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Japanese Banks' International Expansion, 1980–1998 Journal of International Business Studies (2008) 39, 231–248 & 2008 Academy of International Business All rights reserved 0047-2506 $30.00 www.jibs.net Internalization and experience: Japanese banks’ international expansion, 1980–1998 1 Lihong Qian and Abstract Andrew Delios2 We use an interdisciplinary approach to investigate multinational banks’ foreign activities. We bridge core concepts from the stages theory of 1Department of Business Administration, internationalization to internalization theory, to extend the literature on the University of Illinois at Urbana-Champaign, defensive expansion hypothesis. Unlike the primarily aggregate levels of Champaign, IL, USA; 2Department of Business analysis employed in previous research on multinational banking, we utilize a Policy, National University of Singapore, firm-level analysis of the internationalization experiences of 21 Japanese banks Singapore in the period 1980–1998. We find that banks undertake foreign direct investment to secure internalization benefits by following their existing clients, Correspondence: and to achieve economies of scale in the application of their intangible assets in Lihong Qian, Department of Business international markets. The magnitude of these relationships, however, is Administration, University of Illinois at contingent upon the level of a bank’s experience in the host countries. Urbana-Champaign, 350 Wohlers Hall, 1206 S. 6th St, Champaign, IL 61820, USA. Consistent with predictions from internationalization theory, we find that the Tel: þ 1 812 391 0206; motivations for international expansion can change over time. Fax: þ 1 217 344 2810; Journal of International Business Studies (2008) 39, 231–248. E-mail: [email protected] doi:10.1057/palgrave.jibs.8400317 Keywords: internalization theory; defensive expansion; follow-the-client; multinational banking; Japanese banks INTRODUCTION Multinational banks (MNBs) are distinct from other multinational firms, particularly those in the manufacturing sector, in terms of the nature of their product offerings, the information intensity embedded in their products (Rugman, 1981), and the ways in which they undertake their internationalization (Boddewyn, Halbrich, & Perry, 1986; Contractor & Kundu, 1998; Li & Guisinger, 1992). The pattern of foreign direct investment (FDI) in the banking industry differs substantially from that in other industries (Graham & Krugman, 1994). Accordingly, research on the FDI activities of multinational banks has been developed from a distinct conceptual base. Specifically, the ‘‘defensive expansion’’ or the ‘‘follow-the-client’’ hypothesis has been a major argument in theorizing on bank FDI (Gray & Gray, 1981; Williams, 2002). In addition to this conceptual work, substantial empirical work has been done on MNBs to address questions such as: ‘‘What are the motivations for the foreign expansion of MNBs?’’ (Buch, 2003; Hultman & McGee, 1989); ‘‘What factors determine an Received: 21 June 2004 Revised: 13 December 2006 MNB’s choice of foreign market?’’ (Miller & Parkhe, 1998; Nigh, Cho, Accepted: 14 March 2007 & Krishnan, 1986); and ‘‘What influences the entry mode choice of Online publication date: 20 September 2007 an MNB?’’ (Ball & Tschoegl, 1982; Ursacki & Vertinsky, 1992). Internalization and experience Lihong Qian and Andrew Delios 232 In this study, we explore the first two of these an MNB can internationalize not only to follow its three research questions. We address the issues of clients, but also to seek new market opportunities. ‘‘why’’ and ‘‘where’’ in an MNB’s international This conjecture accords with the beachhead argu- expansion. We use an internalization theory frame- ment of Fieleke (1977). In this argument, an MNB work, as augmented by ideas drawn from a sequen- follows its client to form its overseas operation, tial learning and entry perspective (Chang, 1995; which then acts as a beachhead from which the Johanson & Vahlne, 1977), to explore whether MNB can expand to compete with incumbent MNBs, like other service firms, have a shift in their banks in the host country. If an MNB incorpo- motive for international expansion from client rates both ‘‘follow-the-client’’ and beachhead servicing to local market expansion, as learning approaches in its international expansion, then it and experience are accumulated in a host country could initially be following its clients to subse- (Erramilli, 1991). We thus extend the internalization quently gain access to host country non-bank theory approach to multinational banking to con- clients. In this sense there can be dynamic aspects sider how a bank’s experience in operating in a host to the motives underlying an MNB’s international country alters the strength of other internaliza- expansion, which could help address the aforemen- tion-theory-related influences on its international tioned inconsistencies in empirical evidence on the expansion. ‘‘follow-the-client’’ hypothesis. Unlike much of the existing literature on the Aside from the debate about whether the international expansion of multinational banks, dynamic beachhead argument or the static defen- which has used aggregate cross-country flows of sive expansion argument more accurately explains bank-related FDI as the empirical setting, we utilize the internationalization pattern of MNBs, it also firm-level data on the foreign expansion of 21 remains at question which theoretical framework Japanese banks into 36 countries in the period best explains multinational banking. Several theo- 1980–1998 as the setting to test our hypotheses. retical frameworks have been employed to explain banking FDI, including the eclectic paradigm (Miller BACKGROUND & Parkhe, 1998; Moshirian, 2001; Moshirian & Client-following behavior tends to have a greater Van der Laan, 1998; Yannopoulos, 1983) and incidence of occurrence and a greater importance internalization theory (Williams, 1997). Among in service industries than in manufacturing indus- other perspectives, Lewis and Davis (1987) looked tries. In research on multinational banking this at the risk management of multinational banking ‘‘follow-the-client’’ or ‘‘defensive expansion’’ argu- in terms of the reduction of transaction costs. ment has been widely applied and tested (for a Grubel (1977) argued that multinational banks comprehensive review, see Williams, 2002). applied surplus entrepreneurial skills to FDI. Across Researchers exploring this hypothesis have found a these perspectives, the eclectic paradigm and inter- positive relationship between levels of non-bank FDI nalization theory have been the most widely (FDI made in all sectors but the banking sector) and applied (Williams, 1997, 2002). bank FDI (Buch, 2000; Li & Guisinger, 1992; Miller & Both the eclectic paradigm and internalization Parkhe, 1998; Moshirian, 2001; Yamori, 1997, 1998). theory, however, take a static approach to explain the That said, not all evidence supports the defensive internationalization of banks. They look at the expansion argument. Seth and Quijano (1993: 371) factors – internalization advantages in the case of juxtaposed data on the liabilities of US affiliates of internalization theory, and the ownership, internali- Japanese non-bank firms and data on the loans of zation and location advantages in the case of the Japanese branches and agencies in the US, and found eclectic paradigm – that exist prior to a bank’s initial that ‘‘home country relationships no longer explain foreign expansion. In other words, capabilities or the increased presence of the Japanese in the US assets that are developed after a bank’s initial foreign banking market.’’ Seth, Nolle, and Mohanty (1998) entries are not taken into account when examining found that banks from four out of the six countries subsequent expansions, yet such post-entry develop- in their sample allocated a majority of their loans to ments in experience and capabilities can influence non-home-country borrowers. In other words, a the subsequent expansion behavior of manufactur- bank’s foreign expansion could be independent of ing and service firms alike (Chang, 1995; Erramilli, the intensity of non-bank FDI. 1991; Johanson & Vahlne, 1977). Observations such as those in Seth and Quijano At an empirical level, most research has investi- (1993) and Seth et al. (1998) highlight the idea that gated the defensive expansion hypothesis using Journal of International Business Studies Internalization and experience Lihong Qian and Andrew Delios 233 aggregate data such as the total foreign bank assets perspective is a behavioral approach that incorpo- in a country or the total volume of non-bank FDI rates an organizational learning rationale. flowing from one country to another. Hypotheses By utilizing a firm-level analysis, we can identify a are usually tested by examining the association bank’s clients and provide a more definitive test of between aggregate-level measures. As examples, the defensive expansion hypothesis. Finally, by Hultman and McGee (1989) looked at the relation- looking specifically at the characteristics of a bank, ship between Japanese shares of US banking assets including its experience profile, we can identify and the annual change in Japanese FDI into the US; whether and how sequential learning enables a Thornton (1992) compared total worldwide Japa- bank to make its international investment deci- nese FDI (scaled by Japanese GDP) with Japanese sions independent of serving its clients in its host bank assets in London; and Yamori (1998) investi- country markets. gated the
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