A commentary on home-region internationalization in

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A commentary on home-region internationalization in financial groups from emerging economies J. Franc¸ois Outreville

Emerging economies

195

Department of Finance, HEC Montreal, Montreal, Canada Abstract Purpose – The purpose of this paper is to examine where large financial firms are expanding their operations, including financial firms from emerging economies. This paper has two objectives. The first is the documentation of the relative importance of the largest financial groups in emerging countries. The second objective is to describe the regional nature of financial firms. Design/methodology/approach – The analysis of the internationalization process of these groups is based on a list of top 50 financial groups ranked by total assets in 2010. Findings – The paper shows that the majority of the largest financial institutions from emerging countries are expanding their business in the home region where they are headquartered. This result provides support to the debate on the home-region preference. Research limitations/implications – The paper provides an example on preferences for the home-region orientation but does not provide an analysis of the determinants of FDI in the financial sector. Originality/value – The paper examines where large financial firms are expanding their operations, including financial firms from emerging economies. Keywords Multinational companies, Emerging markets, Multinational corporations, Home-region orientation, Financial groups, Emerging countries Paper type Viewpoint

Introduction Recent papers by Wolf et al. (2012) and Verbeke and Kano (2012) in this journal offer an analysis to explain the home-region orientation phenomenon of large firms. Here we apply this thinking to the internationalization of financial services. Before the 1970s, the operations of the multinational banks mainly took the form of establishing branches, offices or subsidiaries abroad to support the activities of non-financial companies. In response to foreign market opportunities made available by deregulation and globalization, many financial firms have increased their foreign direct investment (FDI) and acquired other companies in part because of the belief that only very large players will have the cost advantages necessary to remain competitive in emerging global markets[1]. The question of whether and how internationalization of activities affects the performance of a firm is also one of the most addressed research problems in strategic management and international business (Glaum and Oesterle, 2007; Hejazi and Santor, 2010). International diversification can be defined as a firm’s expansion beyond the borders of its home country across different countries and geographical regions. Firms with strong competencies that are developed at home can utilize these in international markets (Bartlett and Ghoshal, 1989) to generate growth, but it has also been suggested that international diversification tends to take place in markets that are physically and

The Multinational Business Review Vol. 21 No. 2, 2013 pp. 195-206 q Emerald Group Publishing Limited 1525-383X DOI 10.1108/MBR-03-2013-0013

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culturally close and that other factors such as logistics and trade barriers are likely to increase the cost of operations rather than providing economies of scale (Katrishen and Scordis, 1998). The controversy over globalization and its implications has been debated in the literature (Rugman, 2005; Rugman and Verbeke, 2004, 2005, 2008; Dunning et al., 2007; Wolf et al., 2012). Rugman and Verbeke (2004) showed that a large percentage of companies were oriented within their own home region and that only a small percentage of companies were truly global. Several other studies have confirmed these basic findings (Rugman and Brain, 2003; Delios and Beamish, 2005; Banalieva and Dhanaraj, 2013). In the financial services sector, Grosse (2005) found that the majority of the largest institutions were expanding their business in the home region of the triad in which they are headquartered. One institution (HSBC) earned the bulk of its income in two regions (Asia and Europe), which is explained by its historical orientation towards Asia. A similar result was reported by Outreville (2007) for the 50 largest financial institutions in the world. Financial groups from the USA have a dominant presence in Latin America and the Caribbean (LAC), and Canadian banks are prevalent in the Caribbean as well. The Spanish banks, Banco Santander and Banco Bilbao Vizcaya Argentaria, have the largest proportion of their affiliates in LAC. In recent years, there has been a strong increase in the demand for financial services in emerging markets. At the same time, FDI in the financial sector of emerging economies surged in the 1990s as some countries were eager to attract a number of FDI-based activities by financial groups. Yin and Choi (2005) explored the patterns of inward FDI into China, and they found that the majority of such investments stem from Asia. This is an important result, since one might expect that in rapidly growing emerging economies, a more even distribution across regions might exist. There have been only a few empirical studies about the determinants of the number of branches and offices a bank will have abroad. Goldberg and Johnson (1990) examined factors, which determine the presence of US banks abroad. Moshirian’s (2001) study is the first one that uses data on FDI in banking to measure US bank’s activities abroad. Outreville (2007) examines where the largest financial firms are expanding their operations and documents some of the factors that may explain the most-favored locations of these financial groups. The purpose of this paper is not to examine why financial firms from emerging countries are increasing their international diversification but rather where they are expanding their operations. To our knowledge, this topic has never been investigated for financial firms in emerging countries. Thus, this paper has two objectives: (1) to document the relative importance of the largest financial firms in these emerging countries; and (2) to examine where financial firms are expanding their operations as well as explore the debate on home-region preference. In the next section, we describe the data used for the largest financial groups in emerging countries. In the following section, we provide an analysis of the internationalization of these companies.

The largest financial groups from emerging countries The home-country composition of the world’s largest financial groups has changed dramatically in the past 20 years. European banks have taken over the lead from the USA and Japanese firms. The rise to prominence of European banks has occurred in parallel with their increasing participation in cross-border mergers and acquisitions (M&As) since the end of the 1990s (BIS, 2001). Recently, the emergence of the Chinese banks is the most striking event. In 2010, among the 24 largest banks with total assets over US$1 billion, four of them are from China: the Industrial and Commercial Bank of China ranks 12, China Construction Bank Corp. ranks 17, Agriculture Bank of China ranks 20, and Bank of China ranks 21. Large financial groups dominate the world financial services not only in total assets but also in the increasing number of countries in which they operate. Obtaining comparable data for all companies around the world is a difficult task because of different reporting procedures. A list of the largest groups in emerging countries, ranked by total assets, has been compiled using data on total assets and employees by Bloomberg from 2010. Data on affiliates and host countries is based on the Dun & Bradstreet “Who owns Whom” database. The listing of the 50 largest groups (Table I) provides information on total assets, operating revenues and the total number of employees. The list includes 28 groups from Eastern Asia (China, Taiwan, Hong Kong and the Republic of Korea), three groups from South-East Asia (Singapore and Malaysia), eight groups from South America (Brazil, Colombia and Chile), five groups from South Africa and six groups from four other emerging countries (India, Mexico, Egypt and Zimbabwe). The degree of internationalization (DOI) can be analyzed from a number of perspectives: the operations (assets, sales and employment), the stakeholders, the spatial organization of the operations or the diversification of activities among several countries. Given the range of perspectives and dimensions that can be considered for each, the degree of transnationality of a firm cannot be fully captured by a single synthetic measure[2]. In the financial sector, data on the foreign operations (assets, income, and employment) of the companies is not readily available even when looking at annual reports. In this paper, DOI is defined as a function of the extent to which a firm’s activities are located abroad. An approach that measures this dimension of transnationality is captured in the number of foreign affiliates and the number of host countries in which a company has established its affiliates. The Geographical Spread Index (GSI)[3] indicates high levels of ownership advantages as well as high knowledge of market conditions in many countries. Ranking the largest financial groups from emerging countries in terms of the number of host countries for their foreign affiliates (Table II) gives a list that is not necessarily correlated with the size measured by total assets. On the other hand, there is a high correlation (as expected) between the number of host countries and the GSI (last column of Table II). Among the top five groups in this list, two are from Brazil, two are from Singapore and one is from India. Internationalization of the financial groups in their home region Geographic and cultural distances have received a great deal of attention in the international business literature and have been identified as a key factor in explaining foreign market attractiveness (Kogut and Singh, 1988; Focarelli and Pozzolo, 2008).

Emerging economies

197

MBR 21,2 Company name

198

Table I. The 50 largest financial groups from emerging countries

Industrial & Commercial Bank of China-ICBC China Construction Bank Corporation Agricultural Bank of China Limited Bank of China Limited China Development Bank Corporation Bank of Communications Co. Ltd Banco Do Brasil S.A. China Postal Savings Bank Itausa-Investimentos Itau SA State Bank of India China Merchants Bank Co Ltd Banco Bradesco SA Kingdom Financial Holdings Ltd Woori Finance Holdings Co. Ltd Agricultural Development Bank of China Shanghai Pudong Development Bank National Agricultural Cooperative Federation – NACF Kb Financial Group, Inc Banco Nacional De Desenvolvimento Economico E Social-Bndes Shinhan Financial Group China Minsheng Banking Corporation MBCA Bank Limited CAIXA Economica Federal DBS Bank Ltd Standard Bank Group Limited China Everbright Bank Co Ltd Chunghwa Post Co Ltd Korea Finance Corporation BOC Hong Kong (Holdings) Ltd Industrial Bank Co Ltd Oversea-Chinese Banking Corporation Limited OCBC Cathay Financial Holdings Co Ltd Industrial Bank of Korea Hana Financial Group HUA XIA Bank Co., Limited Korea Development Bank Export-Import Bank of China – China Eximbank Taiwan Financial Holdings ICICI Bank Limited Hang Seng Bank Ltd Firstr and Limited

Country

Total assets (mil USD)

Operating revenue (mil USD)

Employees

China China China China China China Brazil China Brazil India China Brazil Zimbabwe Rep. of Korea

1,725,938.00 1,409,355.00 1,300,868.00 1,281,183.00 664,869.00 484,628.00 407,118.00 395,019.00 353,920.00 321,290.00 302,853.00 290,866.00 255,608.00 244,658.00

45,149.00 39,373.00 32,552.00 32,760.00 11,267.00 11,947.00 29,060.00 3,695.00 38,072.00 14,894.00 7,541.00 23,621.00 186,114.00 6,822.00

389,827.00 301,537.00 441,144.00 204,818.00 6,711.00 79,122.00 n.a. n.a. n.a. n.a. 40,340.00 n.a. n.a. n.a.

China China

242,644.00 237,649.00

4,377.00 5,337.00

59,519.00 21,877.00

Rep. of Korea Rep. of Korea

233,066.00 225,134.00

9,615.00 7,653.00

Brazil Rep. of Korea China Zimbabwe Brazil Singapore South Africa China Taiwan Rep. of Korea Hong Kong China

222,152.00 218,994.00 208,897.00 205,025.00 196,410.00 184,313.00 181,545.00 175,404.00 166,370.00 157,571.00 156,378.00 149,372.00

5,425.00 15,264.00 5,442.00 170,634.00 12,120.00 4,705.00 9,799.00 3,553.00 1,853.00 72.00 3,360.00 4,353.00

n.a. n.a. 26,039.00 n.a. n.a. n.a. 51,411.00 19,217.00 n.a. n.a. n.a. 19,536.00

Singapore Taiwan Rep. of Korea Rep. of Korea China Rep. of Korea

138,449.00 134,269.00 132,684.00 129,084.00 123,839.00 119,493.00

3,400.00 2,192.00 3,731.00 5,022.00 2,511.00 2,715.00

19,561.00 43,340.00 n.a. n.a. 12,301.00 n.a.

China Taiwan India Hong Kong South Africa

116,010.00 113,378.00 108,419.00 106,501.00 105,381.00

866.00 790.00 8,594.00 2,684.00 5,685.00

1,503.00 8,675.00 n.a. 9,342.00 n.a. (continued)

n.a. n.a.

Company name Malayan Banking Berhad – Maybank ABSA Group Limited Nedbank Group Limited National Bank of Egypt Grupo Financiero Banorte Investec Limited Grupo AVAL Acciones Y Valores SA Banco De Chile Bancolombia

Country Malaysia South Africa South Africa Egypt Mexico South Africa Colombia Chile Colombia

Emerging economies

Total assets (mil USD)

Operating revenue (mil USD)

Employees

103,361.00 97,255.00 77,331.00 46,384.00 43,430.00 37,778.00 34,693.00 34,480.00 30,263.00

3,951.00 5,684.00 3,822.00 1,034.00 2,478.00 1,274.00 2,499.00 2,007.00 2,783.00

n.a. 36,150.00 27,037.00 n.a. n.a. n.a. n.a. n.a. n.a.

Source: Bloomberg database

The home-region focus of international business activity has been discussed by Rugman and Verbeke (2004, 2005), Dunning et al. (2007), Asmussen (2009) and Wolf et al. (2012). Increasing performance through international expansion in proximate foreign markets (Delios, 2011) also supports this hypothesis. Empirical applications by Ahearne et al. (2000), Choi et al. (2002), Portes and Rey (1999) and Wei and Wu (2001) show that distance influences international capital flows and investment decisions of banks in a similar way as it influences international trade. Buch and DeLong (2004) found that besides geographic proximity, sharing a common language or a common legal system are likely to lower the operation costs. Sethi and Elango (1999) demonstrate how the country of origin influences the decision of a firm to expand in countries with geographic or cultural proximity. More recently, Banalieva and Dhanaraj (2013) found empirical support to explain how technology is an advantage for home orientation in international expansion strategies. Table III illustrates the distribution of host regions for the affiliates of the largest financial groups. Geographic distance clearly has a major impact on the results. Companies from Asia have a dominant presence in Asia. For example, 54 percent of the affiliates of Chinese groups are in neighboring Asian sub-regions. 35 percent of the affiliates of groups from Singapore and Malaysia are established in their own region, i.e. South-East Asia. Foreign affiliates from Indian groups are located in the Indian Ocean region (Sri Lanka, Maldives and Mauritius). Similarly, 43 percent of the foreign affiliates of the Brazilian groups are in Latin America and 30 percent of South-African groups are in the South-African sub-region. The concept of psychic distance, used in numerous studies on the internationalization process, reflects managers’ perceptions of differences in business-relevant characteristics between the home and host countries (Brewer, 2007). The concept includes different stages of economic development (Chetty and Campbell-Hunt, 2004). Table III provides one example. Financial groups originating from the Republic of Korea, with a much higher level of economic development, are also, on average, more diversified. Their presence in Europe is explained by the presence of large industrial groups headquartered in the Republic of Korea. Psychic

199

Table I.

Table II. Internationalization of the largest financial groups from emerging countries by number of host countries, year 2010

Hang Seng Bank Ltd

Investec Limited

ICICI Bank Limited Malayan Banking Berhad – Maybank China Merchants Bank Co Ltd Cathay Financial Holdings Co Ltd Agricultural Bank of China Limited Bancolombia Standard Bank Group Limited

Shinhan Financial Group

Industrial & Commercial Bank of China – ICBC Woori Finance Holdings Co. Ltd

CAIXA Economica Federal Oversea-Chinese Banking Corporation Limited – OCBC State Bank of India Itausa-Investimentos Itau SA DBS Bank Ltd Firstrand Limited

Company name

Rep. of Korea Rep. of Korea India Malaysia China Taiwan China Colombia South Africa South Africa Hong Kong

321,290.00 353,920.00 184,313.00 105,381.00

India Brazil Singapore South Africa China

106,501.00

37,778.00

108,419.00 103,361.00 302,853.00 134,269.00 1,300,868.00 30,263.00 181,545.00

218,994.00

244,658.00

1,725,938.00

196,410.00 138,449.00

Country

Total assets mil USD

Brazil Singapore

Groups ranked by the number of host countries

22

14

17 66 43 11 4 10 13

17

11

986

21 61 45 39

40 47

Domestic affiliates

8

7

6 9 60 4 5 8 8

6

7

21

17 33 40 23

32 47

30

21

23 75 103 15 9 18 21

23

18

1,007

38 94 85 62

72 94

26.67

33.33

26.09 12.00 58.25 26.67 55.56 44.44 38.10

26.09

38.89

2.09

44.74 35.11 47.06 37.10

44.44 50.00

D&B 2010/2011 Foreign II affiliates Total index

3

3

5 5 4 4 3 3 3

6

6

8

13 10 8 8

17 15

10.00

11.42 7.75 15.26 10.33 12.91 11.55 10.69

12.51

15.28

4.08

24.12 18.74 19.40 17.23

27.49 27.39

GSI

8.94 (continued)

Host countries

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200

Country

Source: Dun & Bradstreet “Who owns Whom” database

Rep. of Korea Bank of Communications Co. Ltd China Nedbank Group Limited South Africa Banco Bradesco SA Brazil Grupo Financiero Banorte Mexico National Bank of Egypt Egypt BOC Hong Kong (Holdings) Ltd Hong Kong Grupo Aval Acciones Y Valores SA Colombia Hana Financial Group Rep. of Korea National Agricultural Cooperative Federation Rep. of – NACF Korea ABSA Group Limited South Africa

KB Financial Group, Inc

Company name

Groups ranked by the number of host countries

9 8 7 34 51 2 5 10 10 14 16

484,628.00 77,331.00 290,866.00 43,430.00 46,384.00 156,378.00 34,693.00 129,084.00 233,066.00 97,255.00

Domestic affiliates

225,134.00

Total assets mil USD

1

1

2 3 1 1 2 1

9 3

3

17

15

36 54 3 6 12 11

17 10

12

5.88

6.67

5.56 5.56 33.33 16.67 16.67 9.09

52.94 30.00

25.00

D&B 2010/2011 Foreign II affiliates Total index

GSI 8.66 10.29 7.75 3.33 3.33 5.77 4.08 4.08 3.02 2.58 2.43

Host countries 3 2 2 2 2 1 1 1 1 1 1

Emerging economies

201

Table II.

Table III. Breakdown of the location of foreign affiliates by host regions (in percent) 27 16 35 18 0 0

27 23 18 0 0 8

0 0

18

0 0

0

0 0

0

4 0

5

South Japan Asia (%) (%)

7 23

11

6 11

9

UK (%)

Note: In parentheses is the number of groups in the calculated average value Source: Author’s calculations

Asia China, Hong Kong and Taiwan (7) Korea (Rep. of) (5) Singapore and Malaysia (3) India (2) South America Brazil (3) South Africa (5)

South-East Asia (%)

22 23

0

26 11

9

14 8

18

13 7

14

43 0

0

0 0

0

Latin America (%)

14 0

6

6 11

9

Caribbean islands (%)

202

Home country

Eastern Asia (%)

Host region North Other America Europe (%) (%)

0 30

11

0 0

0

0 8

18

6 7

0

South Other Africa (%) (%)

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distance also includes culture, religion and legal and political history (Dow, 2000; Dow and Karunaratna, 2006). Therefore, groups from South Africa are located in the UK and in The Netherlands for economic, cultural and historical reasons. At the same time, financial services have also succumbed to the general trend towards global markets and risks. Globalization, defined as the increasing liberalization and integration of economies in terms of trade and investment, has transformed financial and capital markets during the past two decades (Hausler, 2002). Improvements in information processing, telecommunications, and financial technologies have allowed the possibility of banks’ and other financial institutions’ management to carry out their activities in the various financial markets throughout the world simultaneously. Banks, like other sectors of the economy, must compete with each other globally as part of a broader process of political and economic integration (Leyshon and Pollard, 2000). Ranking the most preferred locations (countries) in terms of the number of foreign affiliates of financial groups shows that the world’s largest financial cities are at the top of the list. UK (London) is the most popular location, followed by Hong Kong and the USA. The limited number of most favored host countries suggests that the financial firms from emerging countries, and the commercial banking industry in particular, currently remain far from globalized. Conclusion This paper documents the relative importance of the largest financial firms in emerging countries and examines where financial firms are expanding their operations. We found that the majority of the largest institutions are expanding their businesses in the home region where they are headquartered. This result supports the home-region preference hypothesis of large firms along with the empirical evidence that institutions are regional, not global. This finding is also in line with previous results. For example, Berger et al. (2003) demonstrated that the financial services industry in general and the commercial banking industry in particular, currently remain far from globalized. Rugman and Brain (2004) found that most of the largest banks are heavily dependent on their home region. A shortcoming of this analysis is that other possible determinants of FDI in the financial sector like the relative economic growth of markets or the differential in the cost of capital in the host and home country are not investigated. Other factors like the role of governance in host countries may have a strong impact on the determinants of the internationalization process. Also, emerging markets have as many differences between them as they do with developed markets. Despite these differences, emerging markets do have several similarities including the potential for sustained growth and a need to develop their financial systems in the long term. Emerging markets are typically very different in terms of the health of their banking systems; however, their banks are being forced to internationalize and to make choices about the allocation of capital between countries and activities in order to compete with their counterparts from developed countries. It is expected that their DOI will increase, but there is also a danger that mandatory requirements for capital in the “home” markets of banks located in developed economies will lead to a reduction in capital allocation to other countries.

Emerging economies

203

MBR 21,2

Notes 1. The empirical literature on the determinants of bank mergers generally supports the hypothesis that deregulation has a substantial impact on merger decisions ( Jayaratne and Strahan, 1998; Saunders, 1999). Berger et al. (2000) surveyed hundreds of papers on the causes and consequences of consolidation, covering the topics of efficiency, market power, managerial and government motives and consequences.

204

2. For recent work based on multidimensional measures of internationalization see, for instance, Fisch and Oesterle (2003), Goerzen and Beamish (2003), UNCTAD (2007), Sommer (2009), Rugman and Oh (2011). 3. UNCTAD (2006) defined the Geographical Spread Index (GSI) as the square root of the Internationalization Index (the number of foreign affiliates divided by the total number of affiliates) multiplied by the number of host countries. References Ahearne, A., Griever, W. and Warnock, F. (2000), “Information costs and home bias: an analysis of US holdings of foreign equities”, International Finance Discussion Paper, 691, Federal Reserve Board, Washington, DC. Asmussen, C.G. (2009), “Local, regional or global: quantifying MNEs geographic scope”, Journal of International Business Studies, Vol. 40 No. 7, pp. 1192-1205. Banalieva, E.R. and Dhanaraj, C. (2013), “Home-region orientation in international expansion strategies”, Journal of International Business Studies, Vol. 44 No. 2, pp. 89-116. Bartlett, C.A. and Ghoshal, S. (1989), Managing Across Borders: The Transnational Solution, Harvard Business School Press, Boston, MA. Berger, A.N., Dai, Q., Ongena, S. and Smith, D.C. (2003), “To what extent will the banking industry be globalized? A study of bank nationality and reach in 20 European nations”, Journal of Banking and Finance, Vol. 27 No. 3, pp. 383-415. Berger, A.N., DeYoung, R., Genay, H. and Udell, G.F. (2000), “Globalization of financial institutions: evidence from cross-border banking performance”, Finance and Economics Discussion Series 2000-2004, Board of Governors of the Federal Reserve System, Washington, DC. BIS (2001), Report on Consolidation in the Financial Sector, Bank of International Settlements, Group of Ten, January, available at: www.bis.org Brewer, P. (2007), “Psychic distance and Australian export market selection”, Australian Journal of Management, Vol. 32 No. 1, pp. 73-94. Buch, C.M. and DeLong, G. (2004), “Cross-border bank mergers: what lures the rare animal?”, Journal of Banking and Finance, Vol. 28 No. 9, pp. 2077-2102. Chetty, S. and Campbell-Hunt, C. (2004), “A strategic approach to internationalization: a traditional versus a ‘born-global’ approach”, Journal of International Marketing, Vol. 12 No. 1, pp. 57-81. Choi, S.-R., Park, D. and Tschoegl, A.E. (2002), “Banks and the world’s major banking centers 2000”, Working Paper No. 02/36, Wharton School of the University of Pennsylvania, Philadelphia, PA. Delios, A. (2011), “Experience and a firm’s performance in foreign markets: a commentary essay”, Journal of Business Research, Vol. 64 No. 2, pp. 227-229. Delios, A. and Beamish, P.W. (2005), “Regional and global strategies of Japanese firms”, Management International Review, Vol. 44 No. 1, pp. 19-36.

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