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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Banking & Finance, Volume 33, Issue 10, October 2009, Pages 1781–1792
When expanding abroad, a multinational bank faces a trade-off between accessing a foreign country via cross border lending or financial foreign direct investment, i.e. greenfield or acquisition entry. We analyze the entry mode choice of multinational banks and explicitly derive the entry mode pattern in the banking industry. Moreover, we show that in less developed banking markets, a trend towards cross border lending and acquisition entry exists. Greenfield entry prevails in more developed markets. Furthermore, we identify a tendency towards acquisition entry in smaller host countries and towards greenfield entry in larger host countries.
The last few years have seen an impressive liberalization of banking markets.1 While banks active in rather saturated, developed financial markets have looked for new investment and growth opportunities, banks in many emerging economies have been in need for fresh capital in the aftermath of banking crises. The privatization process in Eastern Europe provided further opportunities for multinational banks to expand abroad. Nowadays, in around 40% of all developing countries, more than 50% of banks are foreign owned. Strikingly, this figure rises to more than 80% in several Eastern European countries (Claessens et al., 2008). This immense transformation of banking markets gives rise to several questions concerning both the incentives of multinational banks to enter new markets and the incentives of host countries as to how to shape foreign entry. Should a multinational bank grant cross border loans or rather access a new market via de novo investment or acquisition of a local bank? How do the development and the size of the local banking market affect a multinational bank’s entry mode choice? What are the host country policy maker’s preferences regarding different entry modes of foreign banks? With the aim of addressing these questions, we set up a model of spatial bank competition à la Salop. Foreign banks may enter the host country via cross border lending, de novo investment or acquisition of a domestic bank. Banks compete in interest rates for potential borrowers that engage in investment projects of uncertain return. Foreign banks have access to a better screening technology and enjoy lower refinancing costs than local banks. However, besides market entry costs, foreign banks are at a disadvantage relative to domestic banks in that the latter hold soft information on borrowers due to prior lending relationships. Furthermore, granting cross border loans implies a rather limited knowledge of the host market. Hence, when multinational banks decide about their mode of entry, they face a trade-off between the size of market entry costs and their relative disadvantage in access to soft information and their knowledge of the local market. We demonstrate that multinational banks choose their entry mode according to their efficiency in screening potential borrowers. If a bank is rather inefficient in screening, it chooses not to expand abroad. With increasing efficiency, cross border lending becomes feasible. As soon as the better market knowledge in the case of greenfield entry compared to cross border lending compensates for the larger fixed entry cost, the foreign bank shifts from cross border lending to de novo investment. Only if the screening technology of the foreign bank is powerful enough can it drive down the acquisition price to the point that acquisition entry becomes the dominant entry mode. A major focus of our study is to explain how a foreign bank’s entry mode choice is affected by the financial development and the size of the host banking market. Indicators for the host country’s level of financial development in our model are the screening efficiency and refinancing conditions of local relative to foreign banks. As a further indicator, the importance of access to soft information serves as a measure of a market’s transparency. A high level of competitive pressure is yet another sign of increased development. We show that in less developed host banking markets a wider range of foreign banks opt for cross border lending and acquisition entry whereas the range of foreign banks that prefer greenfield investment contracts. Interestingly, a wider range of foreign banks favors acquisition entry in smaller host banking markets whereas the attractiveness of de novo investment is enhanced in larger markets. Our welfare analysis allows us to determine the preferences of the host country policy maker concerning foreign bank entry. The policy maker prefers a foreign bank not to enter the market when it is rather inefficient in screening borrowers. From the policy maker’s point of view, cross border lending is strictly inferior to greenfield entry. Greenfield entry, in turn, is favored for intermediate screening efficiencies of foreign banks. If a foreign bank is highly efficient in screening borrowers, the policy maker prefers the foreign bank to acquire a local bank. Although the policy maker’s preferences regarding foreign entry are similar to those of foreign banks, scope for regulation exists as the threshold values determining the preferred entry mode pattern of the policy maker and the foreign banks differ. We find that the regulation of foreign bank entry is shaped as follows. Entry is permitted only to foreign banks that rather efficiently screen borrowers. Furthermore, the less competitive the market environment is, the more likely it is that foreign banks are denied entry. Cross border lending is not allowed for. Foreign banks that intend to expand via cross border lending or the acquisition of a local bank are forced to enter via de novo investment if their screening efficiency is insufficiently high. The remainder of this paper is organized as follows. The next section reviews the literature. Section 3 describes the set up of the model. In Section 4, we study the entry mode choice of multinational banks. Comparative statics in Section 5 allow us to analyze the impact of the financial development as well as the size of the host banking market on the entry mode decision of foreign banks. We present the welfare analysis in Section 6. Empirical hypotheses are stated in Section 7. Section 8 concludes.
نتیجه گیری انگلیسی
In this paper, we have analyzed a foreign bank’s trade-off be- tween cross border lending and a financial foreign direct invest- ment, i.e. greenfield or acquisition entry. We showed that if foreign banks are rather inefficient in screening borrowers, they choose not to expand abroad. With increasing efficiency, banks grant cross border loans. Still more efficient banks opt for de novo investment whereas the most efficient banks favor the acquisition of a local bank. Moreover, we investigated how the entry mode choice of for- eign banks is affected by the host country’s development and size. We found that the less developed a banking market is, the wider the range of foreign banks that opt for cross border lending and acquisition entry and the smaller the range of foreign banks that expand via de novo investment. Moreover, the smaller the host banking market, the larger the range of foreign banks that prefer the acquisition of a domestic bank and the smaller the range of for- eign banks that favor greenfield entry. Finally, we studied the regulation of foreign bank entry. We showed that entry is permitted only those foreign banks that screen borrowers rather efficiently. Furthermore, the less compet- itive the market environment is, the more likely it is that foreign banks are denied entry. Cross border lending is not allowed for. Foreign banks that intend to expand via cross border lending or the acquisition of a local bank are forced to enter via de novo investment if their screening efficiency is insufficiently high. Our model set up allows for several interesting extensions. First, we might not only consider the influence of the host country’s development but also the impact of the development of a foreign bank’s home country on its entry mode choice. If we interpret a foreign bank’s screening efficiency as an indicator of its home mar- ket’s development, our model implies the following results. Banks based in the most developed countries would tend to expand via acquisitions. Banks from less developed countries would opt for de novo investment. Banks based in still less developed countries would prefer to grant cross border loans whereas banks located in the least developed countries would not expand abroad. Furthermore, it would be interesting to allow for asymmetries in domestic banks. If local banks differed in their screening abili- ties, the incentives of foreign banks to acquire a domestic bank would depend on a trade-off as follows. A lower efficiency would imply a smaller acquisition price. However, costs related to restructuring processes or the amortization of bad loans might be much higher for less efficient local banks.