Factors Influencing the Foreign Entry Mode of Asian and Latin American Banks

Meng-Fen Hsieh

Department of Finance

National Taichung Institute of Technology

E-mail: mfhsieh@ntit.edu.tw

Chung-Hua Shen* Department of Finance,

National Taiwan University e-mail: chshen01@ntu.edu.tw

* Corresponding author: Dr. Chung-Hua Shen, Professor, Department of Finance, National Taiwan University, Taiwan. Address: No. 1, Sec. 4, Roosevelt Road, Taipei, 10617 Taiwan (R.O.C); E-mail: chshen01@ntu.edu.tw.

Factors Influencing the Foreign Entry Mode of Asian and Latin American Banks

The majority of past studies on the foreign market mode of entry have focused

on manufacturing industries. Although some studies have explored the entry mode

decision of the banking industry, most of them have adopted the case study method,

and systematic studies have been relatively few. This study intends to fill this gap

through an investigation of 7,041 Asian and Latin American bank branches covering

the period from 1999 to 2005.

The analytical results demonstrate that both Asian and Latin American banks are

market seekers. However, Latin American banks are not customer followers. In

addition, the larger the scale of the bank or the greater the net interest margin, the

more likely it is that high control entry modes will be adopted. By contrast, in

countries in Asia with a greater cultural distance, banks tend to establish low control

entry modes to avoid uncertainty. This does not apply, however, in the case of Latin

America.

Keywords: Entry Mode, Cultural Difference, Market Seeking, Customer Following,

Financial Service

JEL: G21, M16

1. Introduction

Over the last two decades, there has been a surge in direct investments in the banking

sectors of emerging markets. During the same period, there has been a growing body

of literature on the motivations and determinants driving banking FDI, and several

factors have been identified that can explain why a bank goes abroad and enters a

specific country. For instance, foreign direct investment in banking is correlated with

the degree of bilateral trade and FDI between the host and home country (Grosse and

Goldberg, 1991; Brealey and Kaplanis, 1996; Williams, 1998; Yamori, 1998). Second,

the host and source countries’ characteristics related to profitability and risk have

been found to be important drivers of a bank’s decision to penetrate a foreign market

(Focarelli and Pozzolo, 2000; Galindo, Micco, and Serra, 2003)

However, much of the above literature does not specifically address FDI in

emerging markets, apart from Demirgüç-Kunt and Huizinga (1999), Claessens,

Demirgüç-Kunt, and Huizinga (2001) and Van Horen (2007). These authors adopt

count data or aggregate data to analyze the differences and similarities between

developing and high-income country foreign banks. Demirgüç-Kunt and Huizinga

(1999) and Claessens et al. (2001) find that the efficiency and profitability of banks

are affected by a variety of determinants, including the bank characteristic of

ownership, as well as macroeconomic conditions. Van Horen (2007) finds that foreign

banks in developing countries are much larger in low-income countries in terms of the

numbers of bank branches and assets.

Grosse and Goldberg (1991) (GG hereafter) assess the extent of the foreign bank

presence in the United States and indicate its distribution by country of origin.

Esperanca and Gulamhussen (2001) extend GG’s model of the effect of home country

factors on foreign bank expansion by conducting a study on the multinational

companies with a presence in the U.S., with banking assets or the number of offices

for each home country being adopted as their independent variables. While the use of

large-scale aggregate data may provide us with a big picture, it may not explain which

patterns of foreign activities are chosen by individual banks.

By neither focusing on aggregate nor count data, another stream of the literature

concentrates on the internationalization process or the entry modes of banks. Due to

the micro and macro effects on bank branches which vary with time, being removed

from the aggregate data, the aggregate or count data may not be able to trace the

reasons behind the specific branching decision. Although the majority of past studies

on the foreign market mode of entry have focused on manufacturing industries (see

Bhaumik and Gelb, 2005), with the increased prosperity of the services industry, the

internationalization of service firms has attracted the attention of a growing number of

researchers (Andersson, 2002; Blomstermo, Sharma, and Sallis, 2006; Bouquet,

Hébert, and Delios, 2004; Dawson, 2001; Godley and Fletcher, 2001; Lindblom and

von Koch, 2002; Ochel, 2002; Roberts, 1999).

More recently, the focus of many studies has become the foreign market entry

mode of specific industries, such as the hotel industry (Gannon and Johnson, 1997),

retailing (Andersson, 2002), technical consulting (Sharma and Johanson, 1987),

tourism (Björkman and Kock, 1997), and financial services (Álavarez-Gil et al., 2003;

Grosse, 1997; Hellman, 1994). However, most studies on financial firms’ foreign

market entry modes have been based on case studies, and there have been very few

empirical studies involving large samples.

For example, Hellman (1994) explored the motivations and entry modes of six

Finnish banks and insurance companies, while Álavarez-Gil et al. (2003) investigated

the entry mode of five Spanish banks and insurance companies in Latin America.

Álavarez-Gil et al. (2003) found that the major FDI motivation was to follow

customers mostly Latin American banks beginning with a representative office (low

control) prior to the nineties and to be followed by a relatively high control mode of

entry in the internationalization process initated in 1998, consisted in covering the

group into a franchise, such as a branch or a subsidiary or else a merger or acquisition

(high control).1 Cardone-Riportella et al. (2003) examined the internationalization

patterns followed by Finnish and Spanish financial service firms. However, no

conclusive evidence was found in either market.

Moreover, the studies of Hellman (1994), Álavarez-Gil et al. (2003) and

Cardone-Riportella et al. (2003) used correlation coefficients to express the

relationship between customer following or market seeking and the mode of entry.

However, the approach they adopted may have failed to predict the change in entry

mode. Furthermore, the influences of individual banks or firms in terms of their

specific capabilities or resources were not considered. When a high control mode of

market entry is adopted, it is necessary for the bank’s headquarters to commit more

resources and experience to the success of the venture.

Even though, Cerutti, Dell'Ariccia and Martinez-Peria (2007) examined the factors

influencing the operations in Latin America and Eastern Europe of the world’s top

100 banks for the year 2002, Asian countries were not covered. In addition, due to

only a single year being adopted, it was not possible to detect whether the

international behavior of banks has changed with the passing of time.

1 Blomstermo et al. (2006) make clear definitions on high and low control mode: High control entry

modes (e.g. wholly owned subsidiary, majority owned subsidiary, etc.) demand more resource

commitment abroad, and the foreign-going firm is exposed to a higher degree of uncertainty. Low

control modes (e.g. licensing, different types of contractual relationships, etc.) require a more limited

resource commitment, thus reducing the uncertainty exposure of the foreign-going firm. The high

control entry mode offers the highest mode of integration/control, whereas low control entry modes,

such as cooperative agreements, offer the lowest (Anderson and Gatignon, 1986; Erramilli and Rao,

1993; Vandermerwe and Chadwick, 1989).

Hsieh, Chang and Wang (2008), by contrast, focused on a single Asian country.

They analyzed the determinants of 123 Taiwanese bank branching decisions covering

a time period extending from 1995 to 2005. They found that Taiwanese banks are

financial market seekers, but not customer followers. In addition, the larger the scale

of the bank or the greater the cultural distance between the home country and the host

country, the less possible it is that high control entry modes will be adopted. However,

banks with more international experience will be more likely to adopt high control

entry modes.

This study, by means of a more comprehensive dataset, extends Hsieh et al.

(2008)’s study through an investigation of 7,041 Asian and Latin American bank

branches covering the time period from 1999 to 2005. Asian and Latin American

banks are used as a research sample due to these two groups of countries accounting

for over 75% of all international capital flows.2 Van Horen (2007) also finds that 27%

of all foreign banks in developing countries are owned by a bank from another

developing country. This highlights the need to increasingly focus on developing

countries.

This study intends to explore the foreign market entry mode of Asian and Latin

American banks and to look into the factors that influence that entry using objective

data and a more complete framework. Specifically, this study uses 7,041 overseas

branches of Asian and Latin American banks as its research sample in exploring the

influence of the economic and financial market environment of the host country, the

cultural distance between the host and home country, as well as the resources of banks,

on the choice of foreign market entry mode. What are the factors that influence the

2 See Hsieh, Yang, and Vu (2009), “Do Herding Behavior and Positive Feedback Effects Influence

Capital Inflows? Evidence from Asia and Latin America,” International Journal of Business and Finance Research (forthcoming).

Asian and Latin American banks’ foreign entry mode? Are they market seeking or

customer following? These questions are intended to be answered in the following

sections.

Thus, the purpose of this study is to construct a more complete framework than

that in extant research, which will serve as valuable reference to practitioners. In

Section 2 of this study we review the relevant literature and build research hypotheses,

and in Section 3 we present the method, data, and empirical models used in this study.

The empirical results are provided in Section 4. Finally, the conclusions and

implications are presented in Section 5.

2. Literature Review

2.1 Entry strategy

This study adopts the eclectic paradigm (Dunning, 1980) to explore the choice of

foreign market entry mode. The eclectic paradigm comprises many important theories,

such as transaction cost theory, internalization theory (Buckley and Casson, 1976), the

comparative advantage and factor endowment theory of international trade, and the

resources-based theory of the firm, which provides a comprehensive framework for

the analysis of FDI. In addition, the eclectic paradigm is also suitable for small and

medium-sized enterprises (SMEs) as well as service industries (Brouthers, Brouthers,

and Werner, 1996).

The eclectic paradigm argues that the foreign market entry mode is influenced by

three factors, namely, the ownership advantages of a firm, the locational advantages

of a market, and the firm’s internalization advantages. When all these three

advantages are superior, firms will choose to enter the prospective market using the

mode for which the firm has a higher degree of control.

To be specific, Dunning separated ownership advantage into asset advantage (Oa)

and transaction advantage (Ot), where the former refers to the tangible or intangible

assets of a firm, such as the scale, technical or managerial capabilities, and where the

latter refers to the advantages gained from multinational operations, such as

experiences accumulated or economies of scale. The locational advantage refers to the

attractiveness of a host country and includes the market seeking and competition

within that country. The internalization advantage refers to the benefits generated as a

result of reducing transaction costs by replacing the market mechanism with an

internal hierarchy.

Many studies have sought to verify the eclectic paradigm using empirical data.

Generally speaking, most studies confirm that the ownership, locational and

internalization advantages can explain the choices among foreign market entry modes.

More recent research suggests that the internationalization pattern of service

firms is explained by one of the two phenomena referred to as “market seeking” or

“customer following” (Erramilli and Rao, 1990; Marjhgard and Sharma, 1998;

Grönroos, 1999).

2.2 The internationalization of financial service firms

There are many studies that have explored the process and the factors

attributable to the success of the internationalization of firms (Wiedersheim-Paul,

Olson, and Welch, 1978; Johanson and Vahlne, 1990, etc.). However, the first to adopt

financial firms as a research topic was probably Aliber (1976), who explained the

growth of multinational banks in terms of the different levels of efficiency among

countries. According to the comparative advantage theory, the banks that enjoy a

comparative advantage in the banking industry will offer more competitive financial

products, and will therefore be more competitive in international markets.

Furthermore, banks engage in foreign entry to increase the bank’s profitability, within

an acceptable risk profile and risk diversification goals. Focarelli and Pozzolo (2000)

find that banks prefer to have subsidiaries in countries where expected profits are

larger, owing to higher expected economic growth and the prospect of reducing the

local banks’ inefficiency. Gray and Gray (1981) also applied the eclectic paradigm to

the research of the transnational operation of banks.

Rugman (1981) argued that the internalization theory can be applied to

multinational banks, and concluded that the reasons for internalization include low

marginal costs, market intelligence advantages, the information provided by the

headquarters in the home country, reputation, regulations (e.g., deposit insurance and

foreign exchange regulations), transaction costs, growth and risk reduction. Cho

(1986) developed a growth model of multinational banks using the eclectic paradigm,

and empirically verified that the bank’s scale of operations in the home country,

differences in loan interest rates, the market size of the host country, and so on, are the

main factors that facilitate the growth of multinational banks in the host country.

2.3 Development of hypotheses

This study attempts to build a comprehensive model to explain the foreign

market entry mode of banks. In short, this study classifies the factors influencing the

market entry mode mentioned by existing studies into three categories: the local

environment of the host country, the advantages of a bank, and the cultural distances

between the host and home countries. For example, Dunning (1989) argued that four

factors influence the internationalization process of service firms, namely, the

“attributes of the product” which Dunning (1989) classified into the “advantages of

the bank,” the competitive behavior of local banks and the political and legal

environment belonging to the “local environment of the host country.”

For a second example, Erramilli (1992) investigated the factors influencing the

entry mode, as well as the legal restrictions, country risks, market size, and

availability of cooperative partners which Erramilli (1992) classified into the “local

environment” that we adopt in this study. As a last example, in a study by Li and

Guisinger (1992), the influential factors include the market size, the market

characteristics ( the “local environment of the host country” in this study), the cultural

distance (the same as in this study), the competitive advantage, the scale and

opportunities of the bank (the “advantages of a bank” in this study), and so on, and all

can be classified into proper categories in the framework proposed by this study (see

Figure 1).

(Insert Figure 1 about here)

Cultural distance represents the extent of the cultural differences between the host

and home countries. Cultural distance influences the internalization of an enterprise in

many ways. For example, during the initial phase of internationalization, some firms

choose to export to psychologically-close countries first. After accumulating

international experience, they then extend their reach to psychologically-distant

countries (Buckley, Pass, and Prescott, 1992; Johanson and Vahlne, 1990;

Wiedersheim-Paul et al., 1978).

Based on the logical reasoning of transaction cost economics, when the cultural

distance is high, it is more difficult to monitor and to communicate with the overseas

unit. That is, the cost of using organizational or hierarchical mechanisms will be

higher than the cost of using the market mechanism. Therefore, firms will tend to

enter the foreign market with a low control mode. For example, Gatignon and

Anderson (1988) demonstrated that, the higher the recognized cultural distance

between the home and host countries, the more that firms will tend to adopt a low

control entry mode, because a low control mode is also a more flexible mode for

withdrawal when the firm is unable to adapt to the host country. In addition, Erramilli

(1991) also empirically demonstrated that market similarity is an important factor that

influences the foreign market entry mode. Furthermore, Esperanca and Gulamhussen

(2001) found that the closer the cultural distance between the home and host country,

the more that foreign banking is attacted to the host country. Therefore, this study

proposes that the higher the cultural distance, the more likely it is that a low control

mode of foreign market entry will be adopted.

H1: Other things being equal, the cultural distance between the home and host

countries will be positively associated with the likelihood of adopting a low

control entry mode.

There are many dimensions used to describe the environment of the host country,

and it is impossible to discuss all of them in a single paper. This study thus intends to

focus attention on the economic, financial, and competitive attractiveness of the host

country. In view of the available data, the market’s seeking (a strategic motive driven

by the large scale of the local economy), customer following (a strategic motive

driven by greater home country investment or exports into the host country) and the

degree of oligopoly in the host country were selected for the purposes of this study.

Dunning (1988) argued that firms tend to invest in foreign countries with larger

market scales. Moreover, multinational enterprises are likely to originate in countries

or regions with access to large and wealthy domestic markets (Vernon, 1966; Buckley

and Casson, 1976). Along a similar line of reasoning, Wengel (1995) has empirically

found a positive relationship between the size of the home country and foreign bank

expansion. In other words, the larger the market, the more attractive the market will

be to the firm, and therefore firms will use a high control mode to enter the market in

order to generate profits. For example, Brouthers et al. (1996) explored the impact of

ownership and locational factors on the entry strategy of U.S. computer software

firms, and found that the more ownership and locational advantages a firm has, the

more likely it is that it will adopt a high control mode. Therefore, this study proposes

that the greater the market seeking, the more likely it is that a bank will adopt a high

control entry mode.

Furthermore, Anderson (1993) pointed out that the internationalization can be

seen as a way of maintaining a relationship with original clients that are now abroad,

and also as a way of searching for new clients. In addition, the more two-way trade

that takes place between the home country and the foreign country, the greater will be

the presence of banks from the home country in the foreign country (Sabi, 1988;

Goldberg and Johnson, 1990; Brealey and Kaplanis, 1996; Yamori, 1998). Therefore,

this study proposes that a high control entry mode is positively associated with a

customer following strategy, which is represented by the amount of home country

investment or exports into the host country. This leads to the following two

hypotheses:

H2: Other things being equal, host market seeking will be positively associated

with the possibility of adopting a high control entry mode.

H3: Other things being equal, customer following will be positively associated

with the possibility of adopting a high control entry mode.

Different foreign market entry modes represent different types of control

exercised by firms in relation to their foreign operations, different levels of resources

committed, and different levels of risk (Anderson and Gatignon, 1986). Therefore, the

choice of foreign entry mode strategy also depends on the resources of the firm. Asset

specificity is thus an important factor that influences the foreign entry mode. Existing

studies indicate that, the more specific the asset is, the higher will be the value of that

asset, and the more tacit the asset is, the more appropriate it will be to adopt a high

control mode (Teece, 1986; Hill , Hwang, and Kim, 1990; Kim and Hwang, 1992).

Due to the limited availability of secondary data, this study does not measure the

degree of product differentiation or asset specificity of sample firms. However, it is

reasonable to speculate that, generally speaking, a larger-scale bank is more likely to

have advantageous products and specialized assets. Therefore, this study uses the

scale of the banks as a proxy for product differentiation and asset specificity.

The scale of a bank can also be a proxy of its management capability. The larger

the bank and the more resources it has, it can be argued that its risk taking capacity

and management capability will be greater. Therefore, as argued in regard to their

foreign experience, larger banks will be more likely to enter foreign markets with a

high control mode. For example, Buckley and Casson (1976) and Yu and Ito (1988)

argued that the larger firms are more likely to enter foreign markets by resorting to

FDI through wholly-owned subsidiaries or joint ventures than the smaller firms.

Hennart (1991) also argued that larger scale firms with more assets are generally more

capable of integrating and managing risk.

H4: Other things being equal, the scale of banks will be positively associated with

the possibility of adopting a high control entry mode.

3. Methodology

3.1 Data description

The data on the establishment of overseas branches by Asian and Latin

American banks cover the period from 1999 to 2005, given that those years are

available for the entry strategy information. The research sample includes different

types of overseas entry modes, such as representative offices, branches, subsidiaries,

and mergers and acquisitions for Asia and Latin America’s banking industry.

Financial data are obtained from BankScope. The entry strategy information is

gleaned from the database of Global Banks Foreign Expansion, which is

hand-collected by the research team of Professor Shen. Furthermore, the information

on cultural distance is based on Hofstede (1983). The macroeconomic data is obtained

from World Development Indicators (WDI). The financial and macro variables are

matched with the entry strategy with a one-year lag.

3.2 Empirical models

According to the concepts and research assumptions developed in this study, the

empirical model is set up as follows:

Entry Mode = β0 Constant + β1 Cultural Distance +β2 Market Seeking

+β3 Customer Following +β4 Bank Scale +ε

There are two approaches used to measure the entry mode, i.e., the dependent

variable. Setting up an office is treated as one, while a representative office and

branch opening belong to numbers two and three, respectively. A subsidiary and

headquarters are classified as numbers four and five. The greater the number, the

higher that the degree of control over the entry mode will be. In this scenario, an

ordered Probit is used to estimate the model’s coefficients.

As regards the cultural distance, this measure is constructed by Hofstede (1983).

The calculation method is as follows:

4/}/){(4

1hom, i

ieiijij VIICD ∑

=

−=

Here, ijI is the score for the ith cultural dimension in country j, while iV is the

variance of the i th cultural dimension. The higher the score, the higher that the

cultural distance will be.

As for market seeking, our study separates this variable into economic and

financial developments. The former includes the GDP growth rate for the host country,

and GDP per capita (Cerutti et al., 2007; Choi, Tschoegal, and Yu, 1986; and

Goodnow, 1985), while the latter covers the private credit claims against GDP ratio

(Levine and Zervos, 1998; Hermes and Lensink, 2004; Shen and Lee, 2006), broad

money against foreign reserves and stock market capitalization against the GDP ratio.

As for customer following, two proxy variables are adopted by this study, namely,

the export amount (home country) against GDP ratio, and the foreign direct

investment outflow (home country) against GDP ratio. It is worth noting that

Álavarez-Gil et al. (2003) adopted three variables to measure “customer following”.

They are the total investment amount of the home country, the total export amount of

the home country, and the index of liberalization in the host countries. Nevertheless,

the third indicator should be classified as the market seeking variable.

Finally, as for the bank advantage, this study uses three variables, namely, the

scale, net interest margin and the return on assets (Goodnow, 1985; Terpstra and Yu,

1988).

4. Analysis of the Empirical Results

4.1 Descriptive statistics

Table 1 and Table 2 report the descriptive statistics for Asian and Latin

American banks. The average entry modes are 2.74 and 2.59, respectively, showing

that banks in these two regions mainly set up representative offices and branches to

establish a foreign presence. The difference is that Asian banks are able to accept

expansion in a country with a larger cultural distance; the average value is 2.16 for the

Asian banks, while that for Latin American banks would be 1.58.

Furthermore, the degrees of economic and financial development in the case of

the Asian banks’ foreign expansion in the host country are higher than those of the

Latin American banks. For example, the GDP growth rate for the former is 3.74%;

and 2.57% for the latter. In addition, the private credit claims against GDP ratios for

the host country are 126.63% and 106.17%, and the stock market capitalization ratios

are 134.89% and 94.64%, respectively.

As regards the customer following variables, the average export amount against

GDP for the home countries is 45.74% for the Asian sample. However, the same

indicator falls to 24.27% for the Latin American banks, indicating that Asian banks

are more likely to be customer followers. The same situation applies to the FDI

outflow against GDP ratio variable, which is 5.72% for the Asian sample, and

likewise higher than the one for Latin Amercia of 2.86%.

However, there is no conclusive pattern for banks having an advantage. While

Asian banks possess larger scales ($27,295 vs. $22,451 millions) and higher returns

on assets (0.34% vs. 0.25%), they are accompanied by a lower level of interest rate

margin. (2.10% vs. 6.36%).

4.2 Empirical results

Tables 3 and 4 provide the empirical results for Asian and Latin American banks,

respectively. Hypothesis 1 proposed that the home country bank will adopt a low

control entry mode when the cultural distance is greater. The empirical results of

Table 3 show that the coefficient of cultural distance is significantly negative, which

is consistent with our expectation. This means that the higher the cultural distance, the

more likely it is that banks will tend to adopt the low control entry mode, such as by

setting up representative offices. In doing so, banks will be able to maintain a higher

degree of flexibility and to withdraw from the host country when something goes

wrong (Gatignon and Anderson, 1988; Erramilli, 1991; Esperanca and Gulamhussen,

2001; Hsieh et al., 2008).

Nevertheless, the coefficient of cultural distance for Latin American banks

results in the opposite sign, which is significantly positive. This seems to reflect that

the Latin culture is full of adventure.

As regards the market seeking variables, it is found in Table 3 and Table 4 that

banks in the two regions are mainly market seeking in terms of the economic and

financial development of the host country. For example, the coefficients of the GDP

growth rate, private credit claims and broad money against foreign reserves, are all

significantly positive. This result shows that when the market is larger and more

attractive to banks, a higher control mode will be adopted. This finding strongly

supports our Hypothesis 2 and is consistent with the findings of Terpstra and Yu

(1988), Wengel (1995) and the others (Vernon, 1966; Buckley and Casson, 1976;

Hsieh et al., 2008).

However, in regard to the stock market capitalization variable, a measure of

direct finance, the coefficients for the Asian and Latin American banks appear to

depict the opposite situation. The variable appears to exhibit a significantly negative

sign for Latin America, thus matching the theoretical expectation that direct finance

(the stock market) should play a complementary role to indirect finance (banking). In

other words, in their foreign expansion, banks should adopt a more conservative

branching strategy under the financial system with a larger scale of stock market.

However, a significant positive sign applies to the Asian sample. This result may

indicate that in Asia there are parallel developments between direct and indirect

finance during the sample period.

In regard to customer following, the coefficients for the exports and FDI

outflows for Asian banks are both significantly positive in terms of the entry mode,

meaning that more investments abroad make it attractive for banks to adopt an entry

mode with a higher degree of control. This result supports our Hypothesis 3.

Nevertheless, the results for Latin American banks are quite the opposite. While this

result supports our Hypothesis 3, it also supports the negative relationship between

the exports and the foreign banking presence as evidenced by Esperanca and

Gulamhussen (2001), and Hsieh et al. (2008). This same result also implies that

exports are preferred by risk-adverse investors during the internationalization process.

As regards the bank advantages, the coefficients of bank scale and the net

interest rate margin are both significantly positive in the two regions, showing that the

larger banks will adopt the entry mode with a higher degree of control. This result

supports our Hypothesis 4 and also confirms the existing studies that indicate that, the

more specific the asset is, the higher will be the value of that asset, and the more tacit

the asset is, the more appropriate it will be to adopt a high control mode (Teece, 1986;

Hill et al., 1990; Kim and Hwang, 1992).

5. Conclusions and Policy Implications

Most past studies on the foreign market entry mode focused on manufacturing

industries. Although some of them examined the entry mode decision of the banking

industry, the majority of them adopted the case study method, and systematic research

was relatively rare. This study has sought to fill this gap by investigating a sample of

7,041 Asian and Latin American bank branches covering a time period from 1999 to

2005. The purpose of this study is to construct a more complete framework than that

in extant research. What, then, are the factors influencing the Asian and Latin

American banks’ foreign entry mode? Are they market seeking or customer following?

These questions have been answered in this study.

It is found that the cultural distance, market potential of the host country,

customer following and bank advantages are the factors that influence the foreign

entry mode of Asian and Latin American banks. For Asian banks, the higher the

cultural distance, the lower will be the entry mode adopted by banks. This, however,

is not true for Latin American banks.

As regards the market seeking, it is found that banks in the two regions are

mainly market seeking in relation to the economic and financial development of the

host country. Furthermore, Asian banks are also customer followers, meaning that

more investments abroad make it attractive for banks to adopt an entry mode with a

higher degree of control. As for the bank advantage, it is found that the larger banks

will adopt an entry mode with a higher degree of control.

As part of the financial services industry, when faced with global competition

banks may be unable to satisfy their global customers by providing standard services.

Therefore, the globalization of the banking industry faces more difficult challenges

than the manufacturing industry. The results of this study could serve as valuable

reference for banks in choosing their entry mode.

Specifically, the different entry modes represent different degrees of control, asset

commitments and risks. Thus, the entry mode should be highly correlated with the

complexity of the local environment, the company’s experience as well as its

management ability. Bank managers could adopt an entry mode with a high degree of

control, such as setting up a branch, a subsidiary or engaging in merger and

acquisition activity when sufficient international experience has been accumulated

and they are capable of managing foreign branches. On the contrary, if banks are

planning to enter a less familiar environment, an entry mode with a lower degree of

control, such as a representative office, could be considered to avoid the operational

risks associated with a new market.

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