Materiales

discussion will review these theories.

3.2.2.1. Macro and meso-level studies of bank internationalization

Studies at macro-level draw predominately from international trade and international investment theories to explain the location of foreign banking investment. Some of these studies try to apply general internationalization

1 A multinational bank (MNB) supplies banking services through at least one office located outside the country in which it is incorporated (Viannopulos 1983).

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Table3.1.Mainhypothesesontheinternationalizationofbanking

theories. Aliber (1976) for example, applying his own theory of foreign direct investment (Aliber 1970), has argued that location advantages are created by the differences in loan-deposit spreads across countries, caused by the existence of barriers to trade in money. Some other studies attempt to explain particular banking phenomena. For example, Brimmer and Dahl (1975) have argued that as home clients expand overseas, banks follow them.

The bank objective is to provide clients with the banking services required and to prevent foreign banks from servicing them. Banks that fail to serve their multinational clients adequately can lose advantage both abroad and at home. The "follow the client" motive can explain the second wave of U.S. MNB expansion between 1959 and 1963 (Robinson 1972) .

Furthermore, Kelly (1977), trying to explain the major investment of US banks in Europe in the 1960s and early 1970s, has contended that government regulation on capital flows was the main motive in the selection of the foreign location.

Overall, national regulation is hypothesised to be the main factor stimulating FDI, to the point that Lee (1974) has claimed that "the internationalization of banking could be solely explained by regulation". However, empirical work has demonstrated that besides regulation, other factors affect the selection of location, such as volume of trade (Goldberg and Saunders 1980; Brealey and Kaplanis 1996; Fisher and Molyneux 1996), market size

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(Terrel 1979; Goldberg and Johnson 1990), exchange rates (Khoury 1979; Goldberg and Saunders 1980; 1981), and interest rate (Khoury 1979; Goldberg and Saunders 1980).

For example, Goldberg and Saunders (1980), studying the growth of U.S. banks in the U.K. from 1961 to 1978, found that U.S. trade, Eurodollar rate and the exchange rate were significantly affecting bank growth. This study drew on data published by the Bank of England and the Federal Reserve Bank in Washington.

In general, most of the studies have explained U.S bank expansion overseas by employing aggregate data published from governmental organizations. The emphasis on U.S. banking is attributed to data availability and the scale of foreign expansion by U.S. banks during the 1960s and early 1970s.

Meso-level studies, concerned with the creation of the MNB, have drawn on industrial organization theories by applying either a market power or a market imperfection approach. Grubel (1977), applying the Hymer-Kindleberger- Caves theory, has argued that the existence of surplus entrepreneurial resources such as marketing know-how, technology and commercial intelligence are instrumental in facilitating the internationalization of banking. He has argued that such advantage is necessary for the MNB to compete effectively in a foreign market. This is because the foreign entrant must differentiate its products, and can use existing knowledge residing at head-office at

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minimum cost.

Rugman (1981), takes a different perspective, founded on the proprietary nature of some of the ownership advantages of the bank. Realising that international banking transactions involve significant transaction costs due to imperfections in foreign financial markets, he has argued that the MNB acts as a vehicle for the internalization of these imperfections. He stresses the information-intensive nature of banking, arguing that information skills which are embodied in a bank can be used at marginal cost in other markets. Additionally, competitors cannot access such information through open market transactions.

Neither of the meso-level explanations discussed above can sufficiently explain the whole phenomenon of the creation of the multinational bank. Rugman (1981) has not recognized other ownership advantages additionally to information. MNBs can internalize additional resources such as technology, management and marketing skills (Yiannopulos 1983). As such, the model cannot adequately explain the different degrees of internationalization among banks from the same country.

Alternatively, Grubel (1977) has not acknowledged the benefits arising from the internalization of ownership advantages. As a result, he has not explained why a bank should establish foreign operations rather than transacting in open markets.

A combination of the two hypotheses could explain the

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formation of the M N B , but this would not be able to justify the selection of the foreign location. Consequently, a complete explanation of the internationalization of banking has to combine both meso and macro theories.

Unfortunately, there are no studies, theoretical or empirical which attempt to build on the application of internalization or market power theories in banking. This can be explained by the emphasis placed on Dunning's eclectic theory which is a more complete explanation of the internationalization of the MNB.

Neither Macro nor meso theories in isolation can adequately explain the internationalization of banking.

This is because each stream concentrates on different questions. To explain bank internationalization, the advantages of the foreign location and the advantages of the bank as compared to local competition must be evaluated jointly. The existence of imperfections in a market, for example, does not necessarily provide incentives to a bank to establish operations there. A bank will choose that market only when the market facilitates the exploitation of a bank's ownership advantages to a greater extent, than do other foreign markets.

Similarly, macro-level studies can identify sources of location-related advantages of the MNB. However, since the theories cannot explain why the firm should prefer international production over cross-border transactions, they do not explain the creation of the MNB.

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Empirical research on bank internationalization has primarily studied the effects of location-related factors on foreign bank expansion. The focus on location is attributed to the ease with which aggregate data on banking could be obtained compared to data on individual banks or groups of banks.

The foregoing discussion suggests that most studies of bank foreign activity applied theories of the internationalization of the firm to explain the selection of location or the decision to invest. Each explanation of the internationalization of banking, however is focused on the distinct characteristics of the industry such as its information-intensive nature and its susceptibility to regulation. Furthermore, some studies aim to explain particular phenomena associated with the internationalization of banking, such as the expansion of US banks in Europe during the 1960s and 1970s.

The foregoing discussion has also indicated that no general theory was developed up to the early 1980s to explain completely the FDI phenomenon, but rather, that there are many diverse hypotheses accounting for distinct patterns of FDI, or providing partial explanations of the formation of the MNB.

However, the application of Dunning's theory, which followed the macro and meso-level studies, is a more comprehensive explanation of foreign bank activity. The lack of further theoretical development and the focus of

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empirical studies on the different types of advantages is an indication of this.

The following discussion will focus on Dunning's eclectic theory.

3.2.2.2. Application of Dunning's sclactic theory in