A Theoretical Perspective On the Location of Banking Fdi

Zusammenfassung

---

The paper models location of banking FDI under volatile demand conditions. In the model, information arrives either through passage of time or though presence in the foreign market. The model is also extended to analyze strategic and simultaneous FDI. The results show that market entry evolves from deferring FDI to partial FDI and only then to full FDI. The switch to partial FDI occurs faster when banks can gather information only through a presence in the foreign market. The switch to partial FDI does not occur when immediate full FDI enables more efficient production. The results are at odds with models developed for predictable demand conditions in which banks switch straight from deferring FDI to full FDI. The paper generates an integrated view of the location of banking FDI.

Siehe den Gesamtinhalt dieses Dokumentes

Auszug

---

A Theoretical Perspective On the Location of Banking Fdi

Introduction

Internalization theory applied to me banking firm is concerned with why banks expand across borders and how they do so. The theory assumes that source country banks develop resources in the form of information, technology, capital or managerial expertise in the domestic market that can be used in the foreign market at a low marginal cost (Casson 1990, Esperanca/Gulamhussen 2001, Qian/Delios 2008). High costs of transacting these ownership advantages inhibit the emergence of licensing, franchising, and joint venture arrangements. Domestic banks thus appropriate greater rent by undertaking whollyowned FDI rather than using the aforementioned entry modes (Tschoegl 1987). Banks may be attracted to specific foreign markets due to regulatory factors as well as the size of the local banking market measured, for example, as the presence of domestic and local customers (Gray/Gray 1981, Cho 1986, Nigh/Cho/Krishnan 1986, Sabi 1988).

Banking activity is location-specific in the sense that presence in the foreign market is required for information production and signaling and to monitor domestic and local customers, reduce transaction costs and undertake portfolio optimization and asset transformation (Grubel 1977). For example, the need to monitor customers more closely than can be done from the headquarters provides an incentive to establish a direct overseas presence although these foreign offices will probably still face somewhat of a disadvantage relative to their local competitors in this area (Diamond 1984); banks with a diversified customer base will be able to reduce transaction costs by pooling customers with offsetting needs (Benston/Smith 1976); banks that excel in producing value-added products develop expertise in portfolio and asset transformation (Diamond/Dybvig 1983); banks that specialize in syndicated loans, foreign exchange, Eurobond issues and derivatives develop signaling related advantages (Campbell/Kracaw 1980).

The location of FDI involves a comparison between exporting to the host country (through correspondent banking) and ma...

Siehe den Gesamtinhalt dieses Dokumentes

---