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Impact of Internationalization on Company Performance

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Increased deregulation, cross-border activities of non-financial companies and improved information communications technology led to an increased consolidation of financial institutions across borders. Commercial banking sector in particular, have witnessed tremendous amount of cross-border bank merger and acquisitions' (M&A's) deals throughout the recent years. While globalization has accelerated cross-border merger activities around the world, another global force recently has been creating a counterweight to cross-border deals. Concerns over nationalism, feelings of national security and protectionism have delayed several cross-border banking deals.

Basically, M&A's of these institutions results in Consolidation, Internationalization or Conglomeration. In this context,

Consolidation: It is a result of more concentrated banking systems, smaller number of larger firms. Ex: Consolidation of Bank of New York and hMellon in 2007 in USA.

Internationalization: It is evidenced by increasing number of banking and other financial institutions that operate across national borders. Ex: Citi Bank, HSBC etc., operating worldwide.

Conglomeration: Larger number of financial groups whose activities combine those of bank and non-bank financial firms. Ex: State Bank of India combining other State Banks for various activities in its umbrella in India.

Objective and Scope of the Project

The objective of this project is to understand the concept of internationalization and observe strategic patterns undertaken by various banks and evaluate the way it affected the performance of the organization. In this process, we consider exploring the following areas with a case study of a Canadian or US bank along with our study.

Introduction to Internationalization

After a relatively quiet period in 2001/2002, international mergers and acquisitions have picked up again. Since the 2003 mergers between Bank of America and FleetBoston, and JP Morgan Chase's acquisition of Bank One, speculations were fueled about comparable cross-border deals in the European banking market. JP Morgan Chase announced its purchase of London based Cazenove in October 2004, while Spanish Banco Santander bought British mortgage bank Abbey National for 12.5 billion euro in august 2004, the largest cross border acquisition since HSBC bought French CCF in 2001.

On the other hand, restructuring also took place. Credit Suisse announced in December 2004 that it would absorb First Boston, its global investment bank, into the parent organization to revive profits. After barely four years, ING sold the largest part of its German bank BHF to Sal Oppenheim while expanding its Internet banking activities.

These examples reflect the increased internationalized nature of banking competitions in three respects (Llewellyn, 1999).

Customers that have global financing opportunities are able to arbitrage between domestic, foreign banks and capital markets.
Banks are not restricted to business in their own country.
Regulatory entry barriers have lowered, making it easier for banks to locate in other countries.

In other words, many of the largest banks in the world have been struggling toward a new organizational model where terms as home market seem to become a by-product in a broader strategic vision. Swiss bank UBS, the fifth largest bank in the world measured by assets in 2000, has more than 80% of its assets outside Switzerland. Netherlands based bank ABN Amro owns a retail branch network in Brazil, 9,500 km from Amsterdam which constituted 15% of total profits in 2000. In 2003 the 30 largest banks held more than USD 7,586bn, or 39% of their assets, outside their home country.

Successes in international banking are few, failures have been common. One of the more spectacular failures was the acquisition of American Crocker Bank by British Midland Bank in 1981, costing the bank USD 1bn over the next five years and forcing its strategy to retreat on the British retail banking market. Midland was acquired by Hong Kong based bank HSBC in 1992, a bank who subsequently showed that internationalization can be a profitable activity.

Degree of Internationalization (DOI):

The extent to which a Bank exists and operates in the international markets away from its home market can be measured by a metric called ‘Degree of Internationalization' (DOI). Generally, it is measured in terms of the share of assets, revenues, profits, or employment that locates abroad.

Literature Review

The hypothesized positive relationship between performance and DOI goes back at least to Vernon (1971); many studies have followed. It is generally hypothesized that internationalization is good for firms and leads to better performance, for several reasons (Contractor, Kundu, and Hsu 2003; Dunning 1977, 1981).

Going international implies that firms can spread fixed costs, such as operating overhead and research and development (R&D) expenditures, through a greater scale and scope (Markusen 1984; Kobrin 1991). Internationalization allows firms to learn about domestic markets from their international market experience, thus improving performance (Kobrin 1991).
Operating in foreign jurisdictions allows firms to access factors at lower cost (Helpmann 1984; Porter 1990; Jung 1991). This is particularly true for instances of FDI and other modes of direct involvement in foreign markets.
Internationalization allows firms to cross-subsidize their domestic operations and provides greater opportunities for price discrimination and tax and price arbitrage.

Although theory implies a positive relationship, the empirical evidence of the effects of DOI on performance is mixed (Hsu and Boggs 2003). For example, Sullivan (1994) lists 17 studies that test the relationship between DOI and financial performance, six of which find a positive relationship and five negative. The remaining six find no relationship. This reflects the consensus in the literature that the empirical results are highly dependent on the sample, the measures of DOI, and the measures of performance used.

In addition to testing this link, the literature has moved in two distinct directions. First, to address a measurement issue, Sullivan (1994) attempts to more reliably measure the DOI of a firm by developing a novel index measure of internationalization that captures three of its attributes: Structural, Performance, and Attitudinal. As Ramaswamy, Kroeck, and Renforth (1996) show, there are several limitations to the empirical and theoretical underpinnings of Sullivan's work as the DOI is measured in uni-dimensional method.

There is also a growing literature focus on the shape of the relationship between DOI and performance. Contractor, Kundu, and Hsu (2003) list 15 studies that find the relationship between performance and DOI is linear: seven of the studies find a positive relationship, four a negative relationship and four no relationship. Two studies listed find a U-shaped relationship, and eight find an inverted U-shaped relationship. Contractor, Kundu, and Hsu (2003) and Lu and Beamish (2004) provide theoretical models for curvilinear relationships between DOI and performance.

By analyzing data for 125 multinationals, Kim, Hwang, and Burgers (1993) document the importance of global market diversification in the joint management of risk and return. The measures of global diversification capture the number of foreign markets being operated in, as well as the pattern of a firm's industries across those countries.

A small literature investigates the performance of Canadian banks. D'Souza and Lai (2004) estimate the effects of scope, scale, and concentration on Canada's six largest banks. They find that banks with greater concentration in their business lines are less efficient. Interestingly, for some model specifications, the effect of size on performance (as measured by return on equity) is negative. Using a different methodology, Allen and Liu (2005) estimate cost functions for Canadian banks and find that larger banks are more efficient. Neither study considers the impact of DOI on performance.

Walid Hejazi and Eric Santor tried to address this DOI & Performance realtionship by verifying the direction. i.e., weather DOI is driving superior performance or it is otherwise around. They also brought the risk factor of the country (in which the bank is venturing) into the equation and found that there is a weak but significant positive relationship between DOI & Performance.

Measuring the Degree of Internalization

There are different approaches to measure a banks' degree of internationalization, and estimating the degree of internationalization of a firm or bank is to some extent vague and a random process. An initial approach could be to construct a single item indicator or one-dimensional measurement as indicated above in the literature review; Sullivan (1994) reviewed 17 studies which all applied a single item indicator to measure the degree of internationalization, i.e. the ratio of foreign sales to total sales as degree of internationalization. However as indicated by many researchers and as identified in the literature review above from the work of Ramaswamy, Kroeck, and Renforth in 1996, the use of a single item indicator increases the potential error of measurement, because a single parameter is always more prone to external shocks which may or may not indicate the performance. An alternate approach is to combine several indicators into one index. Depending on the choice of indicators, this might provide a better approximation of the degree of internationalization, but the choice of indicators may be restricted on data availability rather than theoretical induction (Sullivan, 1994).

We will follow the method that is most cited and adopted by the researchers in UN conference of Trade and Development. This method applies three single item indicators, which are combined in a composite index to analyze the degree of internationalization of a bank, the Transnationality Index (TNI). The TNI is one of the most cited indicators for internationalization (cf. United Nations Conference on Trade and Development, 1998, van Tulder, van den Berghe, & Muller, 2001). The index is expressed as a percentage and calculated as an weighted average of

Foreign assets to total assets ratio,
Foreign gross income to total gross income ratio and
Foreign employment to total employment ratio[1].

The percentage term of the TNI is that the degree of internationalization is presented in one scale, which by definition moves between 0 and 100. Also an internationalization index that incorporates income, staff and assets captures a richer picture of the bank's foreign activities than that which would be captured by income, staff and assets separately (cf. Sullivan, 1994). Another attractive characteristic is that the TNI dampens the effect of finance companies or off shore funding constructions if a ratio were only based on foreign assets relative to total assets. A substantial amount of assets can obviously be expected to be located in tax havens or countries with lenient fiscal regimes. Such reported assets would be accompanied by low number of employees. Combining both employees and assets in the TNI would then create a more balanced view. The same argument also applies to investment banking activities that are concentrated in financial centers outside the home country; these activities tend to generate a relatively high degree of income with fewer employees.

Demonstration of Measuring DOI through TNI method

There is also a flip side for this TNI. It can't take into account the recent technological changes, geographic boundaries, and we can't guarantee every bit of data to be same and uniform in all countries.

Technological change: A disadvantage of the TNI might be that the construction of such an index cannot take account of the effects of technological change. Changes in technology can for example raise productivity and increase the assets or income per employee; if these changes are distributed evenly over the total bank organization then its effect on the TNI is probably limited. If the ratio of foreign assets per foreign employee increases in the same amount as the ratio of domestic assets per domestic employee, then technological change has no effect on the TNI. From the mid 1990s however technological advances have had other geographic distribution effects. For example, the development of “Internet” banks like ING Direct implies that the share of foreign assets and foreign income increases while staff and operations working for the Internet bank basically remain at home. This might potentially depress the true extent of internationalization measured by the TNI.

Geographical boundaries: For Banks like Fortis, Belgian/Dutch corporate structure creates a problem to determine what region is home or foreign. This is solved in the database by denoting Benelux as home. Similarly, HSBC is the only bank that is not disclosing information for the home country, instead it is reporting Europe as ‘home region'.

Data availability: Not all banks have consistently reported detailed information on foreign assets, staff, income or profitability. Banks like SBC, UBS or Deutsche Bank did not report this information although they progressed significantly with their internationalization activities. A general remark is usually found in the financial report stating something like “due to the integrated nature of our activities worldwide a geographical breakdown does not provide additional information”; the information provided by British and American banks in the 1980s proves otherwise. Data collection from other sources provided valuable information. For example, foreign banks in the United States have to report their balance sheets to the Federal Reserve.

Internationalization Patterns

Internationalization for banks has progressed at different paces, with different purposes. Here we try to identify these internationalization patterns. As several motives are grounded in history, we start with a brief historic overview of internationalization, after that we shall discuss about various activities that the banks pursued as a part of Internationalization.

Historic Overview

Internationalization of banks is not a new phenomenon. In 1913 there were approximately 2,600 branches of foreign banks worldwide. The dominating factor at that time was colonization, over 80% of those branches belonged to British banks. The share of foreign banks accounted for one third of banking assets in Latin America and over one half in countries like South Africa, Turkey or China (Goldsmith, 1969). The financial empire of J.P. Morgan started out as a partnership financing American civil war loans from England (Chernow, 1990). International banking has in some respects not changed that much. Over time, innovations in financial instruments, telecommunication, information technology, organization innovation and the growing sophistication of customers have meant a dramatic transformation in the conduct of banking business and client relationships in international banking.

The sheer size of international involvement of the present day internationalized banks has increased dramatically (cf. De Nicoló, Bartholomew, Zaman, & Zephirin, 2004). Foreign assets of the thirty largest banks as a percentage of total assets have changed from 35% in 1980 to over 38% in 2003. However, the absolute size of foreign assets of the thirty largest banks has raised eleven fold from USD 650bn in 1990 to USD 7,571bn in 2000. The increasing importance of foreign activities has affected profitability and stability of internationalizing banks in their home country; it can also have serious effects - positive as well as negative - on the host economies. The intensity with which banks have pursued internationalization strategies also encouraged us to have a study on them.

The dissolution of the British Empire meant that British banks represented the old internationalization of banking. American banks on the other hand have been on the rise since the Second World War. American financial aid, exports of American firms and the export of American ideology such as freeing of competition or creation of uniform markets were feeding ground for internationalization activities of American banks. From the 1960s onwards income in Western economies rose and banks developed more financial products to cater households and businesses as increasing scale of firms raised transaction volumes in corporate finance. American banks formed an apparent threat, seeking out the more profitable activities in investment banking in Europe, being equipped with better staff, more financial resources and more experience.

The creation of off shore markets to circumvent (American) regulation and the political potential of seizure of capital belonging to communist states induced the first series of international activities, later propelled by the inflation of capital markets when oil producing countries forced serious wealth transfers. European banks either tried to work together in consortium banks to participate in these activities (Roberts & Arnander, 2001) which in the beginning was a cost saving and knowledge rewarding construction or set up foreign activities themselves. Redistribution of the surpluses of oil producing countries found their way to emerging markets, with American banks leading the way. The growing volume of loans masked growing economic imbalances, brought to light from 1981 onwards when Latin American countries defaulted in their loans. Internationalization of banks became a worldwide event (United Nations Centre on Transnational Corporations, 1991). Institutions like the IMF aided governments with restructuring loans, dealing with severed banks and capital markets in distress. Governments of the lender banks, especially the United States, faced potential crisis at home when the losses in emerging markets were transferred by the large banks to their home country.

A consequence of this restructuring period was that in the 1980s capital strength and adequate supervision of internationally operating banks were major issues for bank regulators. A major coordination initiative took place in the Basle Accord of 1988, creating more transparency and uniformity among regulatory policies for internationally active banks. Among others, the Basle Accord became one of the drivers for the Japanese banks to retreat from the international arena.

Japanese banks increased international activities sharply from the early 1980s fuelled by strong domestic economic growth, a fast pace of deregulation and large flows of foreign direct investment by Japanese industrial firms. The Japanese stock market decline from 1989 showed that (international) banking strategies had not been based on sound banking practices, affecting bank capital and loan quality at the same time (Canals, 1997). Japanese banks found ways to stave off restructuring of their bad loans for almost a decade, contributing substantially to the prolongation of economic recession, and steadily relinquishing their importance in international banking.

A general trend fuelling international activities was the ongoing process of disintermediation from mid-1960: large firms found it more profitable to arrange loans directly with institutional investors, thereby bypassing the role of banks as financial intermediaries. Additionally, stricter monetary policies introduced from the late 1970s onwards eventually led to a steady decrease of interest rates consequently lowering income from the core business of banks. These trends forced banks to reconsider their strategic business portfolios. Non-interest income, especially the high margins of fees and commissions in investment banking, became a promising route. The liberalization of British securities markets in 1984 was followed by an unprecedented wave of acquisitions by host banks. By the end of the 1990s British owned investment banks or securities houses in London were few in number; London as an important financial center had become a manifest of internationalization activities of banks.

Internationalization of banks was also a response to further regional integration and deregulation (cf. Group of Ten, 2001, January). In Europe especially, banks were aware that the competition for larger clients extended over the geographic borders, but the competition for retail clients remained a domestic issue. By the mid-1980s, European integration created momentum in Europe, redefining markets for banking activities on a multinational scale. Mergers and acquisitions became an important strategic tool for banks. They generally took place in two phases: domestic consolidation and then, international expansion; the creation of higher domestic concentration in order to more effectively compete internationally. Opportunity was provided by the capital markets (lower interest rates and higher stock market prices) and the regulators, privatizing banks or not opposing the takeovers. The close of the decade shows the financial might of just a handful of banks: the top 25 banks in 1980 had total assets of USD 1,858bn, equal to 30% of GDP. In 2000 this had risen to 64% of GDP, a combined total of USD 12,781bn. Of this amount, 41% are assets outside the home country. In fact, foreign banks practically control the banking sectors in many Eastern European countries; for some observers the “Single global banking space is almost a reality” (Mullineux & Murinde, 2003). The foreign owned assets of the largest banks exhibit uneven geographic patterns, “Regions and/or countries of the developed world currently represent the most interconnected cluster of national banking systems” (De Nicoló, Bartholomew, Zaman, & Zephirin, 2004).

Internationalization pattern of Banks

Starting in the 1970s, bank internationalization originally consisted of setting up banking activities in financial centers and economic centers. Part of this was related to incentives such as “follow-the-client” or aimed at increasing overall profitability. Additionally, restructuring and expansion in the domestic markets might have been cumbersome for some and impossible for other banks, further stimulating internationalization. Regulatory idiosyncrasies in the home market might be one explanation for this, but also the existence of a home bias ‘inertia': restructuring the domestic retail networks in the early 1980s might have been more difficult with vested interests in the home country such as labor unions. In particular, banks in smaller countries had to expand abroad for fear of anti-trust regulation at home.

For most banks during the 1980s, international expansion supported their domestic strategies and was relatively small compared to the home country. So banks did not have to attract additional capital. When banks initiated larger acquisitions in the late 1980s and 1990s, external capital became more important as a source of financing. (Domestic and foreign) shareholders not only provided additional capital to expand. They also followed management more closely, and pressed for changes when expected results were not delivered. An increasing shareholder role and foreign profitability that was below expectations, led bank managers to change objectives in the mid 1990s: profitability should be internally generated, the domestic base strengthened and foreign activities divested if they did not contribute satisfactorily to total profitability.

Banks can offer in principle five product categories: credit, securities, asset management, financial services and insurance. Also, five client types can be distinguished that banks can target: Governmental clients (nation states, supra national institutions), Corporate clients, Institutional clients (other banks, asset managers and insurers), Retail clients and Private clients. The case studies show that banks which entered new market activities actively serviced and targeted a wide range of clients and products. Two specific patterns have been identified:

Ø Capital market activities, and

Ø Foreign retail banking

Capital Market Activities

For capital market activities banks offer credit, securities, asset management, and financial advice to governmental, institutional and corporate clients. The majority of the banks had set up such operations by 1980: they participated in the Euromarkets, issued bonds to finance their own activities, and took advantage of the financial deregulation in the financial centers. Expanding capital market activities was spurred in the mid-1980s with the financial liberalization in the United Kingdom, and in the mid-1990s with the prospect of restructuring in the European Union.

For several banks, the decision to participate in the capital markets heavily influenced their overall strategy. Paribas and J.P. Morgan decreased their commercial banking activities and transformed themselves into investment banks. Both banks however did not have the scale by the end of the 1990s to remain a major market participant in investment banking and sustain the increasing IT investments: J.P. Morgan was subsequently acquired by Chase Manhattan in 2000 and Paribas by BNP in 1998. Most of the acquisitions of UBS, SBC, Credit Suisse and Deutsche Bank in the 1990s were capital market related, steadily increasing their reliance on fee income instead of net interest income. The composition of the fee income changed: more lucrative (but volatile) fee income from financial advice and securities re-distributions on mergers and acquisitions was combined with more stable income from asset management activities.






Growth Eurocurrency markets (London, Paris, Zurich)

Financial liberalization of American stock market

Financial liberalization European capital markets (London, Paris, Amsterdam)

Financial liberalization of Japanese capital markets

Catch up new entrants to profit from current bull market, consolidation existing players


Chase, Citicorp

Deutsche Bank, ABN Amro, Societe Generale

Credit suisse, Deutsche Bank, JP Morgan

Table 2: Development of Capital Market Activities

Retail Banking

International retail banking has been the domain of a selected number of banks. Chase and Citicorp set out to expand a retail network in Belgium, The Netherlands, Germany and the United Kingdom in the 1950s and 1960s. European banks in the 1970s and 1980s on the other hand did not expand in retail banking in Europe, but expanded in the United States, especially in California where British and Japanese banks bought retail banks helped by lenient regulation. For most Californian banks, their sale was either instigated by regulation (banks that cannot be bought by domestic competitors due to an increase in market share or banks that need outside capital) or poor performance. By the early 1990s a large number of banks exited from the United States market: they found it difficult to transform these banking operations into profitable ones, and their exit was speeded by the deregulation of interstate banking (cf. Tschoegl, 1987). The general expectation was that this would raise the minimum scale of operations to compete effectively, requiring large amounts of additional investments. Banks that remained were for example HSBC and ABN Amro.

Eight foreign banks, including all of the British banks, held retail networks in the United States in the early 1980s; by the late 1980s five had opted out. For European banks, the growth of foreign commercial bank networks took place from the mid-1980s. A limited number of banks (HSBC, ABN and Citicorp) have maintained these foreign networks throughout the period. From the 1990s, the following banks pursued retail banking strategies:

Ø Santander in Argentina, Mexico, Chile

Ø BBVA in Argentina, Chile, Mexico

Ø ABN Amro in Brazil and the United States

Ø ING in Belgium

Ø HSBC in Mexico, Brazil, the United States/Canada and Hong Kong

Ø Citibank in Germany

Two groups of banks did not enter foreign retail banking, or only to a limited extent: Swiss banks and Japanese banks. Swiss banks had retail banking activities in their domestic market, but not outside Switzerland. Switzerland was a major financial center and as an economy ran a capital surplus; an explanation might be that setting up foreign capital market activities was a more logical foreign extension of activities then setting up or acquiring foreign retail banks. Japanese banks also entered foreign retail banking to a limited extent. Their activities were mainly concentrated in California, where the banks initially had some links with Japanese immigrants. More important, lenient regulators allowed takeover of Californian banks by foreign competitors. The existence of an opportunity set - the ability to buy - compared to other more regulated banking markets has probably been the main incentive.

Organizational form

Banks which decided to enter new markets or to strengthen their market position have had a wide range of options available to them as to how they could proceed in implementing their foreign banking activities. Looking back at activities, there has been a strong rise in the number of each of the approaches used. Three specific developments in organizational form have been identified:

Branch Networks
Alliances and Joint Ventures
Internet Banks

Branch Network

In general, the objective to build a branch network has been to assist foreign clients, finance activities more cheaply or to evade home country regulation. Activities in financial centers were set up, usually starting with London, New York and Singapore or Hong Kong. This was then expanded to second tier financial centers and economic centers in Europe, the United States, Asia and Latin America.






Break down consortium

Trade relates service existing clients

Increase in trade and exports

Liberalization of Capital markets

Open up markets (Spain)

Growth in Asian Capital Markets

Opening of Eastern European markets

Increase volume of securities market


Citicorp, Bank of America, Lloyds, Barclays, ABN

Amro, NMB, WestLB

Deutsche Bank, Dresdner Bank

Table 3: Development of Branch Networks
Alliances and Consortium banks

Consortium banks were mainly a feature of the late 1960s and 1970s. With these joint ventures, banks tried to create a platform to service foreign clients and undertake corporate finance activities, while sharing the costs of building such an activity independently. In the beginning of the 1980s, there were a number of banks who relied on the consortium banks to provide an alternative for a foreign branch network. These were Amro and Midland. Subsequently, a number of banks built their foreign networks by buying out the other shareholders in the consortium banks.

During these alliances banks probably also acquired detailed information of the partner banks. This could be concluded from the observation that ING unsuccessfully acquired former InterAlpha partners from the mid-1990s for its expansion in Europe. From the 1990s, alliances between banks either had to develop specific skills neither bank could achieve alone, or serve as a defensive move in wake of expected restructuring in the European banking market. This usually was accompanied by share exchanges.

Alliances to acquire or share specific skills

Alliances to ensure future market position

Ø Royal Bank of Scotland - Santandar (1990)

Ø BNP - Dresdner (1988-2000)

Ø Société Générale — BSCH (2000)

Ø BBVA - UniCredito (2000)

Ø Amro - Generale (1988)

Ø Commerzbank - Banco Hispano Americano (1973, 1990)

Table 4: Major Alliances between 1980 and 2000

The re-appearance of alliances and joint ventures in the 1990s was more specific than in the 1970s and was also accompanied by mutual equity stakes. Banks opted for mutual equity stakes to forge a stronger link with the other bank than an alliance; the mutual equity stake effectively represented an option to a first right to negotiate with the other bank when consolidation in the (European) banking market was considered.

Internet Banks

From the late 1990s, the branchless Internet banks as an organizational form gained importance. Internet banking was initially viewed as a cost saving measure, providing the opportunity to close down branches while retaining the bank's customers. Other banks have developed Internet banking into a low cost distribution form to expand in mature markets, such as ING Direct, Comdirect or DB24. Other activities were less successful though. Aiming to capture the high end of the consumer market, HSBC formed in 2000 a USD 1bn joint venture with US securities firm Merrill Lynch to offer online brokerage services to wealthy clients. HSBC wanted to win new customers by outsourcing research and brokerage services to Merrill. However, the activity was quietly disbanded in 2003.

International Strategies

The world's largest banks pursued different internationalization strategies between 1980 and 2000. Banks retreated as well as increased their internationalization activities. Roughly one quarter of the banks remained internationalized, one quarter retreated, while one quarter slowly and one quarter strongly internationalized.

A bank's strategy is determined by a large number of variables which cannot be easily molded into a framework (Canals, 1997). Walter (1988), Smith and Walter (1997), and Canals (1997) have developed strategic frameworks for banks. Smith and Walter (1997, pp. 401-436) developed a three dimensional matrix, which can be drawn up for each banking organization: a client - arena - product (C-A-P) matrix. The C-A-P classification is useful to analyze the activities of a bank or any firm in general. Smith and Walter do not derive general strategic typologies from their framework, although it builds on the strategy research of Porter (1985). Banking “is a complex web of markets, services and institutions that is not easily subjected to systematic analysis” (Canals, 1997, p. 401). Instead, they state essential attributes to exploit opportunities within the C-A-P framework. These include the adequacy of the institution's capital base, the institutional risk base, quality of human resources, its access to information and markets, its technology base and managerial culture, and the entrepreneurial quality of its people.

Canals (1997, pp. 266-269) investigated internationalization strategies of banks and presented an internationalization model which is based on three main incentives, the combination of which he hypothesizes to be instrumental for the internationalization of banks. In his view scale, customer service and resource transfer are the main incentives for international activity. Canals (1997, p. 250) further linked these motives to organizational forms of internationalization activity. Alliances are the best way to transfer resources or skills, and acquisitions are a modus operandi for increasing scale. If on the other hand customer service is an important objective, then the development of branches are quite likely. Canals stressed that “the strategic options banks have open to them vary depending on their resources and their home country. The reason for this variety of strategic options is related not only to each bank's starting position, resources, skills, and weaknesses, but also to the financial model in which it operates.”

The risk of simplifying strategic nuances may weigh up to the analytical advantages of creating a comparative framework to develop general observations. Although each framework has its merits, there is no general framework which can be straightforwardly applied to internationalization strategies for banks. Therefore, the strategic framework for internationalization strategies in this study builds on the determination of strategy phases developed by Fujita and Ishigaki (1986), and De Carmoy (1990), combining banking strategies with strategic conduct into phases. Within this framework, four major phases for internationalization activities were identified: entry, expansion, consolidation and restructuring. Additionally, we limit ourselves to the identification of realized strategic activities compared to intended strategies (Mintzberg, Quinn, & Ghoshal, 1995): information on realized strategies is publicly available and the measurement of realized strategies allows more comparisons between banks.

Grouping banks on the basis of these phases and the resulting TNI development leads to five distinct types of realized internationalization strategies. In general, a stylized strategy is bound to ignore specific choices that banks have made, but on the other hand offers the advantage of defining commonalities in internationalization activities more clearly. The five types are:

Accelerating internationalization: Banks initially develop internationalization activities by setting up branches in major economic and financial centers. As a next step international activities are expanded by increasingly large foreign bank acquisitions. Finally, the bank has to restructure, to consolidate the large foreign acquisitions and to regain or increase its profitability.

Moderate internationalization: In general, banks with Moderate internationalization strategies consider internationalization as a support activity of the total bank organization. They develop a foreign branch network and bank activities in major foreign economic and financial centers; acquisitions and establishment of other international bank activities are a reaction to the internationalization activities of other banks, especially banks with Accelerating strategies. Ultimately, restructuring also sets in to consolidate activities and regain profitability.

Imploding internationalization: Fast increase of internationalization activities, to uphold or increase the bank's relative position compared to other competitors. Because the bank is unable to control the large increase in international activities, a prolonged financial crisis occurs. Finally, internationalization activities are divested to raise capital; bank management (under pressure of regulators) refocuses its activities on the domestic banking market.

Retreating internationalization: After a foreign financial or economic crisis, banks reassess their foreign activities and shift their focus from international activities to domestic activities. Foreign activities are divested to raise capital and/or domestic banking activities are expanded, lowering the degree of internationalization.

Established internationalization: These are banks with a high degree of internationalization; the banks have been historically committed to international activities, usually building up international activities over a long period.






Credit Suisse



Chemical Bank




Credit Lyonnais

Mitsubishi Bank


ABN / Amro


Bank of America


NMB Bank

Bayerische Hypobank

Manufacturers Hanovers

Tokyo Mitsubishi




JP Morgan

Deutsche Bank


Chase Manhattan





Table 5: Banks and their Model of Internationalization

The five types represent the internationalization of some banks in the society, and are classified in Table above. Besides the two banks representing Imploding internationalization, the number banks' models of internationalization is evenly spread between the other four types.

Characteristics of International Strategies

The typologies are based on observations by Alfred Slager about realized strategies. In other words, the observation of what a bank actually has done has been the basis for identifying the different realized internationalization types. The different strategy types have a long time period in common spanning twenty years, which might be considered a long time for a strategy. Such a long time period is not uncommon. One of the path breaking management studies in the 1980s by Peters and Waterman, “In search of Excellence”, examined American (non-financial) companies between 1961 and 1980 (Peters & Waterman, 1982). Another example is Collins and Portas (1993), who in 1989 studied a sample of American companies founded before 1945 to analyse their long term performance. Along term horizon also has some implications: the bank is in the analyses treated as an organization with a sense of historical memory; changes or events in the past bear their mark on strategic thinking today.

Established banks show the highest TNI throughout the period, only to be surpassed by Accelerating banks in a period of time. Around year 2000, some of the accelerating banks with their aggressive internationalization strategies overtook Established banks TNI. On the lower end are the Moderate banks, showing the lowest average TNI throughout the period were surpassed by the Retreated banks in 1998 due to the similar reason. Accelerating and Retreated banks are negatively related: for the Accelerating banks TNI increased, especially after 1989. Retreated banks show steadily declining levels of TNI, from 1983 onwards. Although Accelerating and Retreated banks are different strategies, they seem to have had similar growth targets: they have an average asset size in 1995-2000 is similar for Accelerating, Retreated and Established banks. For the 1990s, Retreated and Established banks have been better capitalized, but also had higher loan provisions than Accelerating banks. Moderate banks have had a relatively high degree of provisions in 1981-1985, probably leading to the relatively low capitalization of the banks during that period. This may be partly responsible for the low degree of internationalization: these banks did not have the financial cushions (anymore) in the early 1980s to engage in international activities. If herding has taken place in the 1990s, then it surely was a risk-controlled one: exits were more swiftly decided on than with other bank types.

Finally, they examined whether herding applies to the five different realized internationalization strategy types. An incentive identified earlier to internationalize was herding. Herding takes place when a bank imitates the actions of other banks; the bank must be aware of and be influenced by other banks' actions (Bikhchandani & Sharma, 2000). A herding incentive might exist if other banks may know something about the return of foreign bank activities that the bank does not know; the bank may also have an intrinsic preference for conformity and follow domestic competitors. Established and Retreating internationalization strategies tend to be concentrated with American, British and Japanese banks, while Moderate and Accelerating realized strategies tend to be clustered around German, Dutch, Spanish and Swiss banks. This supports the notion that herding on a country level might exist.

Profitability and Shareholder Value

Through internationalization, a bank might aim to improve its profitability, or realize more stable profitability through geographical diversification. In this part, we try to determine if international activities have delivered a better performance than home country activities, and what relationships exist between performance measures of banks and TNI. There are several performance measures which can be evaluated, leading to the presentation of a number of analyses. First, the relationship between profitability and internationalization is tested, after shareholder return is included in the analyses.

Relationship between profitability and internationalization

Have banks become more profitable through internationalization, and have shareholders gained by it? To get an answer to this question, the relationship between the degree of internationalization and performance was analyzed.

Hypothetical Relationships

The relationship between internationalization and performance has been extensively investigated, focusing on two research questions. Is there a relationship, and if so, what is the shape of that relationship? Organizations might show learning effects when their commitment and involvement in foreign activities increase, resulting in different benefit-cost trade off pay-offs for the organization[4]. In the last decade, researchers have developed different scenarios for explanation, hypothesizing two primary non-linear curve types: quadratic (J, U, inverted J, inverted U) and cubic.

The J curve assumes that over time banks can learn to minimize the additional costs associated with foreign expansion. (cf. Ruigrok and Wagner, 2003). This means that internationalization costs outweigh benefits until banks gain experience and learn to deal with them. Consequently, banks will reach an inflexion point along the expansion path at which incremental benefits start to outweigh incremental costs. This is visualized as a J- or U-curve. This scenario implies that bank undergo a period of performance deterioration before experimental knowledge can lead to higher performance levels.

On the other hand, an opposite J- or U-curve can be hypothesized, arguing that banks do not need to explicitly address initial internationalization costs through organizational learning, but deploy their home based skills and resources to achieve economies of scale and/or scope, without large cost increases. Thus, at the start of internationalization, the incremental benefits of internationalization should outweigh the incremental costs. However, as banks intensify their foreign expansion, not only do coordination and monitoring costs increase exponentially and become difficult to address through organizational learning, but learning costs may outweigh value generated. In other words, an internationalization threshold is identified at the point where incremental costs of internationalization start to outweigh incremental benefits, implying that banks should not overstep this (degree of) foreign expansion.

Besides a J or U curve, a horizontal S shape has also been proposed to explain the link between performance and internationalization, aiming to reconcile the conflicting quadratic curve types. Here, two types of costs associated with internationalization are identified. Type I costs are fixed and modest costs at low degrees of internationalization, stemming from the liabilities of foreignness and newness: unfamiliarity with trade laws, consumer ethnocentricity, new consumer tastes and cross-cultural communication costs. Type 2 costs, visible at high degrees of internationalization stem from the significant coordination and monitoring demands caused by intense market complexity, dynamism and uncertainty. The horizontal S logic argues that learning to address the Type I costs is necessary and cost effective, but learning to successfully manage extreme levels of internationalization (Type 2 costs) is not. Banks should aim at learning to deal with initial costs of foreign expansion but avoid extreme levels of foreign market dependence.

Ruigrok and Wagner (2003) conducted a meta analysis of the relationship between performance and internationalization. Using data from 62 studies, covering 174 samples, they found empirical support for a non-zero, positive impact at the aggregate level. As to the form of relationship, no clear conclusions could be drawn.

Internationalization of Banks and their performance

On a basic level, we can define the relationship between internationalization and performance as

pT = f(w, pF, pH) à (1)

Where ‘p' is profit before tax as a percentage of total assets, the subscripts denote (T - Total, F - Foreign, and H- Home). ‘w' is defined as foreign assets as a percentage of total assets. Whether w, pF, pH are related or not, the accounting definition holds by definition, stating that total profits before tax is an asset weighted average of foreign, and domestic profits before tax:

pT = w x pF + (1-w) x pH à(2)

Equation (2) is a simple test for the linear relationship between profitability and internationalization. If pF > pH we should observe a linear, upward sloping relationship between total profitability (pT) and the degree of internationalization (w). Then the opposite holds good for pF < pH. In other words, not assuming any learning effects or economies of scale exploitation leads to a hypothesized linear relationship between internationalization and performance. Theoretically, we could observe 4 different combinations of relationships. These are shown in Table below.

Foreign vs. Domestic Profitability

Relationship total profitability and internationalization

Support for

Pf > ph

Pt = f(w+)

Positive internationalization effects. Resource based asset seeking, or seeking new clients/markets. Geographic diversification advantages might apply.

Pf > ph

Pt = f(wˉ)

While foreign activities are more profitable, managerial and overhead costs of integrating them in the organization outweigh internationalization benefits.

Pf < ph

Pt = f(wˉ)

Support strategy. Foreign activities are loss making, but support total profitability. Resource based asset seeking, or seeking new clients/markets. Geographic diversification advantages might apply.

Pf < ph

Pt = f(wˉ)

Other motives to internationalize: gaining market share fast, having a long term acquisition horizon.

Table 6: Hypothesized relationship between profitability and internationalization

We first examine whether foreign profitability is higher than domestic profitability - in other words, is pF > pH. We do not assume, or test for specific J, S or U curve relationships between internationalization and performance. We examine the relationship between total profitability and the degree of internationalization, and identify a possible shape.
Is foreign profitability higher than domestic?

To test whether pF > pH, the following analysis focuses on differences in profitability based on reported data by banks (actual figures for a smaller number of banks). Banks have published this information to a limited degree. In 1980, 15 out of 44 banks reported such information, increasing to 20 out of 44 in 2000. Incidental reporting by for example Deutsche Bank has been left out, as have incidental reporting for Rabobank, NMB Bank and Tokyo Bank. A second analysis is then set up to analyze differences in performance for the whole sample with estimated figures for the whole sample. An alternative measures is developed here for foreign and domestic profitability, using benchmark profitability data and asset weightings.

The best disclosed performance measure between for the banks in the sample with a geographic dimension is profit before tax as a share of total assets; Information before 1990 leans strongly on the information provided by British and American banks, and to a lesser extent on French banks. It cannot be stated that when internationalization became more important for banks, they started to report more internationalization-related information in their financial reports. Banks like SBC, UBS or Deutsche Bank did not report this information although they progressed significantly with their internationalization activities. A general remark is usually found in the financial report stating something like “due to the integrated nature of our activities worldwide a geographical breakdown does not provide additional information”; the information provided by British and American banks in the 1980s proves otherwise. Difference in profitability between foreign and home activities (pD) is calculated as:

pD = pF - pH à (3)

The relative size of foreign activities does not influence the value of pD; the difference in profitability does not change if the bank has 1% or 10% foreign assets.

In total 34 out of 44 selected banks have reported at some time foreign and domestic profitability figures for three or more years between 1980 and 2003; 10 banks have not reported such figures. Of these 34 banks, 19 have shown a negative difference in profitability. When banks show a negative difference in profitability, is this caused by a relatively lower profitability of foreign activities or a relatively higher profitability of domestic activities? To answer this, Alfred Slager plotted a scatter plot where on the vertical axis, the difference between foreign and domestic profitability is shown (pD), and on the horizontal axis the total profitability is shown. The plot is shown here for reference

The relationship presented in Figure 2 is negatively sloped with a correlation of -.59 (p<.01, n=30). There is one outlier, Fortis, reporting a relatively higher difference between foreign and domestic profitability than would have been expected given the general negative relationship. An explanation for this might be the relatively favorable period of reporting for Fortis, between 1996 and 2003. The scatter plot indicates that in general pD is negatively related to total profitability, if we cluster the results we find different relationships for countries. For Japanese banks, pD is on average positive while pT is negative. This suggests that Japanese banks need foreign activities to support their total profitability. On the other hand, for continental European banks pD is on average negative while pT is positive: foreign banking activities seem to have depressed total profitability for European banks. Mixed results are found for - mostly - American and British banks: their total profitability is high, but the variance of pD is also high.

The negative relationship suggests that a relative positive domestic performance is not necessarily related to a relatively successful foreign performance. It suggests that lagging domestic performance might have been an incentive for some banks to internationalize since additional performance is relatively much easy to achieve outside the home country than within[5]. It can also be interpreted another way: some banks with relatively high domestic performance (Credit Suisse, Barclays) perhaps have the buffers and reserves to sustain relatively lower foreign performance.

The observed negative relationship between pD and the relative domestic performance is difficult to generalize, due to differences between time periods of banks. Banks who reported on average a negative pD did this during an average length of 13.6 years compared to 8.6 for banks reporting a positive pD: the difference in years is a combination of not reporting the figures, and the higher number of mergers in the 1990s, limiting the maximum reporting period for some banks. A better approach would be to consider the information per year for the sample.

The representativeness of the banks who reported foreign and domestic profitability increased throughout the period: before 1990 not more than 16 banks reported these figures, increasing to 22 in 2000. The highly negative values for pD between 1987 and 1989 are followed by a short period of high pD values between 1990 and 1994. The values from 1980 to 1987 and 1994 to 2000 remain closer to zero. pD does not differ significantly from zero for the whole sample. PD in 1987 or 1989 differs substantially from the other pD values. This can be explained by the large provisions banks had to take in 1987 and 1989, since securities activities were mainly concentrated in financial centers (outside the home country for a number of banks). Another explanation is the large provisioning in 1987 banks booked to write off LDC loans, led by Citibank after six years of unresolved negotiations to reschedule LDC debt. Two years later, LDC write offs were once again large when the Baker plan led to a final agreement to end the LDC crisis for banks.

From 1983 to 1989, foreign activities were on average less profitable, especially since 1987. A financial recovery period was visible in the early 1990s, especially in 1992 and 1993. This suggests that timing has been important: banks that have increased their international activities significantly in the early 1990s should have enjoyed above average returns, while banks who established international activities in the 1980s will have experienced rebounding foreign profitability. On the same note, an exit from international banking in the early 1990s will have meant that “recovery advantages” were not reaped, while exiting or expanding from 1995 will not on average have changed performance for better or for worse. The conclusion is then that for the banks who have reported geographic distribution of profits:

Ø Performance of foreign activities is lower than domestic, but does not differ significantly from zero.

Ø The negative performance difference is concentrated around 1987 and 1989.

Ø Entry and exit moments matter for the total profitability of the international activities.

Relationship between internationalization and total profitability

The previous test focused on the relationship between foreign and domestic profitability where the relative weight of foreign or domestic activities exerted no influence. The next test determines if internationalization is positively related to a higher performance. This is tested in two steps: does such a relationship exit for the individual banks in the sample between 1980 and 2000. Next, does such a relationship exist for the whole sample? A straightforward approach is to evaluate one variable regression model per bank

Yit = αi + ßiTNIit + εit à (4)

The dependent variable is profit before tax as percentage of capital and reserves; TNI is the independent variable. The constant in the model represents the level of profitability if the bank would not have internationalized (TNI=0). This test focuses on the direction of coefficient ß. If ß is negative (positive), then a higher degree of internationalization is associated with lower (higher) profitability. The number of observations varies per bank, so the significance of ß provides less information and is ignored here. At the most, 21 observations per bank can be found, while on the lower side at most 3 observations per bank can be observed.

Out of selected 44 banks 25 show a negative relationship between TNI and profit before tax as a percentage of capital and reserves. In other words, there is no tendency towards a positive or negative relationship for the whole sample. For 12 banks, the adjusted R Square is negative indicating absence of any relationship. This is not due to the number of observations for the regression; 7 of these 12 banks have the longest possible period of data availability (21 years). Also, most of the banks showing no relationship between performance and TNI have pursued strategies increasing their TNI: Accelerating strategies (UBS, Dresdner Bank, Credit Suisse, BBV, Argentaria) or Moderate (Commerzbank, BCH, Hypovereinsbank).

A stronger relationship is observed for 15 banks in the sample, showinga relationship between TNI and performance is shown with an adjusted R-Square higher than .25. Of these banks, 10 out of 15 show a negative relationship between the level of TNI and profit before tax. In short, the estimated signs of relationship between TNI and performance for the banks are equally distributed for the positive and negative direction. For almost a quarter of the sample, there is no relationship observable. Similar results are yielded if profit before tax as a percentage of total assets is taken as a measure for performance, or if performance is corrected for domestic performance or the performance of the sample.

Summarizing, for most banks and most time periods there is a negative relationship between performance and TNI. This suggests that a degree of internationalization lower than 20% would have yielded the best performance. Also, for most banks an increase in internationalization correlates with a decrease in profitability, but this result is valid cross-section, not longitudinal. A positive relationship between profitability and the degree of internationalization cannot be found on a bank level. For almost a quarter of the banks in the sample no such relationship has existed between 1980 and 2000; for the other half no tendency towards a positive or negative relationship can be observed. For the total sample, there is only a positive relationship between 1981 and 1985. For the other periods up to 2000, there is a negative relationship between profitability and the degree of internationalization. The negative relationship in 1986-90 is determined by the years 1987 and 1989. After 1990 a weak form of a negative and V-shaped relationship exists. Banks with the lowest levels of TNI in the sample, 0-20%, have shown the highest performance. Banks with TNI levels of 40-60% have shown a higher performance than banks with a TNI of 20-40%, but both reported lower performance levels than banks with TNI of 0-20%. Overall do the results not support the hypothesis that a higher degree of internationalization is positively related to a higher performance of the total bank?

Internationalization and risk/return diversification

While internationalization might not on improve overall profitability, another argument is that internationalization leads to more stable profitability through geographical diversification. Rugman (1976) found that a higher ratio of foreign to total operations is positively related to a lower variability of earnings to book value, concluding that internationalization is risk reducing. Literature on commercial banks in the United States generally finds that larger, more geographically diversified institutions tend to have better risk-return trade off (Berger et al., 2000, Goldberg 2001). Buch et al. (2004) calculated efficient country-allocation portfolios, and compared these with the actual allocations reported by banks. Overall, it was found that banks tend to over-invest domestically, leading to suboptimal risk/return diversification advantages.

In this study, risk/return diversification advantages were examined by the ratio of variability of profitability and average profitability. A finding was that variability of profitability increased with a higher degree of internationalization. This suggests that the banks in the sample were on average not able to generate additional profitability (reaping internalization advantages) and neither to generate more stable earnings (profit from geographical diversification).

Similarly, another hypothesis was that geographical diversification advantages should allow a bank to generate more stable results and improve its return-to-risk ratio, i.e. average profitability (return) as a ratio of the standard deviation of profitability (risk). Having established that foreign activities do not structurally generate more return, the burden of proof lies with the reduction of risk. However, no relationship exists between TNI and risk. Combining the results for risk and return, internationalization in general is negatively related to the level of the return-risk ratio.

Chase Manhattan Bank: A case study

We followed the internationalization of what became Chase Manhattan Bank from its first (indirect) operations abroad in 1917 to its acquisition by Chemical Ba

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