local Chinese institutions.

Major performance indicators also show learning and commit-ment building by WRB in China. Fig. 3 shows that the number ofChinese customers, including both private and corporate custo-mers, continued to increase while the other customers, mainlyKorean firms, also increased. In addition, the deposit amounts fromChinese customers also increased. The performance level achievedis particularly remarkable, as most local Chinese banks offerinterest rates on savings which are higher than the fixed ratespecified by the central bank of China, and the interest rate offered

Fig. 3. Customer learning and commitment: number of customers and changes of

by WRB in China follows the fixed rate. The evidence indicates thatWRB in China has become more active in its customer relations.

4.3. Case study 2: internationalization by the Korea Exchange Bank

into Hong Kong

When Korean Exchange Bank (KEB) established a branch inHong Kong in 1967, the main customers were Korean expatriateswho wired money to or received money from Korea. Before theAsian financial crisis in 1998, Korean firms established local postsin Hong Kong to coordinate trade in Asia. By 1998, as Korean firmsentered Hong Kong, KEB also increased, though modestly, thenumbers of individual customers (expatriates) and corporatecustomers. It also served as a financial bridge between the Koreanmanufacturing subsidiaries in Hong Kong and their headquartersin Korea. Due to restrictions and the heavy regulation of foreignexpansion in the mainland’s banking sector and a betterunderstanding of institutions in the financial system in HongKong, Korean FDI in China relied on Korean banks in Hong Kong foran overseas base.

However, the Asian financial crisis shut down the local offices inHong Kong, as corporate restructuring in Korea proceeded. Inaddition, as a major part of Korean FDI, Hong Kong’s manufacturingsector relocated to mainland China and KEB in Hong Kong shrankaccordingly.

As the global economy bounced back, KEB in Hong Kongmanaged to stabilize its business. Nevertheless, because a majorityof Korean manufacturers were heading to developing countriesrather than Hong Kong, KEB in Hong Kong could not aggressivelyincrease the number of branches or offices. Its role as an overseasfinancial centre was being replaced by bank subsidiaries in Beijing.A KEB manager who worked in the Hong Kong office stated thefollowing:

The first shock was that we gradually lost our customers, as theKorean manufacturing firms began to relocate to China or Vietnam.Then the next shock came suddenly as both Hong Kong and Seoulwere battered during the Asian financial crisis. The Hong Kongoffice could not serve any longer as a profit centre. After the crisis,Hong Kong recovered and re-emerged as a hub for the financeindustry in Asia. When we accordingly re-opened the office, twochoices were clear to us. First, given that our old customers (Koreanmanufacturing firms) left, we should find a new business model,for example, investment banking. Second, we should stick to theexisting role but locate to a new network.

The banking industry in Hong Kong was dominated by the HongKong Shanghai Bank Corporation (HSBC) and the Bank of China. KEBhad to find a new niche based on its local learning and commitment.Therefore, KEB in Hong Kong became networked with Korean

deposits for WRB in China. Source: Internal report provided by Woori Bank.

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048 1047

manufacturers moving into Southeast Asian countries. Due to itsexperience with local regulations and geographic location, KEB inHong Kong offered services and related advice to manufacturersnewly entering Southeast Asia. As a result, as Table 5 shows, itsmarket share in terms of the net profits is four times higher than thedeposit share. It means that KEB in Hong Kong makes profits fromservices other than deposit-related works.

Another example of learning and commitment after the Asianfinancial crisis was that KEB in Hong Kong expanded to serve localHong Kong and non-Korean multinational enterprises in HongKong. That was an innovative attempt given the duopolisticstructure of the banking sector in Hong Kong. KEB in Hong Kongaccumulated knowledge about local customers despite thelimitation in geographic expansion. As KEB in Hong Kong gatheredmore knowledge about local regulations and local consumers, thebusiness evolved from financial intermediation to investmentbanking. KEB began to specialize and established an investmentbanking subsidiary. It was KEB’s second entry into Hong Kong.Given that KEB in Hong Kong had to compete with global IFSFs, theexpansion was gradual and less remarkable than KEB investmentsin developing countries. However, when the global financial crisisoccurred in 2008, KEB in Hong Kong was experienced enough tosurvive the crisis and, indeed, accelerated its global networking.

The 2008 crisis called for a spreading of risk due to thevulnerable domestic economy and market saturation in Korea, andKEB therefore tried to transform the Hong Kong branch into thehub for its Southeast Asian banking networks. At the same time,KEB in Hong Kong built a reputation as a knowledgeablecommercial-oriented bank even among foreign banks. KEBmanagers in Hong Kong explained the reasons as follows:

After experiencing two financial crises, we thought seriouslyabout our competitiveness and our appeal in Hong Kong. In HongKong, everybody is so busy. Based on our experience and learningin Hong Kong, speed seems to be a strong competitive factor forKEB. We therefore developed our management system in HongKong to maximize transactional efficiency.

In recognition of the fact that corporate customers in SoutheastAsia need efficient communications with, and active feedbackfrom, the headquarters in Korea, KEB established a finance centrein Hong Kong. Previously, remittance in dollars was processed afterthe banks opened in the U.S. and took at least one day. The KEBfinance centre in Hong Kong, however, enabled real-time transac-tions with remittance, payment, and trade finance. Because thecommitment required more support from skilled employees, KEBin Hong Kong has the largest expert pool of employees among theKorean banks in Hong Kong. The high speed internationaltransactions and the introduction of various services related totrade finance made KEB in Hong Kong a specialist in trade finance,and it gained profits from financial charges and commissionsamounting to 42.5% of its operating income in 2011. Service profitsaccount for 9.9 million USD for KEB in Hong Kong which is a muchbetter performance than its Korean rivals. The employment rate oflocal staff amounted almost to 80%, implying a high level of KEB’slearning and commitment.

Table 5Commitment and subsidiary operation by Korean banks in Hong Kong.

Employment (people) Service

Profits

% of Total

Subsidiary

ProfitsKorean Local Total

KEB 8 31 39 9.9 42.5

HNB 4 11 15 1.1 8.0

WRB 4 17 21 2.9 22.5

SHB 6 8 14 1.5 19.0

Source: Authors’ interviews.

Note: Service profits are measured in million USD.

5. Concluding remarks

While there is a large volume of research on the internationali-zation of manufacturing firms, financial service firms are lessrepresented in the internationalization literature. Research on thistopic is urgent because of the growing presence of internationalfinancial service firms and their vulnerability towards interna-tional financial crises. As financial liberalization globally connectsthe banks, their internationalization is heavily affected by crisis.Yet, theoretically, it is not well understood how a crisis affects bankinternationalization. A crisis naturally increases uncertainty andregulation, deterring bank internationalization. Alternatively, itmay encourage banks to seek other markets for risk diversification.To understand the internationalization of banks during changes inthe global business environment, we used the internationalizationprocess (IP) model. The IP model illustrates that the international-ization of a firm is determined by uncertainties, which depend onthe levels of learning and commitment.

In this effort, we examined the internationalization behaviourof Korean banks with a particular focus on the Asian financial crisisin 1998 and the global financial crisis in 2008. We proposed thatthe network context, which is based on an understanding of thehome government and the host government policies, has a bearingon the learning and commitment of entrants in terms of localregulations, local consumers, and geographic locations. This leadsto differences in terms of sequential entry, the form of establish-ment, and the functional balance of banks.

To recap our findings, the first crisis in 1998 discouraged Koreanbanks from overseas expansion. However, from that experience,Korean banks learned to manage crisis situations to the extent thatinternationalization was even promoted when the second crisisoccurred in 2008. During and after the second crisis, internation-alization among banks varied depending on their learning andcommitment in terms of local regulations, local consumers, andgeographic locations; learning and commitment, meanwhile, wereaffected by their relationships with home-market policies, host-market policies, and manufacturers.

The IP model suggests that foreign market entry is a position-building process in a foreign market network (Johanson & Vahlne,2009). As the IP model predicts, foreign expansion was affected bythe learning and commitment to build a foreign market network.The earliest crisis may discourage internationalization, as firmsreact to the shock, but we have found that firms also learn from thecrisis. As a result, they increased development of foreignestablishment in the subsequent crises. The Korean experiencesuggests that the impact of crises on bank internationalizationshould be examined in a specific network context, apart fromfinancial risks. The general relationship between the networkcontext and the internationalization process is not hurt by thecrisis and, further, the crisis provides a momentum to strengthenthe current network or to explore new networks. A crisis justifiesre-shaping in the business network and, if the crisis repeats, locallearning and commitment strengthen as they help banks spreadthe risks. Our paper argues that, by pushing to strengthen businessnetworks, a crisis may provide an opportunity for a foreigncompany to transform from an outsider to an insider.

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