Reverse Efficiency Spillovers from Host Country Banks to Foreign Banks: Evidence from Emerging Market Bank Subsidiaries in Developed Markets.
| Verfasser | Yuan, Xiaohui |
| Posten | RESEARCH ARTICLE |
[Text incomplete in original source.] which stem from banks' comparative advantages in product design and resource endowments, is the major cause of multinational banking; the eclectic theory approach proposes ownership, location and internalization advantages facilitate the emergence of multinational banks (Gray & Gray, 1981; Jones, 1990). Additionally, Goldberg and Saunders (1980) find that the regulatory change, i.e. the Internationa] Banking Act of 1978, leads to the early agglomeration of U.S. banks in London.
Essentially, banks use agent banks, representative offices, branches and subsidiaries to participate and compete in the global market (Buch, 2000; Hurduc & Nitu, 2011). Among them, branches and representative offices are more widely used, especially at the early stage of internationalization, owing to the advantage of lowcost capital resources and relatively lax regulations. However, bank subsidiaries, as an independent legal identity, usually have full licenses to provide diversified financial services and help achieve market penetration in local markets (Hurduc & Nitu. 2011). Therefore, multinational banks prefer using the organizational form of subsidiaries for long-term considerations. Scholars also examine the determinants of entry strategies of multinational banks (Lehner, 2009). For example, Buch and Lipponer (2007) find the larger the host country market, the more likely the bank is to conduct direct investments rather than cross-border lending. Beermann (2007) finds that efficient banks tend to use cross-border acquisitions rather than greenfield.
Within research regarding the location choice, extant studies indicate multinational banks tend to use "follow-the-customer" strategy which means the larger the home-based business presence in the host country, the more the service provider (banks) should invest in that country (Brealey & Kaplanis, 1996; Buch, 2000; Kindleberger, 1983; Nigh et al., 1986; Yamori, 1998). For example, Nigh et al. (1986) finds the strong positive relationship between U.S. FDI activities and U.S. banking service in the same host country as the customers would establish new banking networks to replace existing relations with home country banks if domestic banks do not follow the clients abroad. Other studies find banks consider "follow-the-peer" strategy which depicts that the probability of achieving a presence in a given country is influenced by the location choices of other banks (He & Yeung, 2011). Additionally, multinational banks locate their entities in cities with more banking opportunities and informational externalities (Chamley, 2003). The agglomeration of foreign banks in financial centers, such as London, New York, Frankfurt and Tokyo, is likely the technological firms clustering in Silicon Valley (Choi et al., 1986; Vicente & Suire, 2007). Financial hubs help multinational banks access to large talent pools, capital flows, financial information and sophisticated financial products (Glaeser, 1999), thereby facilitating knowledge flows and efficiency improvement. Moreover, scholars examine the determinants of bank performance (Kosmidou et al., 2007). Clare et al. (2013) further discusses the continuation of international banking activity in London and finds it is influenced by certain bank characteristics, domestic market-related advantages and global market conditions. Some scholars even explore how expansion strategies influence the performance of parent banks. They find the level of multinationality (breadth and depth) has a positive influence on parent banks" performance (Liang et al., 2013).
Despite the above abundant research in bank internationalization, little is known about the post-entry efficiency of multinational banks. Research on the efficiency of multinational banks has primarily focused on the comparison between foreignowned banks and local banks (Berger, 2007; Edward Chang et al., 1998). Scholars find that foreign-owned firms are less efficient than local banks in developed economies, with the opposite occurring in developing economies (Berger et al., 2000; DeYoung & Nolle, 1996). Though scholars attempt to discuss the productivity and technology transfer issues in the financial sector by using the language of efficiency, studies only examine how foreign banks stimulate the domestic competitions and enhance the efficiency of domestic banks (Deng et al., 2011; Levine, 1996; Walter & Gray, 1983). Therefore, it is vital for banks from less-developed countries to learn from local developed-market banks during foreign spreads. Specifically, the issue on the efficiency spillover effects from local banks to foreign banks deserves further discussing.
Moreover, since the pioneering study of Caves (1974), scholars have mainly examine FDI spillover effects including total factor productivity (Blake et al., 2009; Javorcik, 2004), exporting performance (Anwar & Nguyen, 2011; Kneller & Pisu, 2007), innovation (Liu & Zou, 2008; Liu et al., 2010), and firms' survival (Chang & Xu, 2008) from developed-market firms to local emerging-market firms (Xiao & Park, 2018), less is known about how emerging economies using outward FDI to obtain knowledge spillovers from developed-market firms. Given the insufficient attention on the post-entry efficiency of bank subsidiaries, our paper examines how foreign bank subsidiaries benefit from local banks by means of foreign entry, that is reverse FDI spillover.
2.2 Mechanisms of Reverse FDI Spillovers
An organizational learning process can improve efficiency by combining external and internal knowledge (Cohen & Levinthal, 1990; Li-Ying et al., 2016). Alongside the absorptive capacity of external knowledge (Cohen & Levinthal, 1990; Li-Ying et al., 2016), the amount of external knowledge also influences the organizational learning effect. As a source of external knowledge (Jiang et al., 2019), the quality of an FDI spillover has a direct impact on firm efficiency.
Positive spillovers usually occur when recipient firms observe and imitate frontier firms through such ways as the demonstration effect, supply-chain networks, and employee turnovers (Blomstrom & Kokko, 1998; Spencer, 2008). Prior literature identifies two critical factors that trigger positive spillovers: technological gap and geographic proximity (Findlay, 1978; Funk, 2014). The relative backwardness of recipient firms in the areas of management, technology, and talent, can be considered technological gaps, which constitute a critical condition for efficiency spillovers (Findlay, 1978). The greater the technological distance between the recipient firm and the frontier firm, the more opportunities available for recipient firms to gain access to advanced new technologies and managerial expertise (Girma, 2005). A technological gap can also enhance the absorptive capacity of laggard firms by obtaining human capital and technological know-how from frontier firms (Glass & Saggi, 1998).
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2.3.2 Negative Spillovers/Competition from Peer Emerging-Market Banks
EMMNB subsidiaries would receive negative competition effects from peer same-home-country banks because of the intense competition in the similar target market. Prior literature indicates international banks tend to use "follow-thecustomer" (Buch, 2000; Kindleberger, 1983) or "follow-the-peer" (He & Yeung, 2011; Henisz & Delios, 2001) strategies when choosing foreign locations at the early stage of internationalization. For example, Brealey and Kaplanis (1996) finds a positive relationship between the pattern of bank locations and foreign trades. Chamley (2003) finds multinational banks tend to follow their peers to locate representative offices or branches in cities with informational externalities and more banking opportunities. These findings suggest international bank subsidiaries, especially those from the same home country, tend to congregate in the similar overseas regions and compete for overlapped market segments (Vicente & Suire, 2007). Based on Chen (1996), a high level of market commonality would provoke fierce retaliation once an attack has been launched. Baum and Mezias (1992) also find firms located in the same region stimulate more intense competition thereby reducing the chance of survival. Besides, firms located in the same region are constrained by the same subnational institutional environments which would force them to adopt similar market strategies to obtain legitimacy or better performance (DiMaggio & Powell, 1983). Moreover, at the early stage of internationalization, emerging market banks usually exhibit homogeneous features on product structures to compete for the same customer resources, since the revenue largely depends on the lending business on the customers from the same home country (Nigh et al., 1986).
EMMNBs subsidiaries from the same home country share a high level of resource similarity thereby invoking competition among competitors. As is known to all, the breadth, depth, and efficiency of emerging markets are not as developed as those of developed markets (OECD, 2018; World Economic Forum, 2012), thus resources from parent banks may be insufficient for emerging-market subsidiaries to survive and prosper in developed markets, not to mention generating meaningful knowledge spillovers among each other. Besides, firms make strategic choices based on their resource endowments which means firms with similar resource profiles are more likely to adopt similar market strategies and develop similar competitive capabilities (Collis, 1991; Teece et al., 1997). According to Porter (1980), firms who adopt same market strategies are positioned in the same strategic group, in which the intense competition arise if firms have a higher level of resource similarity.
To summarize we conjecture that when emerging-market banks invest into developed markets, the level of both resource similarity and market commonality among emerging-market banks with...
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