^A
ALFRED
P.
WORKING PAPER
SLOAN SCHOOL OF MANAGEMENT
Foreign Direct
in
Investment in Banking
California*
Adriiin t.
Mc rc h
WP
ID
5ft
TschoeoL
19 79
-79
MASSACHUSETTS
INSTITUTE OF TECHNOLOGY
50 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139
Foreign Direct
InvcstTient
in
Banking
inCoLifornis*
Aorian t. TscHoeoL
March 1979
ij
P
i
5
f<.
-79
and
Kenneth vpricle*
Lessaro*
R.
thank
JonsLcJ
like
wouLc
also
I
Robinson for their advice anc criticism.
Richard D.
riostoi)» iKilliarr Rutledge
F e c . h e s . bank
of
Jack
Intertor
thank
to
of
i
S uti er i nt endent
of the
f f
i'au I us
(F c J.Res .Hcink of ^Y)» John R,
c e
F
D
(U.S.
of
c
e
c
n
t
o u
o z I o w and b r e c r y C.
p .
n k s » C I i f . ) » cnv k I p h
Conmorcp) for their assistance* anu er.Dtcially for their willingness to
answer often cumbersome and ooscurr questions. Findllyt I Tiust especially
tfu^nK my wife Vao-ni for her forbeardoce.
*
T
woulc
like to
(
(
f- ;,
fi
)
><
TABLE OF
l.G
Intro duction
2.C
Fore ion Eefiks
i r*
C
r^
N
U
\ T
S
California
2.1SizeoftheForeionSictor
^.ir
Oraanizfjtion,iL
2 . 3
Re''ul
4
^
.
2
.5
'i
t i
Form and Twrfershio
on
Reciprocity
Oper^t ions
2.51
pppresr^ntative offices
2.52Anencics
2.53 Suo si diaries
3.U
Theory
3
. 1
\e ce[)t
i
vi
t
y
3.2 Conioftition
3
.
3
Cc st s
3.4Acvfjnta'jes
3.^1Intern<il
3.411 Factor Narkets
5
,m2 TutDut
3.413
K
arkets
<nowLe(ige
-
Cop^rrerricil
-
Product [jitferentiation
Internal Fconomies anc Liceconomies of Scole
3.42 extern rl
Factor liarkets
-
Financial *^nrKet
3.422 Output Markets
-
nii.-opoListic
3.421
3
.
4 2 3
3.424
i
X t
9 r n a
I
r
r
n
n,
i
Host
e s
Covcrnment-Crratec Imperfections
^ion^
Iiroerfections
^^rkfts
3.'f2'tl
Interstate Operations
3.42'f2
Investment Banking
3.f2«^3
Federal Reserve Membership
5,t2^t Anti-Trust Law
3.5 Behavioral Explanations
3.5
't.O
Theoretical Synopsis
Hypothesis Testing
4.1
Agencies
4.11 Model
4.12 Bank-Specific Variables
4.13 Country-Specific variables
4.14 Results
4.15 Classification
4.2 Subsi diaries
4.21 Model
4.22 Bank-Specific Variables
4.25 Country Specific Variables
4.24 Results
4.25 Classi
5.0
ti cat
ion
Summary
Footnotes
Shanghai Banking Coro.'s Overseas Exoansion
Appendix
A
-
Hongkong
Appendix
B
-
Major Acquisitions of California Banks by Foreign Banks
Appendix
C
-
Japanese Minority Ownership of Subsidiaries
-
EconoTies of Scale
Appendix
Bibl iography
&
l.OIntrofluction
This paper investiu.". tes
C'.
forei-jn
lifornia.(l) The topic is
investment
(iirect
given
ana
re''ulators»
oir-icussion some
rise
banking
in
in
practical and theoreticctl interest.
of
Foreinn banks are increasing trieir Dresencc
phf-notnenon has
(FDI)
concern
to
Lawiiakers.
the
th'^
United rotates*
imofiq
seers
It
intoriTdtion on
in
aorr,
worthwhile
estic
to
bankers*
the
to
eicd
tactorstn,jt may influence
This
a
foreign
bank»sdecisiontot-ntertheUo.
The
theories
currerit
occurrence
in
I'm
[Grubelt
and Aliier,
1'-3
cveloaed
ti-rt^n
industries,
7Jj»
explain
to
with diL/
=3
few
rrescriptive
F3I
have
rivf
it
aua
I
i
t a t
i
aovantaqe
an
this
in
v('
Thr-
.
over
local
its
traoition,
we
berrT^its
us
to
^no
nistiricuish
dS operntini
C-lifornia
is
not
A'hilc
in
i
two
tended to
of
fir:n
which
we
will
also consioer external factors
thj^t
foreign fir-rs can ocnefit.
First*
it
i;.
relatively
m^ny have establishea one rations there.
somewhat
E'-terately.
br-nkiny
corrpetitors.
situ;itions from which orrhaps only
banks
anrJ
discussions
thi-cretical
j-nany
chose Colifornia for two reasons.
foreicn
exceotions
studies* such as Lees C1977J* Terrell
'lost
concentrateo on factors internal to the investii}
continue
crr-^te
anc*
its
multin^tion^il bantcinq has rrawn little
[1977], Hanj-Shenq Chen; [19753, ano titerran [197P3 havt
Key
we
hjvc
'nanufdCturin:
theoretical atteniion.
be
FJI
of
sub- markets
ano
to
open
to
Srcond*
investigate
it
each
follow in^' GrubeL Ll977Dt we can tlink of PDI in
the wholesale*
najor
world
corporate* and
financial center.
retail
markets.
Therefore* the
desire to take part in the wholesale market
for
a
bank's
presence
in
reasonable degree* associate
operations
at
iiost
a
Furthrrmore*
state.
the
is
each
in
of
motive
minor
we
the
can*
other
to
a
twa
sub-markets with the organizational form the foreign bank adopts.
Section
2
describes the foreign
banking
in
banking.
Section
4
California.
in
and common explanations
third section discusses theories of FDI
occurrence
sector
tests
soiie
of
these
for
The
its
theories
statistically using regression models of the decision to open an agency
or
a
subsidiary
in
the state.
Section
5
is
a
summary.
I
2.0ForeignBanksinCalifornia
Size
2.1
the
of
Forfii.n Sector
entered California in thr
For?! on banks first
Rothschilds
estaoLished
Honokonc and Shanghai
remained
ever
ancestor
since.
bank to £nt'>r«
in
In
I'-'O?.
Bank of
Lv-ri
so*
hcilf
of
also
Tokyo)
of
Cn^idian
1870*s»
the
In
the Canaaian
the oost- world
jJar
II
7
enterea
th-
openeo
in
oran ch.
the pace of expansion was
the 19 7 0*s»
has
(an
first
Co-riTercef
did so
perioo* thr Suinitono
Bank
and
th*.-
^is
relatively
the followin? tables
slow
snow.
untill
the
first
Tanle 2.1 cjives the
subsidiaries
l9f>b
froir
to
7.
parent.
safre
organizational
T..ble
2.1
a
c-r-^sence
is
that
increase*
th(-
offices
t\a\/e
ciifferences between the
Several banks have two aqencies*
for.T.s.
representative
table
will discuss oelow
«'e
ano the other in Los
the
and
The
Several of the suosiciaries»airncies» anu recr esentative
and
Thr
Tokyo estaoLisheo subsiaiaries in 19 5 3.
Insert
the
1849.
Soecie Bank
YoKohairia
a
century.
1B75
in
Irperial Hank of
development of the nu nber of a^encic^s anr
19
Fransisco
San
in
Corporaton
banicina
the bank
of
oranch
a
min-ninetepnth
or
an
agency
office, with one being located in San Fransisco
Angeles.
not
One interesting fact
only
out th" nu.Tioer
die'
of
the numoor of
tn-it
emerges
fro^i
banks establishino
a
hranchts per California subsidiary
Table 2-1
Subsidiaries, Agencies, and Representative Offices, 1965-77
1965
Subsidiaries
1970
1975
1977
)
dLsoin creased.
T.Me
2.2 oresents
banks»
th;'
activity in doLLar tErtis* and
Tables 2.2
Insert
1977»
b.^nicst
Japanese banks had
17
Canadian*
P
a
each
^
Switzerland* Brazil* Hone
f^f
b
I
e
2.3
region of orijin.
the share by
In
T s
Californian Dres^nre* as did
Germany
froT
Kon'j,
and 2.3
Italy*
<jnd
Korea* and France*
Philippines* Australia* ann Israel* and
2
each
1
British
each
5
each
^>
Holland*
frori
Iran*
fron,
from
India*
and Thailand.
<:
.
2
r y an
i
z a t
i
onn
I
Form and Ownership
California recognizes
oruanizational
four
forms
representative
office* agency* branch* and suosiciary.
The
and
foreign bankr. wholly-own tncir
These
Dranchfcs.
subsidiaries* they
liability.
ownership of
aoenc i es
.
Six
h
are
are
bariKs
New
r
two
company
es
f?n
t
>j
parts
seperate
share
agencies
in
offices*
vc
aqencies»
their parents.
of
le^al
which
t i
persons
but
with
Jnlike
lirrited
they do so via joint
turn
wholly-owns
the
(2
Reoresentative offices may
n'^ither
ep
inte.iral
not
York
r
accept
not
conduct
banking
Draper*
deposits nor make loans or investments.
i.e.*
they
Instead* they
Table 2-2
Foreign Bank Activity in California
million, and market share by %)
(LJS$
June 1965
June 1970
Subsidiaries
Assets
Market Share
504.0
1,071.9
2.0
Loans
Market Share
263.5
1.16
Deposits
Market Share
434.6
1.27
Agencies
Assets
Market Share
329.3
0.8
Loans
Market Share
168.4
0.74
1
.31
Total
Assets
Market Share
833.3
Loans
Market Share
431.9
2.11
1.9
June 1975
Table 2-3
Foreign Banks in California
Distribution of Assets and Loans
1976, in US$ millions)
(as of June 30,
Asia
Europe
Canada
Latin America
Total
Assets
9,363.1
65.6%
3,183.3
22.3%
955.2
6.7%
775.7
5.4%
14,277.3
100%
Loans
5,486.1
64.9%
1,798.5
21.3%
919.7
10.9%
247.4
2.9%
8,451.7
100%
Agencies
21
16
6
6
49
Subs
8
4
3
Source:
California State Department of Banking, Annual Report , 1976.
15
•
perform L1aison» intelligence* and customer solicitation -functions
their parent
s
authorized
domestic ones.
to
The
accept
agencies
though
deposits*
foreign
however*
may*
activity.
banking
Aoencies engage in lending and most types of
are
for
may hold
none
'credit
temporary
hold
Some
balances*
for their customers when these arise in the course of normal
business.
Agency loan limits
since the tatters'
the
thpir
parent's
capital
limits are based on their own capital accounts.
Only Lloyds Bank, whose subsidiary
Two
on
Of
foreiqn subsidiaries* fourteen have an associated agency.
fifteen
one.
based
they may make larger loans than the subsidiary banks
Thus
resources.
are
Japanese banks with
eech have an agencies.
complementary
and
The
enables
a
is
disoensed
has
minority shareholding in
combination
the
large
very
parent
subsidiary
a
of
organizational
to*
in
forms
effect* operate
a
is
full
branch .
Some banks have established
from
law*
agencies
in
that they may accept
Insurance
Corporation
(FDIC).
available to foreign banks.
Until
California
domestic deposits.
however* requires that these oe insured
Deposit
Federal
tie
oy
differ
branches
Technically*
branches.
recently* this insurance was not
Being unable to accept such deoosits*
the
branches thus were de facto agencies.
charters.
Subsidiaries are incorporated and operate under state
are eligible for Federal Deposit
full
range
of
banking
Until the change in U.S.
law
in
They
Insurance and are allowed to conduct
activities.
Mone
a
sought national charters.
1978, the reaui
r
etient
s
for
I
with
a
national
I
civTterweretcort<;trictive.(3)
C
subs 1 di
the
<
their
a
r
existing in
irs
parents.
The
their
subsidiaries.
firms* including, two banks
J...pencse
Appen d
13
tach
0;.
ownea
ovtO
55»2% and
sdditioT*
In
(Doi-Ichi Kanoyo and
Credit Bcnk)» own J^pin California bank.
b%
two were not
Sumitomo Rank and the Sank ot Tokyo
respectively of
7^.7%
only
l97fc,
thirty-two
Lonp-TerT)
trie
shareholder
has
t h d
n
In
addition to these subsioiarifs* foreifrt in (iivi duals own four
These
(
Se e
are
very
i
X
C
)
STdll»
deposits in California.
branch
of
the
though.
197 3,
In
airectly
r<Gthschila
de
E,jmonc,
inoirectly
or
the
California
Superintendent
rotate
law
requires that
of
Ranks.
allocate and assipn to their agencies
capital
anc
surclus
ocnestic
barik
on comnenceiiitnt
equal
all books and records of
t
hi
SanCal
California*
of
"^ank
of
8%
Renulation(4)
offices or aqencies,
y
2
of
French
the
(of
owts
Wnile no Feceral laws or reciuUitions apoly cirtctly
c.
bank?-.
represented 0.5't%
they
Tri-Stnte Corporation, the holdinc corrpany for the
2.,'.
less
.
Finally*
fafiily)
by
use
re latin':!
to
a
representative
to
must
.')otn
Forei-^n
o a
amount
the
of
operations.
that
would
horre
country
required of
L>e
They must
licensed
banks must
rent
oortion of their
tc
be
keep
a
separate
account oertaininc- to California ojsiness fron
i;usiness
outside the 'jtcte*
inci
Tiust
keep seoerate
their assets from tnose of their parents.
lifornia holds foreign subsiriiaries and
domestic
hanks
seekino
to
10
establish themselves as commercial banks to the sane reqmi rement s.
bank
satisfy
must
promote the
conditions
the
convenience
public
and
Superintendent
establishment will
its
advantage*
and
knowledge*
the
that
The
and
business
that
ability* and standing of the proposed
officers and directors are such that
has
it
a
reasonable
chance
of
success*
The requirement that
to
hold
bank have Federal Deposit Insurance if it wishes
automatically
deposits
regulation.
a
As
US
subsidiaries
brings
jodcr
chartered institutions* foreign subsidiaries come
under the provisions of the Bank Holding Company Act (BHC&)
company
which
defines
This Act
amended in 1970.
over
control
has
Reserve
Federal
subsidiary automatically makes
Reserve
applies
Board
of
Governors*
it
a
do
to
so
since
having
such
a
Federal
The
I
equally to
foreign and domestic bank holding companies* as does
This means that
banking subsidiary and
a
subsidiaries
or
banking
a
in
two
a
foreign
states*
more
and six domestic bank holding companies ,(
foreign banks* unlike
or
domestic
securities)
in
banks*
bank
securities affiliate in the
•grandfathered* existing interstate operation of subsidiaries
(banking
must
List of permissible nonbankino activities
may not maintain
foreign
as
any
as
subsidiary
bank holding co-noany*
interstate banking.
or
1956*
company
bfinkiip
US
a
the prohibition on
US*
of
domestic bank.<5) Any foreign bank,
a
approval
holding
bank
a
acquire
which wishes to establish or
receive
Federal
could
S)
The
BHCA
by
five
Even with the Act»
maintain
a
subsidiary
one state and branches and agencies in the
same state or others. (7)
Urder the International Banking Act of 1978* the Federal Reserve
Board
)
11
bar
the authority to impose Federal Reserve Systen reserve reouirements
on
all
US
hrjinches
agencies of foreign banks thot have more than
DiLLion in worldwide
U.'.J1
Federal
Reserve
ctt;osits
of
in?.
,ind
services.
[,
less than $10 0*000
allowed
ranches
will
foreitn
of
will be rcquirec to
have
oanks
haVf,
to
access
to
that accept
feoeral dePOsit
retail
deposit
However» oranches of foreinn b.inks will bp
accept dotrestic deposits in only one state thou-h they will
able operate as agencies in others.
be
banks
The
urance except that brancnes not engaueo in domestic
activities can be exeTtpted.
2.
assets.
{
J-
^Reciprocity
Uncer California law* the
grintinc;!
licenses
ptrmits US
[yaiTiination
arr)
banks
of
tc
ooeratt'
wnether
establish
to
the
Superintendent
ri^culations
from operating
in
trie
branches
take
into
California.
be
account
in
foreign bartk^s home country
suosiciiaries
or
such countries as C;jnaaa»
of
Mexico inoicates that ther- would
banks
n\ay
srounos
for
there,
Australia*
Dsrring
their
Conversations with some Dt^oartment
officials indicate that generally the deoarttient aoes Tot even consider
the issue when examining cipplications
2.
'^^
2.51
Operations
Representative Offices
The California
•generally
one
for entry. (9)
Superintendent
limitea
to
corporation £«.(1C)
larger,
rt
ports
that
tneir
contacts
ar?
internationally-orientei' American banks
Tney solicit busiriess for t^ieir parents
in
the
)
12
form
of
correspondent
baLances* deposits* and Loans* promote trading
relationships* and assist
GaLifornians
abroad
naking business and bankina
in
for
The offices also gather
foreigners Locally.
and
contacts
information on the activities of competitors and on the Local financial
1
and economic
situation.
offices*
representative
entered
have
banks
Many
California
with
which are relatively inexpensive to establish
and maintain* and have then upgraded them as business developed.
'i
2.52 Agencies
Table 2.4 below lists the agencies* primary activities in 1974 and
reported
involved
number
frequent activity*
with
Loan participation was the most
each.
in
providing
agencies
the
the
overlines
for
correspondent or affiliated banks.
Insert Table 2.4
I
Ayency Loans went to American
particularly
in
banks
the foreign trade area.
and foreign subsidiaries of American corpo ra
which
looser*
their
parent
banks
are
borrowers*
Other principal categories of
home-country
customers included American subsidiaries of
The Japanese agencies reportedly finance
corporate
larae
and
t
i
ons.
.
1 1
trading
the
associ at ed
(
(
1
2
)
corporations
companies
with
Similar* though even
ties occur in the case of European banks* especially the French
and German ones.
Table 2-4
Agencies' Pri mary Activities
(1974)
Service
)
13
Agencies rely heavily on borrowea funds
ooerations.
of
As
June
1976*
30»
borrowed
CaLifornia
their
support
to
accounted
funds
approximately 81% of the iS.3 billion of agency liaoilities.
acencies
to depend on
seemed
u?;ed
the
funds
The California
agencies
the bank
it
Superintendent
saw as the greatest
in Mrw
owns
Banks
of
but
York. (13)
reported
further
that
the
source of competition other foreign banks
and domestic banks with facilities in both
US.
Tiarket*
The European A.Tierican Bank
cane from their parents.
the deposits of
JaPanese
from US banks and on the
([uropean banks drew on the Eurodollar
Eurodollar market,
often
lines of credit
for
their home countries and the
None considered itself in competition with independent
engaged in international busi ness •
(
1
4
banks
not
)
2.53 Subsidiaries
Foreign bank subsidiaries have offices throughout the
generally
to focus
banking.
in
state
in
areas
experiencing rapid rates of population growth. (15) They tend
their business on larger firms* but conoete in
The Southern California Research
Council
all
(SCRC)
tyoes
of
reports that*
contrast with other California banks» foreign banks* portfolios are}
heavily weighted toward real estate and commercial leTdiig.<16)
Their main source of
type of deposit
Foreign
funds were domestic deposits.
closely approximated
bankst however^ held
a
that
of
all
The distribution by
California
banks.
sliqhtly lower proportion of individual
Savings accounts than did their domestic count erpa r t
s .
<
1 7
1^
While officers of Lar-e banks hy-and-larqe
foreign
activity*
Donkincj
the retail
competition
worst. (18)
Community
less because of
Bankiny
as
many
banks
has*
sTialler banks
of
best*
.it
exoansion
Qeograohic
small
however*
discoverer; no
bass.
The
ot
Danks alreaciy in the coirmunity
requiring
that
at
Stats
instance in which an
authorized additional facility has resulted in co-nootition
to
view
aatraging
ds
iind
of
are especially vulnerable to fnarket share
their relatively
Department
representatives
unnecessary
thr
welcorne
destructive
involved, (iv) The deoartfient's oolicy
new branch appear viar'le and promote the public
a
advantape and conveni'^nce protects existing institjtions in stagnant or
low-growth areas.
existing oanks.
in
a
community.
Moreover* much forei
m
expansion
This obviously has no effect on
In
1976* of
some
3.^0
t n
is
?
via takeover
nuiroer
of
of
branches
branches of foreign banks* over
2(.;0weretheresultOTacquisitioriG.
Foreign-owned st^te -chartered
coirpetitive
autcr^oDile
techniques
such
banks
as
have
lower
used
cost
lenerally
checking
accepted
accounts
loans* and widesoredC advertising canoaigns.C^O)
and
15
Theory
3.0
According to Hymer C19763 and Kindleberger L19?.9]» 1f companies wish to
compete in
form
a
foreign market aqainst locaL firms they must possess
quasi-monoooL ist i
of
advantage to overcoTie their
c
assumptions*
two
saovan t ages
unstated
This proposition consists of an
vis-a-vis their competitors.
condition«
di
and
conditional
The
consequence.
a
some
statement is simply »&iven that the receivina country pernits FDI» then
The two assumptions are the existence of:
....
actual or potential,
and 2),
local
firms.
foreign
and
company
successf ullyt the foreign
returns
to
which
market transaction.
it
In
can
consequence
must
with reference to bantcing in general and California
Academic theories have tended to
foreign
to
which
local
below
attention
aspects
particular*
in
factors
firm which give it an advantage over
discussing these* we will draw
factors
emphasize
the
than py some
these
discuss
will
compete
to
FDI
by
between
advantage
some
possess
competition,
costs
that
is
appropriate more fully
this section, we
local
differeTtial
non-trivial
The
1)
internal
firms*
to
In
to
the
addition
external
some
have the effect of encouraging foreign bank entry,
even
when the foreigners possess no other advantage over the locals.
Receptivity
3.1
It
is
interesting that few of the
statistical
consider the question of receotivity.
pair of
that
countries at most.
researchers
have
In
the
of
FDI
Most such studies involve only
this context,
ignored
investigations
it
question.
is
a
quite understandable
However
it
is
clearly
I
;
16
dangerous to assume that
and
in
to
all
orijins just nee a use
industries.
soTte
reaulatec
t
Tiajor factor
a
role
corns
in
about
or
stverly
it
rrifiy
limit
in
fronetary
oven
countries
policy
other
service
t.ankinc,
first
element
assumptioft
of
the
in
especially in the cas" of
there
(Li)Cs)*
competition,
wh'^-n
the
doin,-5
sot
the
it
are
F o re
i
local
no
of
rnanuf ac
LjD-o wn ed
locc<l
in
t u r i nv^
fin^s
parent
their
Long
country
A
the
with
capabl"
They have
residence
means
the
from the receiver*
competition.
Less
in
different rules
is
the
Frequently*
developed
Countries
providing effective
of
rei'ngined
Even
that
LDCs
many
ever since.
In
where
this
is
at
no
they
disadvantage vis-a-vis the domestically-owned oanks in their
of
of
nevertheless
orDoositlon
they have often pre-empted the rrarkt-t,
case*
because
banks est.Jblishea themselves in
countries were colonies.
heavily
a
.-.na
all.
at
Hymer/KindleberyFr
existence
th("
is
industries*
factor being its openness to investment
Thf
some
Many countries that permit FDI
investor's
Competition
from
worlc because of its
investment*
also apply depending on the
in
This
the
of
and
safety.
in
bankina.
in
they per 'nit
^"1.2
ooerate
to
foreicners
oar
if
determininp
not
Ful
in
"lost
ciepositor
m,inijfacturing,
foreimers
<;orre
sectors
all
restrict their activities in others.
industry
irriportant
co
is
permits
it
countries
Almost all
sectors end severly
RpceDtivity
country is eaually open across
a
ere
knowleOoe
local environment.
perhaps Tore inti^resting case, because
it
is
less oOi/iojs,
may
occur
17
there
when
however* choose to compete.
discuss this possibility in the suosection on external
We will
market
local firms which do not*
are
product
imperfections below*
3.3 Costs
The second element
than
costs
These costs derive
firms.
local
do
foreign
the assumption that
is
foreign firms must operate at
firms
frofti
higher
face
the fact that the
distance and in an environment that
a
is
culturally* politically* legally* and economically different from their
This assumption seems eminently reasonable and all discUsSionS of
own.
accepted
have
FDI
tended to use
locate
in
subsidiaries in
firms
Japanese
Asia.
fact.
as
Horst [19723 did find that US firms
Canadian subsidiary as
a
other countries.
to
it
stepoing stone to investing in
a
unlikely
Franko C1975D argues that UK firns are very
contiquous
countries
Commonwealth
tended
but
countries.
to open
are much more likely to have
[19753
Ozawa
found
that
their first subsidiaries in South fast
These results support the notion that these costs are important.
Even so*
and despite the widely acknowledged importance of the
foi'eiqn
environment to the FDI decision, there is no trace in the literature of
to measure the
any attempt
Banking is
Monte
dei
relatively old industry.
a
the longest
the
Hong
One
of
the
sample*
banks in the
Paschi di Siena* traces its corporate history back to 1472.
International banking*
countries
costs* magnitudes and determinants.
to
financ«.'
in
the
sense
of
offices
having
trade* also is quite old.
and
Shanghai
other
The foreign bank with
continuous foreign presence in California (since
Kong
in
Banking CorporatiDn.
Appendix
187^)
A
gives
is
a
18
summary of the history
Oferating
hunci
at
a
its overseas
o-f
expansion.
This bank
that
ocrraiions
minimum
at
like firms* to develop
and
it»
enaole
will
SimiLarly»
cost,
other
after
several
Domestic
disarivantaoes.
discriminate against
f
the other han-S
utral
n
that of
a
any
foreign
origin
re:>ulations«
foreign firms.
In
or
oe
tiay
their
aooitioo,
source
a
enforcement*
of
may
customers
oot'-ntial
harbour irrationdl prejudices aqainst foreign firms.
k i
n
'1
thi'
situotiont de jure and do
lecal
tow^rLS* or even favor*
unusual*
,
equal
in
knowleaie without necessarily Diyini any premium*
requisit'.'
Nevertheless* the very fact of
h
years
^lor^over the foroicjn firm can often hire in local staff
firm.
with the
adrrinistrative
coiduct thsir international
to
therr:
country their knowlf?die of the local environ:iient ^ill
n<.
a
redycars.
technolocies
Gn
been
distdnce and in other cultural environrripnts for over
Over time one can exoect
mriy
has
but
in
frtvorable
the
not
U'c
attitude
i
,
-r,
oos
s
i
S
m
i I
i
bl e
.
r
I
towards
^,
a
foreiin firms.
It
/
*
The
facto*
latter situation
certainly pPrtalns to
customers
firm's orijin*
may
if
may
have'
a
a
be
is
decree in
neutral
or
they are even aware of
it.
While the araument that forei'^jn firms face greater costs is
appealinc* one cennot acceot
a
it
uncritically.
function of the firm's nationality*
The
intuitively
extra costs will
be
industry* and coroorate history*
For some companies they may even approach
zero.
19
3.4 Advantages
The third element of the proposition is the advantage
which
the
returns
the
foreign firm can aopropriate more fully by FDI
to
than by some
market transaction.
3.41 Internal Advantages
In
this
Section
differentiated
discuss
we
products*
role
the
economies
and
of
commercial
and
diseconomies
These factors are internal to the firm since
outside
of
the
irrperfect factor
firm
and
economies of scale.
which
embodies
output
markets.
or
they
have
no
creates them.
Some
are
knowledge*
of
scal^*
existence
They reflect
unsaleable*
like
Others* like commercial knowledge* are saleable in
principle but are subject to the problems of imperfect markets.
3.411 Factor Market
Imperfections
-
Commercial Knowledge
3.411 Commercial Knowledge
Much of the recent literature on FDI has emphasized the
factor market imperfections* especially in the markets
commercial
knowledge^
or
technology
(
JohnsonCl970
D*
importance
for
of
information*
Buckley
&
Casson
C19763* and Wagee C1977]).
Since most
concentrated
of
the
on the
literature
deals
role of
or
Rs,D
with
manufacturing*
technology.
it
has
Physical technology is
i
r
20
relitively little importanc'" in bankinn,
of
computPrs
and
systert. s
Duilt on them,
firms which operrite internationally.
any
effect,
probably
is
it
to
uhile somr
banks
use
do
those ^re rtarketed oy specialist
]n
any case,
foreic;n banks
put
factor
this
if
at
has
cisadvantaoe
a
vis-a-visUShanks,
Commercial knowledue -- that
fr.
--
arkets
would
bank builds up
at'
road
and
it
fallows,
the oanK
others
than
able
to
to
may
host
country
have
firms
oetter
its
access
cost
the foreign
it
The
its
oo
local
inforiiation
and
thus
is
t h
i
a-count
Dank
does
not
foreign oank can alsD sell
knowLedie of its home
to
when thoy
a
respond to their needst he they loans or
gives other oanks an entri^.
it
mar:.inal
low
at
operational reQuirerrents.(.''l) r-ioreover,
follow
Over time»
can draw on the
It
foreign
and
has an advantar^e vis-a-vis
servicing its customers.
in
firms
hold more explanatory power*
to
already possesses ouickly and
tittter
information aoout
stock of knowled';e about its customers.
a
it
competition
so em
is-,
r y
Finally,
it
markets than US banks
for
Tiarket,
reasons of history or politics.
Traditionally, banks
business
via
countries.
other.
m,iy
a
The
have
corrf.spondent
The
conducted
iruch
of
their
r'-lationshios with doaiestic bai<s in other
foreiun and domestic banks route business through
relationship
is
not necessarily
common
modus
opcrantii,
even
for
each
exclusive and both oanks
have several correspondents in the other's coLintry.
very
international
banks
with
This is
still
many foreign
branches, and works quite well for stand ardizea transactions like money
trinsfersandlettersofcredit.
21
3.^12 Output Market
Imperfections
-
Proouct Differentiation
Caves Ci97lil has argued that product differentiation is one
advantage.
Grubcl C1977] maintains that
explaining
multinational
thoughf
is
a
is of
it
banking.
retail
source
special importance in
he himself
As
of
points out
competitive advantage based purely on oroduct differentiation
rather precarious since innovative
easily curtail it. (22) For
it
responses
firms
local
by
may
to be useful* the differentiation must
I
i
be
one that the domestic industry cannot easily copy.
National origin itself meets this requirement.
Its
origin
foreign bank an appeal to subsets of the population
ethnic
of
related
either
-
the
minorities* or other groups who attribute some special value to
California provides examples of both situations.
the nationality.
Bank
gii/e
tnay
California
Tokyo and Sumitomo Bank began their
entering
the
to
needs
of
the
State's
Japanese
in
Beverly
Hills.
Leumi-Le-Israel has its agency
neighbourhood.
Fransisco
It
proper.
is
the only
The
agency not
txchange
Korea
section of Los Angeles that
is
heavily
operations
minority*
heavily
a
by
Bank
Jewish
located in Los Angeles or Sao
Bank has its subsid'^ary
Korean.
Careful
analysis
in a
of
other foreign banks* location patterns would probably turn up more such
cases.
The French Bank
Paris)*
is
of
California (a
subsidiary
of
3angue
Mationale
an example of national oriqin appealing to other
de
groups in
the population.
This bank has placed its fojr branches in very wealthy
communities.
perhaos feels that these are where
It
it
is
most
likely
I
22
to
customers
-fino
bank with it because of the cachet that
will
who
acingsomayhavt-.
In all
these cases* one couLo aroue that the operative factor
ct
special knowleocr.' that
one cannot
N(»vertheless»
foreian bank has by v/irtue
th*^
the coeration of such intangible end
out
rule
subjective factors as nationalisin and n<ition3l
Lthnicity* however*
one
sogment
the oopulation»
of
rri^ainder.
The
two
with
90/.,
of
b(inks
fvf'ither
one
is
thdtfeO'i
of
it
in-ije.
•
While aivin'i preferred access
double-eci^ec.
is
customers
bumitomo
now.
sank
The
Jrr>anese-A'nericans.(2^)
of
Japanese-
A'nericans.(23)
opened
other
Dy
end promptly changed
3.^1i Economies and
Since many of the
general
internal
name
its
D
i
seconom
oanii-s
i
to
California First 3ank.
< s
of
involved in
economies
would require that 1) economies
Scale
are
PFiI
lar'^ie,
one
nioht
scale
of
anu
exist*
?)
that
or<>scnts
some lirnitea emoirical evicenc' which indicates that
general
effect
is
"Moreover*
to
ecunaTifS
put
foreitm
of
which
scale^
foreign
banks
banks
pos'-^es'^.
at
no
a
is
Dy
no
Tieans
ais advantage
size
advantay:!t.
in
to
This
the
Appendix
larger than their domestic counteronrts.
banks
are
loDk
f.jctoi^*
foreign
be
Bank
''Jational
scole as an explanatory
of
than
Tokyo of California doubled its
of
1975 oy acouiring the southern California First
size in
purely ethnic
,tS
California reportea» in 1975t
were
accounts
new
its
oeing
T^ank
to
reduce the oank»s aoDeel to the
may
largest Jananese-owned banks rpqan
their
the
orioin*
its
of
is
if
3
there
clear* their
California*
over California
•
23
banks*
The world's
Largest bartk» Bank of America, is Californian,
five or six banks in the state are all
next
in
(ranked in terms of assets less cont r a-accouot s
evidence
anecdotal
There is
operations
International
domestic
their
then can
(letters
of
comoetitorsf
100
in
the world
)
agencies
that
too
the
The
can
handle
better
credit* money transfers* etc.)
with
the
explanation
oeing
diseconomies of scale in clerical operations.
Our
small
organization tends to improve the quality of
services.
We can trace a
transaction within hours
for
a
customerf versus days for a larger bank. (25)
While this is certainly true, one cannot make too much of
it
is
self-limiting
in
that
becomes successful and grows.
the
beginning,
the
handle operations,
Second, much of the efficiency is due to
and
revenue
the
develops* the
higher-value
the
agency's
the agency has few clerical personnel
so
officers.
and officers
opportunity cost of the officers* time
Tht
generated
officers
activities,
spend
such
First,
agency looses its advantage as it
the use of over-qualified personnel, that is,
At
it.
helos
more
defray
a^d
as making
more
loans.
overnead*
of
their
As
is
low
business
time
on
An expanded clerical
staff takes over operations and in time the persannel adwa^ta?? too
is
lost.
3.^2 External Advantages
We wish
in this
the firm.
Section to emphasize the role of advantages external to
These contribute to the foreign firms* ability to compete it
2<i
Howpver
Local market.
tne
they
hyfrer-Klndleoer^er sense.
The
i
are
\
rm
investment
3.421
in
to come
or'Jer
Factor Niarkets
evaluations
crew
FOl,
It
is
interesting to
occurred
the yen and
a
played
a
part*
note
after
of
nu-Tiber
even rrauire the act of
the
attf'ntion
outward, and tax
Tuch
that
effect
rjc
va
I
ua
t
i
ons
European currencies.
maintain
inward*
flows of
FDI
m.'rKets
foctors
obviously
the flow is
consistent
Other
•
Aqmon
C1^7?J* ana
imperfections
and
as
Lessars;
causes
of
[197 fc]
FDI.
focus
on
securities
individuals
It
cannot
Diversify their portfolios themselves because of transactions costs
foreign
Cc'n
exchange
in
the dollar relative to
of
withthistheory.
Rariazzi
of
that
bankinq
the
of
the airection and timinp of
but
the
to
Countries
FDl,
of
exchange rates subsidize
California
in
orior to tTe recent widespread use of
floating exchange rates* on flows
over -valued
Hciy
right
Financial Market Imperfections
-
revaluations,
and
They
the
in
into existence.
Kohlhagen [19773* aTiongst others*
c^
advantarjes
has no assiqnaDls orooerty
advantages and cannot sell them.
the
really
riot
controls*
!)ut
can invest
in
doifcstic companies
operate internationally* the latter can charge
a
for
oreniuii
or
that
the
diversification servicetheyprovicfe.
3.'422
A'
Output Market
I
moe r f e c t i ons
-
H (jopo
mentioned earlier* forei<]n firms may
local
firms choose
not
to
conipite.
The
I i
he
i^odel
s t i c
Host
Markets
able
to
survive
here is one of
a
because
doninant
25
oliaopoly
with
established
a
producfTS.
fringe
mioht result
firms*
firms
have
modus Vivendi with each other* they nay tolerate sere new
entrants because acting against
or
dominant
the
If
in
them would
disrupting the
ff^^an
government anti-trust action.
fts
a
cartelt
result* foreign
though higher-cost producers than the oligopolists* may be
under the price 'umbrella* the former have erected.
to
survive
3.1
gives four and eight-firm
industry
in
concentration
California from 1970 to
197fe.
ratios
for
Table
banking
the
Both are very high for all
presence
While they oo not prove the
years.
able
oliaopoly*
of
they
do
indicate itsbasic feasibility.
InsertTableS.l
Entry by new and foreign banks
1970-1976.
we
As
continued
has
foreign
in
or
on
inter-state
banks may even have an advantape: over
local
Because they can
draw
establishing new retail banks.
funds
issue
period
the
discuss in Section 5.42^1 below* th^se are the only
possible entrants because of the prohibition
The
throughout
securities
in capital
bankina.
entrepreneurs
on
internal
markets where they are already
well known* they may have lower-cost access to capital. (?&)
The four
and
laroest banks are increasino their market share in both
deposit
ratios.
aaencies
marketst
and
Unfortunately we
and
Edge Act
picture somewhat.
asset
there is no clear trend for tTe eight-fir.n
were
unable
subsidiaries.
to
get
comparable
data
for
Their inclusion might change the
Even so* given the evidence on internal
scale reported in Appendix D* we suspect that the
largest
economies of
banks
have
Table 3-1
California 4 and 8-Firm Concentration Ratio Based on
Total Domestic Assets and Deposits of National and State-Chartered Banks
(including foreign-owned)
Assets
1970
1972
1974
1976
4-Firni
69.6
68.8
70.4
71.0
8-Firm
86.5
85.7
86.9
86.1
Deposits
4- Firm
26
somewhat*
back
held
and
that
this has Left roDH for entrants.
following quotation provides some support for this
model
doiiinant
The
oligopoly
•
California always has been kind of sleeoy in comoarison with
Ever
Banks here have had it too easy.
York or Chicago.
New
branch
since World War II« they've Deen able to just ooen a
It's been an
watch towns develop around theii.
anywhere and
comoetition
easy one-way street* but now there's very severe
moving in.
we
did
CThe foreign banks are] doing to American Danics what
of
American
banks
entry
19SOs.
The
and
in
the
them
]950s
to
spirit
and
competitive
improved
the
overseas really
sophistication of the domestic banks tiiere and I think these
did
guys are doing the same things here on the West Coast we
over there.(27)
3.'f23
fixternal
Economies
Next we consider one effect of financial centers
of
the
in
baf^king.
a
foreign country, not only do they ooen their offices
same city*
but these offices tend to be within walking distance
When banks enter
in
FDI
on
each other.
Having ready access to
a
large number of sellers* especially when these
offer somewhat different products* reduces
search
costs
for
buyers.
Foreign banks are particularly likely to offer different oroaucts since
their knowledge* methods* and policies will not be the same as those of
domestic
is
equal
banks.
to
Search costs are analogous to
an outward shift
this case the banks.
banks
may
be
more
of
Hence the
a
tax
and reducing them
the demand curve facin; tne sellers* in
following
competition*
they
statenent*
bring
more
'While
foreign
business
for
everyone*. (28) If the sellers individually face dowTward sloping demand
curves because their products are differentiated* the result will be an
27
increase
would
n? w
in
the rent
expect
they can collect.
existing firms
that
foreiqn firms.
in
1974 and
Leoislation
proolem,
no
ances
some exoenditure of
bank
on?
will
value to
However* one woulo not
resources Dy
:3
0Tiestic
banks
small
1975*
California
in
sDjght
it
DC
banks to
to
get
passed which woulci have severely restricten foreinn Danks*
officials from several large banks lobbied aq'iinst it»
w^s because of
the
t
foreign entrants.
assist
Uhent
jtis
and assistance activities the full
attributable to an additional bank's entry.
suroriseci to oDserve
c i r c
the market would welcome entry by
the free-rider
riecause of
in encouracttpent
invest
in
under these
.'>
advantage
cone f>rn with
to
thf-m
of
oart*
In
this
recinrocity* but thry were not unaware of
builOin'^ up
Fransisco anc Los Angeles as
^ari
financial centers for the western us«{29)
Overall,
the free-rider orobleT
foreign
encouraqement of
leads to less tnan the sDCially ootimal
entry.
Some
will
encoura.:ie'nent
occur.
Srllers may provide entrants with assistance in find in o quarters* entre
tr
business
associations
business their way*.
several
of
major
US
business in
\'ew
anii
An official
of
3jyers
etc.
clubs*
di
'irtnco
Napoli
In
competition and
generated*
*throw sone
reports
that
corporations opened accounts on the bsnk's first day
York
*as
a
token of dppreciation for our st^rvices in
Italy*. (30) These responses will serve to lower the
ntw comers.
nay
effect* each will
customers.
costs
facinq
the
receive sore *subsidy*from its local
because
one could even argue that
of
st-'^te
the
positiv
<
externalities
banking requlatory aqencies
should offer inducements to foreianers to enter.
28
3.424 Government -Created Imperfections
In
the US» the states and three Federal bodies share the responsibility
for regulating bankinu.
Partly as
lacunae
this*
of
which favor foreign banks vis-a-vis their local
developed
Three commonly
non-prohibition
mentioned
on
sources
affiliates*
Reserve Systetr.(31)
advantage
of
branchinq»
interstate
ownership of securities
Federal
result
a
and
competitors.
arel
non-membership
3),
the
1)»
the non-orohi bi
2)»
have
t i
on on
in
the
addition* anti-trust law can combineoT
In
occasion with banking law to bar all but foreicn banks
acquirinq
froin
certain local banks.
3.4241 Interstate Operations
The McFadden Act
8HCA(1956)»
and
effectively
Foreign banks* however*
state
that
prevent
^nay
f^any
cannot.
regional
markets in
Nevertheless*
one
3(d)
of
a
do
not*
any
California* Mew York*
but
seet^i
to
able
be
to
large noney-c ent er banks
the
way that
exaggerate
can
the
inter-state banking by US banks.
Foreign banks would
Illinois* and some others do.
penetrate
new
Section
*
establish branches and subsidiaries in
entry.
permits
Ammendmen t
Douglas
the
the
importance
of
the
disadvantages facing US oanks.
Almost all
of
production
offices
the
largest
in
major
have
US
Edge
cities.
activities associated with international
suDsidiaries
Act
The
traoe.
loans which are then booked at the home office.
and
loan
former can engaqe in
The
Hank
latter
arranoe
holding companies
1
29
m.Ty
also conduct mortgage banking, leasing, consumer finance, and other
activities across state lines.
related
m.riaged
3.4?<t2
Thf^
G
I
sidestep the restriction to
to
Larqc US banks do
Investment Banking
as s-S tea'sa
commercial
prohibits
Act
1 1
banking
investmerit
anc
banks
US
the
in
frPT
engaging
US,
Foreinn banks may*
through subsidiaries and affili<3tes» underwrite and deal
securities
adriition
in
their
to
banking
principle* then offer corporate clients
can
have
de":ree»(32)
(jreat
a
to
seeir
their
US
coTipe
t i t
The
o r s.
wicer
a
ran,:?e
of
boti
coroorate
in
ousiness.
in
They
can,
services
in
than
activities can generata
two sets of
positive externalities for each other since inforfnation about
company
a
g.ineo in one capacity can be used in the other.
However, the number of foreign banks involved is auite snail*
only
had
2b
securities
US
typically these were Located in New York,
s'-'curities
owned
inoustry
securities
is
slioht.
o r ^-a ni
za
t i
activities*
on
pcssive participants
orientation
markets.
is
in
towards
the
(J.
3)
in
the
Their market
foreign
syntJications.
serving
{3'»)
3.42^3 Federal Reserve Membershio
U,S,,
in
share in the
foreiqn
For
the needs of
bank
ranks only 52nd in the
terms of capital.
banks
1975
affiliates* and
SoGen- Swiss* the larqest
listing of the top 300 securities firms
un>.ierwr1ting
bankinc
investment
or
In
tend
many,
to
be
In
their
essentially
their
primary
investors in their home
30
^on-membe^sh^p in the Federal Hesfrve
just
Almost
all
fractions
of
few.
a
keep
to
acvantage
important
iTore
since
serves
with other
dt>r.)Osits
on
form
the
in
applied to most
deposits
their
S
ta
te-ch
with
.>
rt e
to
seeTi
have been
a
fcreinn banks* not
Tiey are
large US uanks are intTi&ers.
non-interest bearing deposits.
n'
it
would
Systeir.
required
Federal Reserve
the
red banks
r,ay
as
their
keep
approved securities or as interest bearino
of
The upshot
local oanks.
is
non-member
that
banks
seemingly charge less for Loans.
This analysis is
flawed.
First*
the
national
services from the Fsderal Reserve which are
banks
forn of
a
ue
receive
facto interest
Second*
This reouces the foreinn banks* aoparent advantage.
pijyment.
foreign banks*
California at least* co much
in
of
thrir
free
lending
via
aoencies which do not have access to low -cost oeoosits but nust instead
fund their loans via .Torrowinq in the Eurodollar market*
or
the US
in
c a
i
ca
1 1
I
y-o wneo
s
National oanks have tie
markets.
Finally*
these sources.
doniest
pit?)
banks
for^^inn
ta te -c ha
r
t
e
must
banks*
red
still
Tabl*=.
3.3
a
null
coiipete
with
can
charters
if
non-tiindinq constraint
and
Table 3.3
Federal Reserve mennership therefore seems
it
access to
summarizes the ar-utt^ent.
Insert
freedom from
saiie
ano the national oanks
withdraw from the Federal Keserve Systeii and take up such
th^y wish.
from JS oanks*
advanta-^'e
tor
the
a
forti<ners.
S.^^'t'tAnti-TrustL^w
I
Table 3-3
Advantages and Disadvantages of Foreign and Domestic Banks
Domes ti c
National
Federal Reserve
Membership
Domestic Deposits
Eurodollar &
Capital
Market
U.S.
Foreign
State Chartered
I
Subsidiaries
Agencies
i
31
significant
in
explanation.
i
In
(about
b<-.:riks
bankinr
httween
interaction
Thp
nai vi dua
California*
to
$1
were in
banks.
regulators
in
other
further
concentration.
left
has
H
This
a
there
is
state or in the UG*
to
only
jive
id-ran qe
the
forei
oy
hanks of roughly the same size
ailing
their
of
fellows.
Finally*
larae California oanks
(J
jn
already
the
hioh
a
role
industry
banks as possible acquirers*
These have
the <=tcauired laoks bear the
Less
.ire
valuable
to
cost
to
ba^ks
foreion
Government rejulations have combined to create an
imperfection in the mcirket for control
bcoks ana may
rri
'ain to oreventino increased concentration in each
stocicnolriers
banics.
US
blanket
a
o1
is
acauisition
barred
brlCA
local
increase
the deqree that the acauisition s
than
nuTiDer
law
York St<rite,(55)
N!sw
social
a
,j
^s
short description of the four major c-ises.
their parallels in
If
197Us«
Th*-^
absorb
to
since this would have
Apipendix
the early
un willing to permit
were
camot stT^e
thoujh it
takeover.
The
condition
no
casest
anti-trust
anc
billion in assets) were not perfor'^ing well and
i3
w«re prime candidates for
out-of-state
I
regulation
which
does
not
hart
foreion
then an aav.jntape.
3.5 Fiehavioral Explanations
In
some contrast to t^e aoove explanations*
instance
role of
Knickerbocker
C1.9
competitive
relatively
interaction
similar direct
numner
73J and Flowers ri97£l*
»olicopolistic reactiori»
proposes that in
a
in
the
authors*
Lf-^adinr
for
have eTphasizeci the
the rr!otiv,jtion for F3I.
concentrated*
amona
of
oligopolistic
The theory
industries*
firns causes them to make
foreign investmfrnts at almost t^e
saTie
time.
When
one
32
makes
a
possibility
of
firm
foreign investment* the others imitate
a
a
the
competitor accumulating new capabilitiest information*
markets* and competitive options. (36)
from
to counter
it
This would imply that if one bank
country is in California* others
will
there
be
Graham
too.
119773 adds to this the theory that some FDI represents an 'exchange of
threat*.
investing
By
own market* the foreign
the home country of direct
ensures
firms
that
investors in its
engaqe
cannot
they
in
abroad while m3intainin'3 prices and profits
competition
price-cutting
at
in
home.
Proof of the theory of oligopolistic reaction requires the discovery of
cases where imitative investment
that the
could
market
support
not
indications
took place despite ex ante
number
the
of
entrants.
new
"1
Otherwise
the
observed
reflect the fact that
have*
a
•clumpino*
time
in
number of firms
of
industry
on
in
investments may only
country-
and
found and acted on siitilar opportunities*
roughly simultaneously*
3.6 Theoretical Synopsis
Tieing these considerations together* we suggest the following summaf"/*
Distance* physical and cultural* should have
the
but
degree
exoerience.
order
to
will
differ
among
banks
with
domestic
banks
negative effect on
product
differentiation
external
economies*
in
commercial
knowledge
are important* we maintain that theory to
dste has neglected the role of external
that
advantages
later in their home markets*
While we accept that internal advantages such as
or
FDI*
oecause Df the effects of
off-setting
Foreign banks must still have
compete
a
capital
advantages.
market
We
restrictions*
would
lack
argue
of
competition in the nost Tarket* and f.ovorable Leyislation may also play
a
roLef
cannot
especially since it is
be
solu out
these
davantares
rjther require the act of FDI
in
for
narticular
rra
I i
zci t i
on.
that
3A
4.0 Hypothesis Testing
will
ye
agencies
treat
and
subsidiaries
seperately*
major
The
difference between them is that the Latter can acceot dcnestic deposits
engage in retail banking.
and
a
subsidiary* the foreign bank
market
that
from,
We argue therefore that
is
entering to operate
in
in
establishing
different
a
for agency services.
I
Agencies
4.1
investigate the decision by foreign banks
In
this section* we
an
agency in California.
meet
that
of
list
top
the
cont ra-accounts)
100
in
banks
1969
in
or
the
a)«
they aDOeared in The Banker's
world
(ranksd
assets
Sy
and
country
(-6).
problem
on
c)»
they
had at
least one office of some sort
One more bank hao
a
variable.
to
be
drooped
oecause
these
banks*
in 1976
in
of
another
a
data
consideration.
some had one or more aoencies (35)*
none (41)* and soTe shared an ayency
(6).
classify them into two groups (those with
those
banks
US
Eighty-one banks met the criteria and between
them accounted for i6 of the 45 seperate agencies under
Of
less
1976 (119 banks)* and with the size data
being available for both these years (-5)* b)* they were not
(-26)*
open
The population being tested consists of banks
following criteria:
the
to
We
one
some had
then attempt to correctl/
or
more
agencies
and
without any) on the basis of certain bank and country attributes
which we hypothesize bear on the decision.
4.11 i^odel
35
For the regression we use
Linear proba^)itity Torfel of the -form:
a
Yi
where Yi
-
hank
if
1
has
i
=
Lj
+
3
xji
bj
e
wholly-owned agency in
a
California
and
otherwise, except that since six banks jointly own an iqency, we credit
e;.
with
then
of
ch
oroportionate
its
country-specific attributes* anu
regression
h^ive
ar\
eouation
This type
of
rrodel
estimates
of
the
is
sensitive
cuite
e r
os kedas
to
distribution
the
of
term.
and
The
a
bank
will
1
or
less
nature.
The
that
than
Gdussian and hence
estimates
see-n
t-statistics*
Squares^
dependent
model
is*
classical statistical
below and
)ive
we
I I
-beha veo
.
vtna
possible*
formally
tests
We
is
error
the
speaking*
that
not
paraneter
tne
of
the residuals
therefore
*sionificance» levels as
is
Rubinfeld 1976*
variable*
However* our fxperionce
quite
while
error CPindyck
specificdtion
aooly.
do not
models
th«»
very
its
inefticient» but not necessarily
Weiohted Least
regression
by
t i c
flre
Because of the nature of the
2^1].
the
het
coefficients
biased or inconsistent.
of
error
the probability
Fitted values oreater
aoency in California.
are bank
Xj
are obviously possible.
than
p.
describes
then
The
thp stochastic
is
e
share*
if
report
this probleT
ridnotexist.(3 7)
^.lii
A7 6
less
Bank -Speci
is
the
f
i
c
size of
Variables
thi=-
contra-accounts.
parent hank in 1976
We
in
USi
billion
in
included it to capture scale effects*
assets
36
parent
GROW is the growth of the
have
We
GR0W=(A7b/A69)-l.
pen'cd
the
over
expectation
no
as
19&9-197fc»
includes the countrywide effects of exchange
coefficient.
The variable
rate changes*
monetary growth, and growth of the industry.
swamp
will
these
that
advantages or
a
sign of the
the
to
where
factors
bank-specific
any
expect
We
profitable
of
growth orientation.
I
logorithm of the air distance between San Fransisco
DIST is the natural
or
rounded
the nearest
to
five hundred.
increase with distance, but at
primarily
of
miles
The log form qives us costs that
one
included
ye have not
equation
this
in
where
markets
in
thousands
in
decreasing rate.
a
distance
any measures of cultural
operate
office,
head
oank^s
Angeles and the
Los
expect
can
agencies
since
cultural
that
differences will have little effect.
equals
CIMTRY
in
which
or
+
1
bank
the
countries in which
a
the natural
had
branch
a
bank
Logorithm of th? number of
is,
or
subsidiary in 197&.
the frore likely
to
conduct its operations at minimum cost.
a
strategic
choice to establish
a
hypothesis
of
that it has
is
it
Also*
it
is
an
The more
learnt
indicator of
network of offices and represents
capability or service which the bank can sell.
the
countries
decreasing marginal utility
The
of
log
form
a
reflects
representation in an
additional country.
SCMA is
of
an
a
dummy variable for bantts which are the
association
of
limit
organization
savings banks or credit unions, or mortgage or
agricultural credit banks.
not
central
For
these banks, even if their charters
do
their international operations, we exoect that they will be
-
37
di
advant aae vis-a-vis coirmercial Scjnks Jue to
at
a
in
industrial Lendinc or forsion trade.
b(^
negative.
s
TORP is
simiLar measure and reflects
a
four tynes of
J'ipan
recognizes
trust*
and nrovincial banks.
categories
two
customers.
More
are
less
As
far as
is
ascertain*
imoortantly*
Japanese
tht?
ne
to
(3'')
is
in
question's
the only ^ank
no bank
from that
ho'^e
from
country.
takes on
It
its country to havo
country
one.
nothing about whether the Dank
variable's
in
hcis
question
takes
on
interest to others.
theory is correct*
Cfilifornia will
from
Second*
sour
it
too to establish
two other banks.
equal to 1.
that
for OTHER,
the
smaller
we
a
if
expect
a
It
if
Sa/s
expect
we
P1rst» if
the oligopolistic
its
1
thus
particular country*
the presence of one or more of
OThTR? is similar in construction except
of
It
California,
in
is
if
value of
a
coefficient to be oositive for two reasDTs.
the market is attractive to one bank
of
It
of
i/alje
a
California ayency*
a
home country Dank other than itself has an aqency.
is
seems
oovernffent
ariy
presence
latter
the
likely than the others to have larof* firms as
if
probably
systeri.
lona-terT: credit*
or
the
to
dummy variable for the presence in California; of other banks
a
from the bank
the hank
oaTKino
city*
can
we
coefficieot
the
Japanese
the
institutions:
nstrictino their overseas expansion.
OTHER
exoect
We
expertise
of
L^^ck
a
it
is
reaction
competitors
in
itself there.
that
threshold
tht
can only take on
^
value of
1
is
if
th°
OTHER
positive coefficient* smaller in size than
The more banks from
a
country that are in
are the rents that each can expect.
Ae
California*
chosp this method
38
of
representing competition among foreian banks because
variability
in
countries in their representation in the sample and
among
California* and the difficulty of normalizing this
between
countries
structure.
in
Ue have no
country*s
variable for
dummy for national
a
that
least
promotion*
trade
this
and
have
network of offices.
We expect
that
its vehicle*
Banoue
Nationale
(Iran)*
and the Korea Exchange
it
it
I
Bank
The
to have
to
owned the bank.
Panic
the
rationale
of
an
is
including
reason*
of
would tend
met
are
forei'^n-trade bank* be
a
variety
Paris (BNP)* the State
de
its
is
The basic criteria
local bank
b
especially if
bank as
a
bank
in part.
several offices aoroad.
would like
it
<\
woulG mean regressing the
•flagship* banks.
government may feel that for
a
where
case
largest in the country or
that the bank be the
pove rnment-owned,
the
since
deoendent variable on itself* at
FLAG is
differences
for
the size of their economifs or in their banking
representative
sole
great
the
of
international
use
to
largest
Canco do Brazil*
India, bank
MeUi
However
criteria.
wp
dropped BNP and added the Hongkong and Shanghai Banking Corporation and
the Bank
Tokyo. (39)
of
4.13 Country-Specific Variables
CAPITAL is
investment
dummy for home country restrictions on
a
by
citizens.
its
Ideally*
we
continuous measure of the stringency of capital
Measurement
coding.
1*^76
problems
The UK and
foreign
would
outward
have
outflow
preferred
a
restrictions.
forced us to fall back on subjective dichotomous
Israel pose no problem since in Doth
exchange
portfolio
for
foreign
countries
oortfolio investfent commanded
in
a
's
I
39
prf^TiiuHf
indicatiny
restrictions
cciuntries*
the other banks
jovernirents
in
e
other
of
However, aoverniients own alL
rrifjht
have code J
Since
1»
as
bound oy their own exchange control regulations,
not
are
which we
effectiveness
The
Less clear.
is
sar^oLe
tht:-
reduces to
CiiPITAL
bin din:) constraint.
d
dummy for the UK and Israel,
meaning
real
Its
is
therefore somewhat ambiyjous.
The two trade measures (all in Uil billions)
from the home country,
the US
home
country.
The
activities and
t
their
rade-
r
2)
jnd
e
I
a
t
eo
countries* firms and conoitions.
poor
imports to
''PKTS*
variables
reflect
knowledcie
Trade with the U.S.
aqencies»
the
of
is
their
home
admittedly
an
used
duiiny
a
We
settle appropriate data.
to
Canada we treated seperately.
integrated with that
its
zero
to
tr-icie
Canadian
the trace
the US.
of
set
We
for
(CA'J)
substantial outlier on all
nationality.
^ind
instead
Canada
is
a
measures because its economy is so
Incidentally* since all
the
Canadian
banks in the sample have their headquarters in Toronto or Montreal,
is
the
proxy for trfidc with California ana the other western states*
areendeavorini
hctve
1)
XPRTS« exports from the US to
through
advdntd.:je
are^
CAM
collinear with DIST,
CftLCOMP
branch,
the number
is
or
country.
It
operations
interest
merchant banking representation
is
in
in FQI.
coefficient
oanks
Californic.-
of
,i
proxy for
the
If
should
foreign
th'o
effect
t)anks«
of
home
have
that
in
host
country
countries
exch-tnae of threat* theory
oe
positive,
expect
agency,
the forei-^n Dank*s home
the
»je
some
the
on
is
banks
the
with
latters'
correct,
oooDsite though.
the
If
i
iJO
information
Calitornia banks have access to much the same
FOUT
reflects FDI
FIN!
in
hook value
subsidiaries
pursue the
of
parents
countries.
country
home
firms.
companies
of
expect
We
banks
Foreign
197b. (^0)
in
the US from the bank»s home
They are measured in ter^ns of
the reverse stock.
FIN
the
We have
effect than the latter.
To
country*
and
billions in
USj
Local
custotiers
Lesser oegreet they also
their
in
home
FOUT variables to have positive
and
set
a
as
operations
with
coefficients* with the former having
seek
the
rents*
foreign bankst this will reduce the letters* ootential
Finally*
do
as
greater
a
aTcJ
-nore
the Canadian investment
significant
figures to
zeroasinthecaseofthetradedata.
4.1^ Results
Table ^.1 gives the results for three variants of the
report t-stntistics and significance
Throughout
5%
level
on
while
we
these are only indicative.
discussion below our criterion for significance
the
a
levels*
?fiodel.
is
the
one-tailed test.
Insert Table ^.1
The magnitude ano
across
si
oni
equations*
the
cance
f
to
operate
indicate that
there
ones
larger
internationally
are
coefficient
is
consistent
confirmina our casual observation that* of the
world's largest banks* the
likely
A7b»s
of
economies
international network of offices.
are*
ceteris
oaribus*
than are the smaller.
of
scale
in
more
This would
sstaolishing
an
These economies give larger banks an
Table 4-1
Agency Regressions
(t-statistics in parentheses)
Variables
^1
domest
i
banks
c
smaller
vis-a-vis
advantage
ones»
but say nothing aoout
vr.«
.
The direction of the
6R0W*s coefficient is negative and small.
is
foreign
effect
interesting* but one cannot make much of it.
In mooels
and 3» GIST has
1
magnitude
the
coefficient
DIST*s
of
negative effect.
a
the
latter
model*
dramatically.
The
Ttt
jumps
t-statistic does so too* but remains insignificant.
CNiTRY
The more countries
holds no surprises.
likely
the more
Not being
to have
a
commercial bank has
a
the
that
is
it
bank
in
question
which
in
California agency.
a
negative
will
effect
operate
in
the
on
one e- so ec i al
activities.
If
expect
would
i
we
were to
to
find
zed
institutions
reolicate this
the
coefficient
likelihood
California.
coefficient's lack of significance is not surprisim.
countries*
oank operates*
a
In
a
sCMA«s
number
diversifying
dre
research
in
ne eligible
their
years
ten
we
and
size
in
of
sionificance.
TORP is
it
a
very different case.
Its stronoly negative
coefficient makes
very unlikely that Japanese trust or provincial banks
agency.
California
Our impression is that
largest
of
the provincial oanks* has
only member of this group to have
apply
to
it*
the
a
a
this is due to the Japanese
government's restrictions on their activities.
the
have
will
a
The 3ank
of
London branch.
branch overseas.
models would oredict its having
a
If
Yokohama*
It
is
TDRCJ did
the
not
California agency.
42
while government policy
Japanese Government
estaolish
reluctant to authorize more
is
themselves
California.
in
restrictions
its
re':iuce
change in the future* one <;usDects that the
Tiay
It
foreiqn
on
is
hanks
Japanese
banks
to
already unaer pressure to
ooeratin.
Japan
in
and
probably does not wish to strcnqhten dem ancs for reciprocity»<'^l)
OTWER and OTHERS" hrt consistent across the
facing
not
two
or
more cofnoatriots
is
rrociels.
Th- net
sli'^htly positive*
The
permit one to choose between »oli7 0polistic reaction*
attractiveness*
alternative
as
•cancelling out* effect
of
surprising and would
one is
the
explanations
increase
seefi
"lore
in
of
effect
the nu-nber
of
results oo
market
and
-nultiple
c-f
entry.
The
competitors by
consistent witn the latter theory
thanwiththefortrer.
FLAG*s coefficient
s
i
ini f
i
c
ant
a
positive anu not
neuligible
size*
in
but
not
positive* and significant effect*
one
.
While CAPITAL has
Cr.rmot
is
a
very stron-,
,
assipn this unambiguously to the hypothesized causp.
number of other links between California and th»
J^
The''e
Israel
or
af'e
which
m^ypLayapart.
N'PPT's
effect*
coefficient
though
is
oositive and significant.
XPRT
the coefficients are not significant.
unreasonable since one can expect US
banks*
response
has
neaative
a
The si on is not
to
exports
to
mirror the foreiqn banks* response to their countries* exports*
CALCO^!P
has
the expected negative
coefficient.
The
evidence
does
not
m
lend much support to the
exchange
threat* theory.
of
CAN'S coefficient is not significant in either mocfel.
the
In
second
the coefficient increases in magnitude by sone fifty percent and
model
almost becomes significant.
Finally* we come to FIM and FOUT.
Both
coefficients are snail and
ana the signs parallel those for the trade variables*
significant*
would expect the variables to perform more pawerfully if we
data for FDI
could
not
We
get
into and out of California.
'>.15Classification
In this section we
classify
the
examine
will
banks*
the
models*
ability
to
correctly
This gives us an alternative way of
decisions.
Furthermore* examination of the errors
judging explanatory power.
can
provide additional insight.
For classification purposes we have used an ecuation that is
The regression iiodel
combination of two other equations.
Y
where
Y
models
=
bl*Y2
not
of
b2*Y3
is
defined as before* Y2 and Y3
5
and
fc*
and
bl+D2=l.
background to this technique.
some
+
the information that
are
a
linear
is
e
the
fitted
values
fror\
Nelson C19723 gives the mathematical
Basically* it
amounts
to
drawing
out
remains in the residuals* when these are
perfectly correlated* of the component equations.
:
'^
The cofTshinationqave the foLLowin'" result:
SER=0.?62
R2=0.715
adjusted
One can see from
the
rpqression
the cornbination
th.it
eauation alone.
rtject
'w(
is
and
from
to
Ci
into the
the
first
frotr,
and
more oowrrful
that
this model
intervals
last
the
of
than either
l-bl-b2=0
does
not
level.
into
Values less than
1.
error
stand3r:i
sli-:,htLy
t-test of the hypothesis
recoded the fitted values
rlaced
K2
itateventheSO/Jsignificance
intervals
ii
A
U.?89bi*Y3
0,7ir;75*Y2
=
Y
equolly-soaced
ten
anu areater
respectively.
than
The
1
were
results
r e
InsertTable^.2
If
take
we
dividino
the
as
(CUE-tion correctly cljssified
error
was
5.7%»
b.'inksoutof^f.
The two banks
otherwise
(Y = .3'»)«
to
Whil'^
2
fitted orooaoility of .5* the
banks and missed
Dsnks out of 3b.
Type
have California agencies
Lyonnais
Credit
we
II
on
seven.
error was
Type
10.9>.
I
or
(Y^.'tH)
thoijc)h
^nc
the
nodel
5
Boyerische
predicts
Vereinsbank
cannot explain the first error oeyorui atlrihutinq
statistical variation*
outside
a
.
th.jt
arc
or
It*
line
Information
to
in
the case of the second we can
t->c;i
r
,
Th'='r<^
ore
inriications
that
brioq
the
Bavarian banks are chillsn'Jinq Germany's big three* especially
it
soTe
Icirgest
in
the
Table 4-2
Agency Classifications
II
Present
Actual
1
)
)
45
market,(4 2)
coroorate
iri.iy
reflect
olfices as
strategy
a
a
The Bayerische Vereinsbank's Los AnjeLfs aaenry
of
doveLoping
inten^itional
3n
network
of
form of serv/ice c'^mPetition for the noTie Tiarket.
Four of the five ruses in whicrt
the
oredicted
mo^el
wholly-owned
a
which the banks in question did not have are easier to exolain.
agency
The Long-Term Crecit Bank of Japan
(¥=.7^)
Lloyds Bank's (Y = .E)9) California subsidiary
late
in
entorec'
1977,
c'*
3.
quite large and the bank
is
probably does not need an agency.
(Y^.nh) and Deutsche Bank
Societe General
cc-owners
its
the
of
agencies.
(Y^.ot)
are
two
Eluropean-Afne ri can Bankinq Corporation
While this
strat. euy
may have satisfied
of
the
and thus sharo
oartners
trie
pastt the results imply that the two banks could stand .?lone»
the
mi:3ht
speculate aaout the consortium's
Tho fifth case is that
bisically
a
mortgage
of
s t
ab
the ^'iopon Creciit
bank
i I i t
y
.
(
Bank
An aoency may
=.b2).
(Y
well
ii
Hnf
^'t
whicn nevertheless ooened
office in Los An'-eles in lblG»
si'^
a
This
is
representative
follow
eventually.
<.? Subsidiaries
t.21
Model
Ht-re
we perform
time
arf
examine
we
mc^el is
the sime exercise as we cHa
a
the
for the a>^encies»
some of the variables.
this
Acain»
the
The sample is different thounht
c>s
decision to est)t)listi
linear pronability one.
out
a
subsidiary.
.
46
For this test the population consists of those
a
presence
in
California, oe
problem
we
are addressing then
to have a subsiciary,
a t
or
a
share
have
ve office,
1976.
the determinant?; of the decision
is
given
one,
in
i
June*
Sixty banks met this criterion in
agency, or subsidiary.
The
the form of reoresen t
in
it
foreign banks that
that
banks
the
in
question already have some presence in the state*
ij
The model for subsidiaries has even greater statistical
for
one
the
a
securities
aoproach is to develop
banking
or
system
a
equation for each alternative.
is
of
state. (45)
states,
or
subsidiary.
Thus the appropriate
simultaneous
equations
A
with
one
do.
The BHTA
bank could divest
itself of
This is very difficult
its existing subsidiary when acquiring or es
another
between
caoose
to
barrier but not an immutable one.
a
than
The BHCA forces banks, other than those whose
agencies.
operations have been 'grancifathered*,
between
problems
t
^iOl
i
s
hi ng
to
a
subsidiary
in
The model must be able to evaluate the alternatives
for each bank, choose
the best, bar the
others, and yet
Leave some room
for ambi gui ty
Ue have
chosen instead to
use
one-cquation
a
alternatives with dummy variables.
a
start on the development of
a
treat
and
This is far from ideal
expect bias in our estimates ot the coefficients*
us
model
However
the
since we can
it
does give
more complex aid aporopriate nodel.
4,22 Bank-Specific Variables
There are nine bank-specific variables.
GROW, CNTRY, and LIST.
To
We
have already discussed
A7fe,
these wc add SOTHER, S0THEP2* ano TIMEt SUB,
^7
SOTHfR and S0THER2 nre
SEC.
r.-nn
0THE1R2*
but
TIME
a
is
been
the cofripetition referrec to
dummy variable which
in
that of subsiaiaries*
is
takes on
construction to oThlR an^
value of one if the bank
d
Calitornis less than two ytars^ anc zero otherwise.
in
coefficient
its
laenticaL
be neoative.
to
first establishes its presence in the state vis
Subsidiaries^ shoulo the
or an
agency.
thtm*
follow
Pf^rent
requiring several years before
lnc.il
year
a
retail market
or
test
may simply
not
Look
attractive.
SUi'.
is
oummy variaole which takes on
a
has
b.jnk
does not
a
have arrived at
aoply
five
the
to
New York
SPr
neo
is
<-j
Also*
investTient
riot
tl>at
a
from the
knows the
it
time.
Recent
in
one
nuTfiber
or
does
parent
the
if
niG
iisrket
1977,
This
subsidiaries
were
oanks
haVe
of
considered 'banks* under the law
comoanics),
Ue
expect
SJB»s
coefficient
to
t i Ve ,
a
dummy for those o.inKs thtt have
the ownership of
a
a
de
jure cantrollino shaire in
securities comDany in the US.
banks in particular have reportedly preferred to
rather
result
Also we
where
cases
BHCA,('(6)
the
specialized subsidiaries which are
be
valur of
establish
to
time when the retail
^
ban<
investnent.
bankinc subsidiary in another state in
•grandfathered* by
(e.a.
a
the
place
tr^kcs
entrants
decibe
confident
is
it
a
representative office
This cel.^y may
well enouoh to risk Tiakin
ignore the fact that the
Crinnot
a
parents
later.
two
expect
We
incluoe TIME t.ecause usually
we
has
than
alternative.
bankino
subsidiaries.
because of
the
Some German and Swiss
estaolish
securities
Once a-iain* the THZA makes these
complexity
of
the
laws
and
lack
of
4B
information
about
activities
the
probably mis-classified some cases.
estimate
the
coefficient»
the
of
soms suas
of
i
di
a r
i
we
es
have very
This introduces further bias
but
it
clear
not
is
into
in which
We nevertheless expect the sicjn to be negative,
direction.
4.23 Country-Specific Variables
FIN and FOUT reflect
subsidiaries
U.S.
the
in
fact
the
that
or U.S.
home-country
corporations
with
corporations with subsidiaries in
the home country are obvious sources of deposits.
We coded privately-owned banks from
CAPITAL is defined as before.
UK,
Israel* the Philippines* Korea* and Brazil with
Mi'JRTY
reflects the presence* in
minority.
is
It
subjectively
a
Cfnsus does not sufficiently
purposes.
a
of
1.
a
relevant
the
coded dui^my variable.
disaogregate
1970 US
The
origins
national
ethnic
for
our
Moreover* we feel intuitively that numbers of emigrants fron
country
does
which has some
bank.
California*
the
take into account the degree of their difference
not
on
bearin*;-,
their interest
in
bankina with
from the following countries with
We coded banks
a
a
Mexico* the Philippines* Korea* Hono Konq* and Thailand.
home country
Israel*
i:
We
Bank of Tokyo and Sumitomo Bank* the first two Japanese oaTks
also added
(1953)
to
establish California subsidiaries.
distance.
EURO and MFUPO are an attempt to account for cultural
tr:ikes
on
a
value
of
America or Israel* and
1
if
the Dank
otherwise.
in
question
NEUKO is
is
CUPO
from Europe* Latin
si:iiilar.
It
this case
it
'ly
banks
is
Can -id a, and Australia receive
Panks from the UK»
1,
th-^
Including the PhiLiopines* and India which
from Asie»
variables,
treated
also
i«fe
Hongkono
the
essentially an Fncjlisn bank even
thoij;ih
it
receivp
zero on both
a
BaTk
Shanghai
and
as
located in Honnt^ong.
is
^.?1 Results
results for two moaels.
Table ^.3 presents the
and
model
m
,
X
i
m
i
ze s
the
ad
j
contains
secorici
uste
R 2
that
subset
The first
of
the
is
full
the variables
that
significant
only
.
InsertTdbl(>f.3
Hoth are
for
weak.
In
physical distance,
coefficients are
reject the hypotheses that size, growth,
restrictions,
c.jpital
sistance
culturnl
,
ths
of
a
related minority* or FDI, have an effect on the decision
establish
a
suosidiary.
presence
to
We would
and SEC.
CfJTRY
first model,
th(
sic.n,
but
More
tT'ecSurcs,
in
that
determinin',;
t
ant
I
whetner
y
a
»
the
nUTiber
bank
thatt
have little further influence.
C'JTPY
is
like
it,
the Tost
hod retail
effective.
but
is
It
factors nay
in
the
critical
variable
h.^ve
California
could
we
basis of the number of
operations,
The
of
powerful variable.
on the
expected
Part of the problem is the crudeness of our
all.
is
i-tipor
Most of the coefficients hrsve the
.-it
effect
their
and qiven
all,
devi?loo
a
measure
countries in which the bank
woula
prooaoly
be
even
more
factor is probably the bank's experience in
»
runniriT
distant ret.iil ooeration when the onportunity to Durchase
a
or
estoollshsuchobankarisf. s»
1
l^i
and
iT'orovves
the
mat.
nitude
^'ind
sec
fi
siun,
activities
their
forced
«Jhen
underwriting
and
nnative*
it
but
securities
is
Examination
only SUB makes
has
the
of
a
a
positive sidn.
certain
indic^ites
that* of
in
the
olifODOlistic
first
model
reaction.
Vr-riables are very
jood at
deqrer.
the
twot
("^7)
This stands 1n sofie contrast
would
we
in
also
is
a
to
difference* and that in only three cases.
coefficient.
ne native
residurils
be
to
bne could tentatively
less significant,
regression
?eerns
coefficient
SUC's
utalio'^s.
and
w(.-aker
banKs
choosr-»
their area of canoarntiv? aovantaqe*
in
escribe both Icjal constraints as super'fluous
S0ThtR2
to
Continental European hanks in particular this
For some
S0THE:R2
Even so "MkIY remains
variabL'^s,
cant
concentrate
(J
or-iittec
the expectec negative
has
variable k
sicjnificance of the remainder due to their
uickino up the effects of the
non-si yni
Removing some of the
have tne expected si^-n.
MI\iRTY
0HLR2*s
to
consider the results for SOTHER and
However*
oickinc up
the
with
second tiodel shows* thes?
the
as
consistent
vaauely
very
as
effect
of
other*
omitted
factors,
^,25 Classification
Tli(
first model irisclassifies five cases.
out
of
lb
banks* and Type
II
error
is
&,7%,
Type
or
I
error
is
three out of
13.V/i
^^'
or
twD
oanks.
Dl
The
model*
second
Type
seven.
though
the higher adjusted R2» misses oi
has
it
error is 26.7% and Type
I
ren-iains
II
6.7%,
at
Both models fail to classify the Korea Fxchanqe Bank
Bank
Tokai
and
z.-itr;)
subsidiaries.
(Yl
and
=,?.b
these* the second
To
Bank
niche in wealthy nei ghbourhooos
the
'*
8
it
correctly.
The reason for all
for the Japanese cases.
BNP
) .
is
Y?
with
those
Mationale
de
the oarent of
the
3anque
Had we coded it as
.
would have classified
model
.
mono
and
=.^9
which, as discussed earlier* has found
California*
of
=
a
adds
trodel
Peris(BNP» Y2 =.46) and Sanwa Bank (Y2
French
Y2 = .24)
<Y1
We
minority
a
a
bank
have no explanation
these errors nay rest
with
ourmeasureofminorityapoeal.
Both models give the Koyal Bank of Canaoa (R3C),
banic
of
Scotia
Nova
(BMS)* and and National Westminster subsidiaries they do not have,
has
banking
a
subsidiary in Mew York.
one in California.
handle
this
case.
have
SUB did not
(;reat
a
explain
cannot
We
receive permission in 1974 to establish
and
the
approval
Westminster are .50
expired.
has
arxd
good
In
acouisition oopor t un i ty .
New York
a
therefore ^sy not maintain
pnouv;h
subsidiary.
models
properly
effect to
the BNS error.
fitted
The
.56 in the two
error is thus borderline.
It
RBC
It
values
The bank
did
did
not
for
National
respectively*
and
act
the
l97b the bank was already searching for
(
48
>
It
seems that
(National Rank of North America)
it
found
it
in
a
1978 in
rather than California.
1
f)2
Summory
[3.0
In
Section 2.0 we discussed the growth of FDI
This growth*
0*
terms of both numbers of participants and their
in
still continuing.
is
sh.jrpt
Daokina in Californio.
ia
the reasons why
iiarket
thiro section tried to identify some
The
foreign fir-ns coulo succesfully cotidpIs
with
local
firms.
Two reasons which we coula not
wtre
hiqhly
the
Government
in
opportunities for foreign banks.
cerate
entrants
fringe
as
oominant oligopoly.
c^-ses
which we dryued were
out
structure
concentrate^^
Lacunae
C<-lifornia» and
test
rei^ulations
unoer
bankino.
Because of
these
and
law
laws*
them.
Thus
even if the acquisition were worth
Recent legislation
not very
effect.
y(;,-:rs
and
to
(because they face the extra
still be able to make
commonly
havin--.
tias
a
bid against
costs
of
li-^itod the other
legcil
important though and doubt that the
anc see
best
if
we
establishment
test
banks were able to
other
Less
effectofthencwUiW.
US
banks
oeinq
for
than to
to thenn
foreiyn)*
will
be to
advantages
We
feel
changes
3
the/
which
were
thet ttiese were
will
have
re-examine the situation
can find any changes in the pattern
by
on
successful bid.
advanced as exolanation in the past.
The
prohibitipn
the
foreir;n
oanks without
rT'i.,ht
a
^econdf one clearly iTjportant factor in individual
local
bank
created
that
price umbrella maintained by
a
dcouire
UF:
industry in
First* foreign oanks Tiight be able to
was the interaction of anti-trust
interstate
Oankinc;
the
of
important
of
in
much
a
few
operations
foreign banks whicn we can taen attrioute to the
53
decisions
countries in which
California.
effect
on
Being
Of
Not
national flaqship
a
However*
entry.
between
being
probability
commercial oank also had
a
imports
Exports to the home country have
ooerations
of
its
in
the
While
California
has
a
positive
having two or more has
a
California
the
and
US.»
oerhaos
positive effect*
a
The
greater
is
country will estaolish agencies*
perhaps
effect*
number
of
foreis^n oank's home country*
having an agency.
positive
a
because
themselves abroad.
the
of
and
country, tne
a
negative
a
they induce US banks to estaolish
forTi
has
negative effect.
a
to
restrictions* have
that banks from that
Competition* in the
also
office
higher the volume of imports to the US from
the
results
to Doen an agency
is
it
bank
head
bank's
a
outflow
capital
th(?
thp
probability of entry decreased as the
the
the country-specific variables*
portfolio
Some of
about
ceteris paribus* the larger the Dank or the more
ooerates* the more Likely
it
physical distance
increased.
hyootheses
some
establish aaencics and subsidiaries.
to
for agencies are that*
in
tested
statisticaLly
The fourth section
having
effect
on
at
a
California
with
banks
reduces the likelihood
least
compatriot
one
in
bank's Drobability of entry*
negative one so that the net effect is
weakly
positive.
(
All of
the results support
the theory that
knowledge
overcoming the costs and disadvantages of operatino
foreign environment* and against
local competition.
is
at
a
important
distance*
The banks
in
in
that are
likely to have agencies are exoerienced in far-flung operations* have
network
of
a
a
offices arojnd the world whose services they can sell* and
54
h?\/e
customers homr country
as
firms enqaaed in tr;ide and investment
in
the US.
Thr results
decision
the
for
subsiciaries
establish
are
foreiqn
by
clear-cut.
Less
confirm or reject the importance of
have
thc't
latter
distance.
take
forms:
two
country's
presence
the
to
iefinitively
cannot
We
cultural
access to seo Tents ot the host
may
California
in
The
Dositive effect dre exoerience in oaeratino at
a
and special
banks
a
factors
distance
population.
The
the relevant ethnic
of
minority* or product differentiation oasen on national
i-nage,
are
fie
intlineo to view these two as having the effect of enaolinq the foreign
parity
achieve
with
local
its
petition by jiving
it
an
advantage that counteracts the riisadvanta'^es of havinu to ooerate at
a
to
b:>nk
oirtance
exoect
and
havinc
to
knowLeaQe
acouire
that over tiTe foreign
corr'
hanics*
subsi diaries
their local competition more and more as they
th(
special
markets
in
which
the
of
they
cirow
market.
to
resemble
oeyonci
the
limits of
the U, L,
context*
restrictive leqisLation on the foreign tanks* activities does
hoVe
an effect*
thou^
h
it
seems decisive*
spread of subsidiary operation^-,
in
*
only
a
in
the sense of
seem
investi/'ite
advantages
drid
on
FDI
in
bankin.?*
rrcentivity ano its rieterriinants.
to
tD
limiting the
fe* cases*
Our future research will expand the number of countries consioered.
this way we hooe to be able to
We
corns
In
beuari.
local
start
the
to
effects
of
In
external
address the question of
L
55
FOOTNOTES
1).
FDI
Pritional
involves the ownership and control
boundaries.
of
an
enterprise
across
Deutsche bank, societe Generate (France), Societe
?)•
Midland Bank*
A-nster dan-Rot terdan
and
Generale de Banque (Belgium), each with 20%,
(i%).
Bank (17%), and Credi t ans t a t-Bank ver ei n
law required that all the directors be U.S.
For instance,
U.S.
citizens and reside near the bank.
3).
.Calif ornia regulations discussed here are contained in Sections 1753
California Financial
et.
seq,, 1756, 1756.1* 1756. 2» and 1780 of the
US regulations are drawn from 12 United States Code Sections 72»
Code.
The International Bankinq Act has modified
181^*
1815, and lB'^l-1850.
some of the US laws.
\
4)
Auerbach [197S» p. 2'*]. Control requires that at least one entity
to
vote 5% or tnore ot the voting
power
have
the
control*
or
securities of any bank.
5).
own*
6).
Bank Stock Quarterly COct.
7).
Auerbach C197fo, p.'jgD.
R).
Congressional Quarterly, Aug.
1978,
26*
Table IV3,
1978* p. 2258.
permit
to
has, on one occasion, exerted pressure on a country
national
banks domiciled in
when
state-chartered bank
a
to
in
California were already operating there and the country had banks
the state.
9).
It
entry
10).
California
("Matters*
11).
Superintendent of Banks, Report on Foreign Banking
Quoted in SCRC C1576* p. 283.
April 1974, p. 22.
Calif.
Super.
of Banks,
65th.
Annual Report,
l^Tin
p. 54,
Fqreign
on
U.S.
Bankinq Requlations
1975*
Muramaki* Itsuo,
School
of
P.
Alfred
Sloan
Thesis*
Masters*
unpublished
Banks*
Japan
in
the
bank-business
groups
on
information
For
60.
Management* p.
see Alhadeff C1975D.
12).
13).
SCRC L1976* P2H-293.
14).
Cal. Super.* 65th.
15).
Ibid.
*p. 56.
16)
SCRC
C
.
17).
Ibid.
1976* p. 303.
An.
Rep.* p. 54.
|l
56
18).
Ibid.,
19).
CaL.
?
I
C
.
)
b
i
d
D.31.
Super, fobth.
. »
p
.
b9
.
21).
Grubcl [1S77, p. 352-5353.
22
I
2
.
)
b
i
d
.
p
.
35
1 .
HronteCMar.
3).
Murakami,
Ph),
kpp.tp.'i^.
Ad.
p.
1978»p.40J.
59fn7.
25).
Hans-PuooLf
KuchLer,
Senior
Vice
SwitzerLend, in ^'unoe^ [197S, d.8 5],
2b).
would like
T
to
thank Donald R,
Presiaent,
Lessard for
r eti
Union
i
n di
ng
Bank
me
of
of
this
point.
R.C.(Teo) Haroharr, SVP anc f^or.
27).
of the International Division of
the United California Bank, quoteo in G.jrcia [Sep,
197(-, , p. 91],
Fsrnest Schneioer,
8).
Aun.
2
8,
LVP,
Irving Trust, quoteo in ATiericsn Bankei't
1977, p. 13.
Jiimilar considerations reportedly were
important
in
explaining
of
support
the
laroe
Chicago banks for CT-in,3er- in Illinois law
O'rniittino the estaolishment of foreign-owned branches CAuerbachf 197 r:>,
9).
tht
2
p
. 1
3 3
.
Piero Getzel, txecutivc Vice President, Banco oi
30).
197b, 0.783.
31).
CMunder,
Auerbach [1976, p.lSj.
3
2).
For on alternative asses stient
3
3).
House Committee ...(197 6)
S'*).
^apoli
see
Terrell
Severiens and Haker [May 1978, p20 +
anr;
Key [1977D.
J.
Marine Midland/Hongkono and i>hanghai
dnkino
Corporation.
^)tional Bank of r\iorth
Aficrica/rjational. Westminster
bank.
American
iank
(iNi.Y.)/Hank
and
Trust
Leu mi Le-Israel 5.M..
Franklin National
b-^nk/Furopean American Bankin') Corp.
3o).
36).
-,
Flowers tl97b, p. ^3j.
37).
Ue are currently
experimentinf;
with
weighted,
combined
least
suuares,
cJiscriTinant
^naly?is,
and
•naxiiiuii
li<eliTDDd
logit.
Fr'Himinary results for thes<^ r-^ethods parallel those from the ordinary
Least
squares
renressions.
«c intend to oresent a comoarison of the
results of thesemethods in a subsequent paper.
bl
;8)
Coombs (1977).
The
rouQhLy the
s ame
size.
alL of
39),
BN'P is one of three oank
povernment nationaLized all
three
in ig'f? and there is no reason tD
any one
^..of them is
assume
,^
that
^..wv ^..,
^
Hongkong and
.o a flagship bank.
Shanghai
bank is the de facto Central Bank for th(e Crown Colony* and its largest
_.
Tokyo*
of
while privately owned* is a soecialized foreign
bank •
Bank
...,,_, ^....,
trade/foreiqn exchange bank and has a priviledgt^d relationship with
Japan's Ministry of Finance for whom it acts as an overseas arm (Bronte
[Jan.
1979D).
.
V
—
..
'
'
^2).
Dornburg (Jul.
"
1978).
should mention that the Union 3ank of
Switzerland
Zealand
the
Australia
New
and
the State Rank of India (Y=.3R)t
(Y=.29»
1-377.
fJankinq Group (Y= .03) also enter eo in
'*Z),
In fairness
4^).
Institutional Investor (Sep,
we
1977, 0.133).
Honqkong and Shanghai Bankino Corporation hr^s just received (Mar*
,
Bank
in
Mew
1979) Federal Reserve approval to acquire Marine '^i-^lano
In order to get the permission it had to sell tne Hongkong Bank
York.
di
Roma
established a
when Banco
bank,
of California to a local
to
divest its share in a
it
in
Chicaoo
ac^eea
subsidiary
banking
tib
)
securities affiliate.
48).
Bank of Tokyo* Sumitomo 3ank* Bank of Nfontreal* Canadian Imperial
19783.
Bank of Commerce* and Barclays Hank LBank Stock Quarterly* Oct.
did
ceteris paribus* if the variable
47).
y difference we mean that*
bank
in Question would have a California subsidiary*
the
not
apply*
of
The three cases are National Westminster* Fuji Bank* and Royal Bank
*-
C.-^nada
.
4e).
Fortune* Jun.
19*
197B.
::
58
Appendix
Honqkong and
A
Shanghai Bankind Corpordtion^s Overseas Expansion
Established os 'THe Honuona and Shanghai B^ankinu Company Ltd,'
18feS:
in Hong Kong» Shanahait and Lonaon by the largest shipoing* trading and
enoineerinc firms
in
Hone Kong to take over the banking interests of
the oLd agency houses which were* in fact* t^e banking
deo r t Tien t s
of
the
great merchant firiis.
The ofcject was to pro-note bankino services
in theEastunder local control.
fi
Ibhb:
Office opened in Yokoha-na.
18fc7:
Calcutta.
lBh3:
Bombay.
l^'^Tb:
San fransisco und Manilla.
IB 77
S
ir-PO:
New York.
1881
Lyons.
lf*&^:
Jakarta and f'enanp.
IfcSB:
Bangkok.
i
noapo re
.
1889:
Hamburg* r.nd by 190U the b^nk
main ports of the East.
1955:
Established Honckong
19
Acquired the h'rrcantile
'-'iS:
11 hO:
Acquirer,
l'-7e:
Acquisition
the
Oarik
of
51% of
fimly estaolished
of
Ltd.
The Banker's Alitianac
the
the t^icicU- Ea-^t.
the stock of Marine Midland
and
all
which operat'rs in India*
Yorkawaitingreoulatoryaoproval.
SCURCE:
in
of Californio,
R;ink
i3ritish Bink
was
Yearbook* 1977-7?.
"ank
in
Mew
59
Appendix
B
Major Acquisitions of California Banks by Foreign Banks
Bank, with a small California subsidiary of three
1974
Lloyds
In
1)
eighth
the
This was
branches, acquired First Western Bank and Trust*
bank in the State with assets of $1.5 billion and 9<t branches.
largest
T ransaner i c a
froTi
bank
itself
acquired
the
had
World Airways
Corporation in the late 19feOs but had to divest it in order to comply
Wells Fargo Bank wanted to acquire the
with i-he BHCA CJohnston, 1977].
197'i,
I'*,
bank but was blocked on anti-trust grounds [Economist, Dec.
Survey , p.79 3.
2) In 1975 the Bank of Tokyo of California acquired a majority share in
National Bank. The Japanese bank had
First
Southern California
the
together
tiDre,
some thirty branches and its acquisition DroJ';;ht it 75
The combined bank is now called the
in
deposits.
million
with
$811
California First Bank.
Chartered bid for
In 1978 Standard
company for Union Bank (sixth largest in
4)
Rancorp*
holding
the
Union
the State with total assets of
The acquisition received regulatory approval in *^arch,
billion).
$4.3
bad
of
dept
worst
the
its
1979.
Union Bancorp is recovering from
which
just
in
1977
0.42%
return on total assets w^s
its
problems
but
California bank?
w.^s somewhat lower than the average of the other big
London's
Chartered
3ank
of
own return
by comparison with the
poor
and
124-127),
Jun
po.
(Economist,
17, 1973,
on $476 million.
of 0.7
'J
60
Apnenoix
C
Jaoanese t^inorit/ Owncrshio ot '^uDsiriiaries
Dai-Ichi
Kanqyo
have
shares
"ninority
in
of
TokyD
and
Bank
Drti-Ichi K,.,n;:yo. with ^4.5;. t is one of
foreign-owned U^ sucsi diaries.
owners of the vJapan California [-(ankt too ether with thu Loni, -Terii
the
tho
other
All
shareholders
.^re
Dai-Ichi*s
Credit Pank
(?.5y. ).
Tiany
of the officers.
anti
it
oroviaes
(^>ourcor
Private
customers
former officer).
communication from
!-oth
.^^2
r}
of
Bank
The case of the Lhicojo ToKyo H.ink is prohaoly very sinilar.
this bank.
There are l-'5 other stockholders* of
owns
ot
Tokyo
^.S;.
and
are
Jap.jnesfv
are
inaividuals
corporations.
whom IC*
'^jl
1'3 77»
(Institutional Investor* Sep.
p.108).
to
banks
This pattern of shareholding woula seem to enable the oare^t
The BHCA does not apply
exorcise de facto* l^'Ut not de jure* control.
since no s h a r h o I e r has t\ or more.
<>
r;
SI
Appendix
Economies of
D
Scale-
the
this Appendix we look at sotie banks domiciled in Japan* Canada*
of
fitting the standard
California,
tnst
consists
The
and
from
stochastic growth model CSmyth et al, 1975] to a croup of banks
The "nodel assuTies that firms*
country and to the comoined group.
each
distributions of growth
from
growth rates represent random crawinos
The equation 'itted is:
retes.
In
UK,
In
S(t)
=
+
b*ln
S( t-1
)
e
where S(t) represents assets* t is 1977* t-1 is 19 6.9* and e is an e^ror
The coefficient b is the elasticity of Size at t with respect to
trrm.
means that* within the sample, sTialler and larger
A b = 1
Si?e at t-1.
firms
drew their growth rates from distributions with different means.
did
the
smaller
the Larcer firms crew faster than
A t > 1 means that
means the reverse* or declining and increasing cost
ones*
and b
<
1
=
or
no
that
The null hypothesis
0,
is
curves respectively.
b-1
economies/diseconomies of scale.
have
the
overall
The table presents the results for the four countries and
group
cannot
we
combined
the
UK*
and
the
For
Canada,
rfgression.
reject the null hypothesis of no economies of scale* or constant costs*
1!^X
=
1
the
the
hypothesis that
at
b
That is* we cannot reject
We would reject this hypothesis for the Japanese
level.
si cjni f i cance
would
and Californian banks, but in directions opposite to those which
aio in explainina FDI.
results
the
inconclusive for a nurnt'er of reasons. First*
number
of
change depending on whether we use assets* deposits*
might
Seconn*
have
we
employees* or something else as our measure of size,
Volume/cost relationships
banks* activities.
the
not
d is-aggregated
miyht vary by line of business.
The test
is
Table
D-1
Stochastic Growth Model
(t-statistics in parentheses)
a
b
Ilk
R^
F
SER
Canada
N=5
2.744*
0.178
0.921
47.5
0.070
(2.596)
0.822*
(6.888)
UK
1.126*
(6.822)
-0.126
(-0.765)
0.901
46.5
0.216
N=6
-0.038
(-0.026)
Japan
N=15
2.790
(6.427)
0.845
(17.011)
0.155
(3.113)
0.954
289.4
0.086
California
-0.656
(-0.155)
1.174*
(16.434)
-0.174*
(-2.430)
0.978
270.1
0.161
N=7
Overall
N=33
0.705
(0.914)
1.058*
(12.038)
-0.053
(-0.656)
0.818
144.9
0.2C3
(1./135)
*
Indicates significance at the 10% level
.
i
62
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r
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A
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at
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