An empirical study on multinational banks decision to go abroad.

Author:Boubacar, Hamadou
Position::Report
 
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INTRODUCTION

Literature related to Multionational banking [see for example Miller and Parkhe (1998), Blandon (1998 and 2000), Mutinelli and Piscitello (2001), Focarelli and Pozzolo (2005), Tschoegl (2004), and Cerutti and al. (2007)], mostly defends that economic and financial factors are decisive in the choice of the organizational form of representation that multinational banks (MNBs) choose when expanding abroad such as subsidiary, branch, affiliate-bank and representative office. The purpose of this paper is to consider parent-bank own characterics in its decision to choice an organizational form of establishment in foreign countries. Thus, our approach is different from macro-economic one, because it considers agency theory and resource-based theory to study the choice of organizational forms of representation abroad. As Fama and Jensen (1983) assert, the survival of an organization like multinational bank, depends on its capacity to solve agency problems that occur by doing its activities. This capacity depends on the type of organisational form chosed by the MNB to exert in a particular area of activity abroad. The agency theory make easy to understand more about the strategy of bank's internationalization. For example, in a multinational bank, agency problems which may be caused by the distance between home country and host country, would depend on the nature of the organizational form of representation abroad. The resource-based theory enables to take into account parent-bank specific characteristics such as capabilities in human resources and international experience.

Different from macro-economic approach, this study presents an important contribution because it allaows to understand better how do MNBs choise among many organizational forms when going abroad. It focuses on the following two research questions : (a) Why does a MNB hold several organizational forms of reprsentation in a same host country? (b) Why do MNBs from a same home country choose to be established via different organizational forms of representation in another foreign country?

The remainder of the paper is organized as follows. In the section 2, we review the literature relating to banking internationalization. Then, the section 3 describes the data and explains the methodology used in the empirical study. The section 4 presents and discusses the empirical results that show, when MNBs expand internationally, that the parent-bank specific characteristics play a leading role. Section 5 concludes.

REVIEW OF LITERATURE

The impact of banking regulations on MNBs and their decision to go abroad is therefore closely linked since it determines the conditions they must comply with in order to conduct their banking activities. According to Dalen and Olsen (2003), Calzolari and Loranth (2005), and Harr and Ronde (2005), from a legal point of view, there exists a significant difference between the branch and the subsidiary as organizational forms when establishing abroad. Indeed, when creating a branch, the parent-bank must conform to the home country's regulations while in the case of a subsidiary form (new creation or an acquisition of a local bank), it is the regulations in the host country which apply. In our research, we consider that the legal framework in a given country is characterized principally by corporate tax imposition and by administrative adherence to regulatory procedures and bodies (barriers to entry) whose compliance constitutes a precondition to any establishment for banks in foreign countries. Cerutti et al. (2007) assert that restrictions imposed on MNBs by the home country and the host country affect negatively and significantly the choice of the organizational form of representation. Thus, the barriers to entry have a negative effect on the establishment of the branch forms. What this implies is that the restrictions on the branches do not encourage the banks to set up this type of organisational form.

According to Bain et al. (2003), some countries like the United Kingdom and Switzerland adopted banking laws on the principle of reciprocity. Consequently, a foreign bank can be established in these countries only when its home country accommodates English and Swiss banks under similar conditions. Each country places conditions on the required capital for the setting up of a branch or a subsidiary as organizational forms of representation. One can also note a difference in taxation according to whether it is a branch or a subsidiary of a foreign banking institution. From a viewpoint of corporate taxation, the branch is more favourable than the subsidiary because tax on a bank branch is paid at a lower rate in the host country, and the benefits are exempted in the parent-bank's home country in which they are returned. Indeed, as Cerutti et al. (2007) assert, even in countries where the corporate tax is relatively high, the branch form is less taxed than the subsidiary form because it allows an easier transfer of tangible benefits towards the home country. On the other hand, for the subsidiary form, often the revenue is taxed, in part, twice. However, this last form presents some advantages, especially in taxation. For example, in France, foreign bank subsidiaries have profited for their international lending operations based in the host country, despite the competitive network and double taxation required by the country. By taking into account these advantages, some foreign banks, initially established in France through the branch form, have transformed their representations into subsidiary banks.

A well developed banking sector should provide many opportunities for the operating financial institutions. In such an environment, banks must, in order to compete, be able to offer a variety of financial products and services. According to Di Antonio et al. (2002), Italian MNBs prefer the branch and the subsidiary as organisational forms when the host country's banking sector is of considerable size and relative strength. Other studies measuring the economic development level as per the GDP per capita (see Cerutti et al., 2007) show a negative impact on the choice of the branch as organizational form of representation abroad. Such results are partly justified by the fact that foreign bank subsidiaries are often created following restructuring of local banks in difficulty in the developing countries. Another reason for the choice of the subsidiary in developing countries may be the fact that foreign banks consider these countries as opportunities "where they believe there is ample room for expansion and these are typically poorer economies, where the local banks are less developed and capitalized, and hence easier to compete against" Cerutti et al. (2007, p. 1686).

In politically unstable countries, foreign banks prefer subsidiary or affiliate-bank as organizational forms of representation in order to limit the in-country risk. If this is the case, one should note that the establishment of French banks in African countries where the political risk is relatively high are all subsidiary and/or affiliate-bank forms. According to Di Antonio et al. (2002), Italian MNBs are established in countries that have great financial centers, through branches as a first choice, and then via the subsidiary form as a second choice. The results of Cerutti et al. (2007) go in the same direction and attest that the banks prefer the branch to the subsidiary as organizational forms in countries which present less of an economical risk. In the same way, these authors stress that in the presence of a proven political risk (governmental interference in the businesses of foreign banks, civil wars, etc), foreign banks prefer the branch form in such environments. Indeed, in the event of civil war or of political interference, foreign bank branches are less state dependant than subsidiaries which have host country capital including important investments in fixed local assets.

Once established abroad, MNBs are inclined to generally concentrate on wholesale and retail banking activities. According to multinational banking theory (see Grubel, 1977; Gray and Gray, 1981; Aliber, 1984; Williams, 1997), MNBs go abroad in order to exploit specific advantages they themselves acquired on national markets. Ursacki and Vertinsky (1992) contend that banks also go abroad to benefit from more of the advantages locally acquired in wholesale and retail activity areas. Ursacki and Vertinsky (1992) use three ratios to measure the parent-bank business orientation. The first ratio (Credit Amount to Total Assets) indicates the importance that the parent bank grants to extend credit compared to other services such as investment services. The second ratio (Deposits to Total Assets) highlights the importance of deposits compared to other sources of funds (in particular inter-banking funds) and thus represents the existence or not of a large available domestic network. The third ratio (Credit Amount to Deposits Amount) can be regarded as an indicator of the level of the parent-bank financial intermediation. Accordingly, a high ratio means that the bank grants more credit than it receives through deposits, and should...

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