Impact of Internationalization on Company Performance

Impact of Inter topicization on Company Performance enlarged deregulation, cross-border activities of non-fiscal companies and improved instruction communications engineering led to an increase desegregation of financial institutions crossways borders. Commercial brinking heavens in particular, tolerate witnessed tremendous step of cross-border margin merger and acquisitions (MAs) deals through protrude the recent years. While sphericization has accelerated cross-border merger activities around the world, an opposite(prenominal) global force recently has been creating a counterweight to cross-border deals. Concerns over nationalism, feelings of national security and protectionism exhaust delayed several cross-border hopeing deals.Basic every last(predicate)y, MAs of these institutions results in Consolidation, transnationalisation or conglomeration. In this context,Consolidation It is a result of to a great extent punishing banking systems, small number of great m enages. Ex Consolidation of bank building of New York and hMellon in 2007 in USA. planetaryization It is evidenced by increase number of banking and other financial institutions that operate across national borders. Ex Citi Bank, HSBC etc., operating universal.Conglomeration Larger number of financial groups whose activities combine those of bank and non-bank financial firms. Ex State Bank of India combining other State Banks for various activities in its umbrella in India.Objective and Scope of the ProjectThe design of this drift is to understand the concept of world(prenominal)ization and observe strategic patterns under ingestn by various banks and evaluate the way it affected the motion of the ecesis. In this process, we consider exploring the a entirelyting areas with a case study of a Canadian or US bank along with our study.Introduction to InternationalizationAfter a comparatively quiet period in 2001/2002, world wide-eyed mergers and acquisitions have picked up a gain. Since the 2003 mergers amidst Bank of the States and FleetBoston, and JP Morgan Chases acquisition of Bank i, speculations were fueled intimately parallel cross-border deals in the europiuman banking commercialize place. JP Morgan Chase announced its purchase of London ground Cazenove in October 2004, tour Spanish Banco Santander bought British mortgage bank Abbey case for 12.5 billion euro in august 2004, the largest cross border acquisition since HSBC bought cut CCF in 2001.On the other hand, restructuring withal took place. conviction Suisse announced in December 2004 that it would absorb First Boston, its global enthronization bank, into the parent organization to revive profits. After barely quaternion years, ING sold the largest part of its German bank BHF to Sal Oppenheim while expanding its Inter salary banking activities.These examples reflect the increased internationalized nature of banking competitions in third respects (Llewellyn, 1999).Customers t hat have global financing opportunities are equal to arbitrage surrounded by interior(prenominal), hostile banks and outstanding merchandises. Banks are non curtail to business in their own country. Regulatory entry barriers have lowered, reservation it easier for banks to locate in other countries.In other words, many of the largest banks in the world have been struggling toward a newfound organizational specimen where terms as base market seem to go a by-product in a broader strategic vision. Swiss bank UBS, the twenty percent largest bank in the world measured by as stripes in 2000, has to a greater extent(prenominal) than 80% of its as clans international Switzerland. Netherlands ground bank ABN Amro owns a sell secernate net endure in Brazil, 9,500 km from Amsterdam which constituted 15% of be profits in 2000. In 2003 the 30 largest banks held more than USD 7,586bn, or 39% of their assets, outside their home country.Successes in international banking are few , failures have been common. One of the more spectacular failures was the acquisition of American Crocker Bank by British Midland Bank in 1981, costing the bank USD 1bn over the next volt years and forcing its strategy to retreat on the British retail banking market. Midland was acquired by Hong Kong based bank HSBC in 1992, a bank who subsequently showed that internationalisation can be a profitable activity. compass point of Internationalization (DOI)The extent to which a Bank exists and operates in the international markets extraneous from its home market can be measured by a metric called Degree of Internationalization (DOI). Generally, it is measured in terms of the consider of assets, revenues, profits, or employment that locates inappropriate.Literature ReviewThe hypothesizingd haughty relationship amongst performance and DOI goes back at least to Vernon (1971) many studies have followed. It is generally hypothesized that internationalization is good for firms and lea ds to better performance, for several reasons (Contractor, Kundu, and Hsu 2003 Dunning 1977, 1981).Going international implies that firms can spread fixed costs, such(prenominal) as operating viewgraph and research and breeding (RD) expenditures, through a greater scale and mountain chain (Markusen 1984 Kobrin 1991). Internationalization allows firms to learn about domestic markets from their international market experience, hencece improving performance (Kobrin 1991). Operating in immaterial jurisdictions allows firms to access factors at lower cost (Helpmann 1984 Porter 1990 Jung 1991). This is particularly true for instances of FDI and other modes of get off involvement in contradictory markets. Internationalization allows firms to cross-subsidize their domestic operations and fork outs greater opportunities for price discrimination and tax and price arbitrage.Although theory implies a positive relationship, the empirical evidence of the cause of DOI on performance is heterogeneous (Hsu and Boggs 2003). For example, Sulli new wave (1994) lists 17 studies that test the relationship between DOI and financial performance, cardinal of which pay off a positive relationship and five negative. The resideing cardinal find no relationship. This reflects the consensus in the books that the empirical results are super dependent on the sample, the measures of DOI, and the measures of performance used.In addition to testing this link, the literature has moved in two distinct shipions. First, to address a meter issue, Sullivan (1994) attempts to more reliably measure the DOI of a firm by developing a novel mogul measure of internationalization that captures triple of its attri savees Structural, Performance, and Attitudinal. As Ramaswamy, Kroeck, and Renforth (1996) show, at that place are several limitations to the empirical and theoretical underpinnings of Sullivans work as the DOI is measured in uni-dimensional method acting.There is in like ma nner a growing literature focus on the shape of the relationship between DOI and performance. Contractor, Kundu, and Hsu (2003) list 15 studies that find the relationship between performance and DOI is linear seven of the studies find a positive relationship, four a negative relationship and four no relationship. Two studies listed find a U-shaped relationship, and eight find an inverted U-shaped relationship. Contractor, Kundu, and Hsu (2003) and Lu and Beamish (2004) provide theoretical models for curvilinear relationships between DOI and performance.By analyzing data for cxxv multinationals, Kim, Hwang, and Burgers (1993) document the magnificence of global market diversification in the critical point management of risk and return. The measures of global diversification capture the number of foreign markets being operated in, as well as the pattern of a firms industries across those countries.A small literature investigates the performance of Canadian banks. DSouza and Lai (200 4) estimate the effects of scope, scale, and concentration on Canadas six largest banks. They find that banks with greater concentration in their business lines are less efficient. Interestingly, for some model itemations, the effect of size on performance (as measured by return on equity) is negative. use a opposite methodology, Allen and Liu (2005) estimate cost functions for Canadian banks and find that larger banks are more efficient. Neither study considers the impact of DOI on performance.Walid Hejazi and Eric Santor tried to address this DOI Performance realtionship by verifying the direction. i.e., withstand DOI is driving superior performance or it is otherwise around. They also brought the risk factor of the country (in which the bank is venturing) into the equation and found that in that respect is a weak but significant positive relationship between DOI Performance.Measuring the Degree of InternalizationThere are different approaches to measure a banks degree of i nternationalization, and estimating the degree of internationalization of a firm or bank is to some extent vague and a random process. An initial approach could be to construct a single head indication or hotshot-dimensional measurement as questd preceding(prenominal) in the literature review Sullivan (1994) reviewed 17 studies which all applied a single item indicator to measure the degree of internationalization, i.e. the ratio of foreign gross sales to organic sales as degree of internationalization. However as indicated by many researchers and as identify in the literature review above from the work of Ramaswamy, Kroeck, and Renforth in 1996, the use of a single item indicator increases the authority error of measurement, because a single parameter is always more pr iodin to away shocks which may or may not indicate the performance. An alternate approach is to combine several indicators into iodine index. Depending on the superior of indicators, this study power pr ovide a better approximation of the degree of internationalization, but the choice of indicators may be restricted on data availability rather than theoretical induction (Sullivan, 1994).We will follow the method that is intimately cited and adopted by the researchers in UN conference of Trade and Development. This method applies three single item indicators, which are combined in a entangled index to analyze the degree of internationalization of a bank, the Transnationality Index (TNI). The TNI is one of the most cited indicators for internationalization (cf. United Nations Conference on Trade and Development, 1998, van Tulder, van den Berghe, Muller, 2001). The index is express as a circumstances and calcu upstartd as an weighted average of overseas assets to native assets ratio, Foreign gross income to total gross income ratio and Foreign employment to total employment ratio1.The percentage term of the TNI is that the degree of internationalization is presented in one scale , which by definition moves between 0 and 100. Also an internationalization index that in integrateds income, cater and assets captures a richer picture of the banks foreign activities than that which would be captured by income, staff and assets separately (cf. Sullivan, 1994). Another attractive characteristic is that the TNI dampens the effect of pay companies or off shore funding windings if a ratio were just now based on foreign assets relative to total assets. A substantial amount of assets can obviously be expected to be located in tax havens or countries with easy fiscal regimes. Such account assets would be accompanied by low number of employees. Combining both employees and assets in the TNI would so create a more quietusd view. The same blood also applies to investiture banking activities that are concentrated in financial centers outside the home country these activities tend to generate a relatively postgraduate degree of income with fewer employees.Demonstra tion of Measuring DOI through TNI methodThere is also a flip side for this TNI. It cant take into account the recent technological changes, geographic boundaries, and we cant guarantee all(prenominal) bit of data to be same and uniform in all countries.Technological change A dis prefer of the TNI susceptibility be that the construction of such an index cannot take account of the effects of technological change. Changes in technology can for example raise productivity and increase the assets or income per employee if these changes are distributed evenly over the total bank organization then its effect on the TNI is probably limited. If the ratio of foreign assets per foreign employee increases in the same amount as the ratio of domestic assets per domestic employee, then technological change has no effect on the TNI. From the mid mid-nineties just technological advances have had other geographic distribution effects. For example, the development of Internet banks like ING Direct implies that the serving of foreign assets and foreign income increases while staff and operations working for the Internet bank basically inhabit at home. This might potentially depress the true extent of internationalization measured by the TNI.Geographical boundaries For Banks like Fortis, Belgian/Dutch corporate structure creates a problem to determine what region is home or foreign. This is solved in the database by denoting Benelux as home. Similarly, HSBC is the only bank that is not disclosing information for the home country, instead it is lineing Europe as home region.Data availability Not all banks have consistently reported detailed information on foreign assets, staff, income or advantageousness. Banks like SBC, UBS or Deutsche Bank did not report this information although they progressed significantly with their internationalization activities. A general remark is usually found in the financial report stating something like due to the integrated nature of our activ ities worldwide a geographic breakdown does not provide additional information the information provided by British and American banks in the eighties proves otherwise. Data collection from other sources provided valuable information. For example, foreign banks in the United States have to report their balance sheets to the Federal Reserve.Internationalization PatternsInternationalization for banks has progressed at different paces, with different purposes. hither we try to identify these internationalization patterns. As several motives are grounded in history, we start with a brief historic overview of internationalization, after that we shall discuss about various activities that the banks pursued as a part of Internationalization.Historic OverviewInternationalization of banks is not a new phenomenon. In 1913 there were approximately 2,600 branches of foreign banks worldwide. The dominating factor at that time was colonization, over 80% of those branches belonged to British banks. The share of foreign banks accounted for one third of banking assets in Latin America and over one half in countries like South Africa, turkey or China (Goldsmith, 1969). The financial empire of J.P. Morgan started out as a partnership financing American civil war loans from England (Chernow, 1990). International banking has in some respects not changed that much. Over time, innovations in financial instruments, telecommunication, information technology, organization innovation and the growing sophistication of customers have meant a spectacular substituteation in the conduct of banking business and client relationships in international banking.The sheer size of international involvement of the present day internationalized banks has increased dramatically (cf. De Nicol, Bartholomew, Zaman, Zephirin, 2004). Foreign assets of the thirty largest banks as a percentage of total assets have changed from 35% in 1980 to over 38% in 2003. However, the supreme size of foreign assets of the thirty largest banks has raised eleven fold from USD 650bn in 1990 to USD 7,571bn in 2000. The increasing importance of foreign activities has affected profitability and constancy of internationalizing banks in their home country it can also have salutary effects positive as well as negative on the host economies. The intensity with which banks have pursued internationalization strategies also further us to have a study on them.The dissolution of the British Empire meant that British banks wreaked the old internationalization of banking. American banks on the other hand have been on the rise since the Second sphere War. American financial aid, exports of American firms and the export of American ideology such as freeing of competition or creation of uniform markets were nutriment ground for internationalization activities of American banks. From the 1960s onwards income in western economies rose and banks developed more financial products to cater households and busines ses as increasing scale of firms raised transaction volumes in corporate finance. American banks make an apparent threat, seeking out the more profitable activities in investment banking in Europe, being equipped with better staff, more financial resources and more experience.The creation of off shore markets to circumvent (American) regulation and the political potential of seizure of metropolis belonging to communist states induced the first serial publication of international activities, latelyr propelled by the inflation of seat of government markets when oil producing countries laboured serious wealth transfers. European banks either tried to work in concert in consortium banks to participate in these activities (Roberts Arnander, 2001) which in the beginning was a cost saving and knowledge rewarding construction or set up foreign activities themselves. Redistribution of the additionales of oil producing countries found their way to emerging markets, with American banks leading the way. The growing volume of loans masked growing stinting imbalances, brought to airy from 1981 onwards when Latin American countries defaulted in their loans. Internationalization of banks became a worldwide event (United Nations Centre on Transnational Corporations, 1991). Institutions like the IMF aided governments with restructuring loans, dealing with severed banks and capital markets in distress. Governments of the lender banks, especially the United States, approach potential crisis at home when the losses in emerging markets were transferred by the large banks to their home country.A consequence of this restructuring period was that in the 1980s capital strength and adequate supervision of internationally operating banks were major issues for bank regulators. A major coordination initiative took place in the Basle cede of 1988, creating more transparency and uniformity among regulatory policies for internationally active banks. Among others, the Basle deed o ver became one of the drivers for the Nipponese banks to retreat from the international arena. Nipponese banks increased international activities sharply from the early 1980s fuelled by strong domestic economic growth, a fast pace of deregulation and large flows of foreign direct investment by Japanese industrial firms. The Japanese stock market decline from 1989 showed that (international) banking strategies had not been based on sound banking practices, affecting bank capital and loan quality at the same time (Canals, 1997). Japanese banks found ways to stave off restructuring of their bad loans for almost a decade, contributing substantially to the prolongation of economic recession, and steadily relinquishing their importance in international banking.A general trend fuelling international activities was the ongoing process of disintermediation from mid-1960 large firms found it more profitable to arrange loans instantaneously with institutional investors, thereby bypassing the role of banks as financial intermediaries. Additionally, stricter monetary policies introduced from the late 1970s onwards eventually led to a steady mitigate of interest rates consequently lowering income from the core business of banks. These trends laboured banks to reconsider their strategic business portfolios. Non-interest income, especially the high margins of fees and commissions in investment banking, became a promising route. The liberalization of British securities markets in 1984 was followed by an strange wave of acquisitions by host banks. By the end of the nineties British owned investment banks or securities houses in London were few in number London as an important financial center had become a manifest of internationalization activities of banks.Internationalization of banks was also a receipt to further regional desegregation and deregulation (cf. Group of Ten, 2001, January). In Europe especially, banks were aware that the competition for larger clients e xtended over the geographic borders, but the competition for retail clients rebrinyed a domestic issue. By the mid-1980s, European integration created momentum in Europe, redefining markets for banking activities on a multinational scale. Mergers and acquisitions became an important strategic tool for banks. They generally took place in two phases domestic consolidation and then, international expansion the creation of higher domestic concentration in order to more effectively compete internationally. Opportunity was provided by the capital markets (lower interest rates and higher stock market prices) and the regulators, privatizing banks or not opposing the takeovers. The close of the decade shows the financial might of just a handful of banks the top 25 banks in 1980 had total assets of USD 1,858bn, equal to 30% of GDP. In 2000 this had risen to 64% of GDP, a combined total of USD 12,781bn. Of this amount, 41% are assets outside the home country. In fact, foreign banks practically ascendence the banking sectors in many Eastern European countries for some observers the Single global banking space is almost a reality (Mullineux Murinde, 2003). The foreign owned assets of the largest banks butt on uneven geographic patterns, Regions and/or countries of the developed world currently represent the most interconnected cluster of national banking systems (De Nicol, Bartholomew, Zaman, Zephirin, 2004).Internationalization pattern of Banks scratch in the 1970s, bank internationalization originally consisted of setting up banking activities in financial centers and economic centers. Part of this was related to incentives such as follow-the-client or aimed at increasing overall profitability. Additionally, restructuring and expansion in the domestic markets might have been cumbersome for some and impossible for other banks, further touch on internationalization. Regulatory idiosyncrasies in the home market might be one explanation for this, but also the existence of a home solidus inertia restructuring the domestic retail networks in the early 1980s might have been more difficult with vested interests in the home country such as labor unions. In particular, banks in smaller countries had to expand abroad for fear of anti-trust regulation at home.For most banks during the 1980s, international expansion support their domestic strategies and was relatively small compared to the home country. So banks did not have to attract additional capital. When banks initiated larger acquisitions in the late 1980s and 1990s, external capital became more important as a source of financing. (Domestic and foreign) shareholders not only provided additional capital to expand. They also followed management more closely, and pressed for changes when expected results were not delivered. An increasing shareholder role and foreign profitability that was below expectations, led bank managers to change objectives in the mid 1990s profitability should be internally gen erated, the domestic base intoneed and foreign activities divested if they did not contribute satisfactorily to total profitability.Banks can affirm in principle five product categories credit, securities, asset management, financial services and insurance. Also, five client types can be distinguished that banks can target political clients (nation states, supra national institutions), Corporate clients, Institutional clients (other banks, asset managers and insurers), Retail clients and orphic clients. The case studies show that banks which entered new market activities actively serviced and targeted a wide range of clients and products. Two specific patterns have been identified Capital market activities, and Foreign retail bankingCapital Market ActivitiesFor capital market activities banks offer credit, securities, asset management, and financial advice to governmental, institutional and corporate clients. The majority of the banks had set up such operations by 1980 they part icipated in the Euromarkets, issued bonds to finance their own activities, and took advantage of the financial deregulation in the financial centers. Expanding capital market activities was spurred in the mid-1980s with the financial liberalization in the United farming, and in the mid-1990s with the prospect of restructuring in the European Union.For several banks, the decision to participate in the capital markets intemperately influenced their overall strategy. Paribas and J.P. Morgan decreased their commercial banking activities and transformed themselves into investment banks. Both banks however did not have the scale by the end of the 1990s to remain a major market participant in investment banking and indication the increasing IT investments J.P. Morgan was subsequently acquired by Chase Manhattan in 2000 and Paribas by BNP in 1998. Most of the acquisitions of UBS, SBC, Credit Suisse and Deutsche Bank in the 1990s were capital market related, steadily increasing their reli ance on fee income instead of net interest income. The composition of the fee income changed more lucrative (but volatile) fee income from financial advice and securities re-distributions on mergers and acquisitions was combined with more stable income from asset management activities. stream1970s1980s1990sReason appendage Eurocurrency markets (London, Paris, Zurich)Financial liberalization of American stock marketFinancial liberalization European capital markets (London, Paris, Amsterdam)Financial liberalization of Japanese capital marketsCatch up new entrants to profit from current bull market, consolidation existing playersExampleChase, CiticorpDeutsche Bank, ABN Amro, Societe GeneraleCredit suisse, Deutsche Bank, JP MorganTable 2 Development of Capital Market ActivitiesRetail BankingInternational retail banking has been the domain of a selected number of banks. Chase and Citicorp set out to expand a retail network in Belgium, The Netherlands, Germany and the United Kingdom in th e 1950s and 1960s. European banks in the 1970s and 1980s on the other hand did not expand in retail banking in Europe, but expanded in the United States, especially in atomic number 20 where British and Japanese banks bought retail banks helped by lenient regulation. For most Californian banks, their sale was either instigated by regulation (banks that cannot be bought by domestic competitors due to an increase in market share or banks that fatality outside capital) or poor performance. By the early 1990s a large number of banks exited from the United States market they found it difficult to transform these banking operations into profitable ones, and their exit was speeded by the deregulation of interstate banking (cf. Tschoegl, 1987). The general expectation was that this would raise the minimum scale of operations to compete effectively, requiring large amounts of additional investments. Banks that remained were for example HSBC and ABN Amro.Eight foreign banks, including all o f the British banks, held retail networks in the United States in the early 1980s by the late 1980s five had opted out. For European banks, the growth of foreign commercial bank networks took place from the mid-1980s. A limited number of banks (HSBC, ABN and Citicorp) have maintained these foreign networks throughout the period. From the 1990s, the following banks pursued retail banking strategies Santander in Argentina, Mexico, Chile BBVA in Argentina, Chile, Mexico ABN Amro in Brazil and the United States ING in Belgium HSBC in Mexico, Brazil, the United States/Canada and Hong Kong Citibank in GermanyTwo groups of banks did not enter foreign retail banking, or only to a limited extent Swiss banks and Japanese banks. Swiss banks had retail banking activities in their domestic market, but not outside Switzerland. Switzerland was a major financial center and as an economy ran a capital surplus an explanation might be that setting up foreign capital market activities was a more logica l foreign extension of activities then setting up or acquiring foreign retail banks. Japanese banks also entered foreign retail banking to a limited extent. Their activities were mainly concentrated in California, where the banks initially had some links with Japanese immigrants. More important, lenient regulators allowed takeover of Californian banks by foreign competitors. The existence of an opportunity set the ability to buy compared to other more regulated banking markets has probably been the main incentive.Organizational formBanks which decided to enter new markets or to strengthen their market position have had a wide range of options open to them as to how they could proceed in implementing their foreign banking activities. Looking back at activities, there has been a strong rise in the number of individually of the approaches used. Three specific developments in organizational form have been identifiedBranch Networks Alliances and Joint Ventures Internet BanksBranch Ne tworkIn general, the objective to build a branch network has been to assist foreign clients, finance activities more cheaply or to evade home country regulation. Activities in financial centers were set up, usually starting with London, New York and Singapore or Hong Kong. This was then expanded to second tier financial centers and economic centers in Europe, the United States, Asia and Latin America.Period1970s1980s1990s incentiveBreak down consortiumTrade relates service existing clients increase in trade and exportsLiberalization of Capital marketsOpen up markets (Spain)Growth in Asian Capital MarketsOpening of Eastern European marketsIncrease volume of securities marketExampleCiticorp, Bank of America, Lloyds, Barclays, ABNAmro, NMB, WestLBDeutsche Bank, Dresdner BankTable 3 Development of Branch Networks Alliances and Consortium banksConsortium banks were mainly a feature of the late 1960s and 1970s. With these joint ventures, banks tried to create a curriculum to service fore ign clients and undertake corporate finance activities, while communion the costs of building such an activity independently. In the beginning of the 1980s, there were a number of banks who relied on the consortium banks to provide an alternative for a foreign branch network. These were Amro and Midland. Subsequently, a number of banks built their foreign networks by buying out the other shareholders in the consortium banks.During these alliances banks probably also acquired detailed information of the partner banks. This could be concluded from the observation that ING unsuccessfully acquired former InterAlpha partners from the mid-1990s for its expansion in Europe. From the 1990s, alliances between banks either had to develop specific skills neither bank could achieve alone, or serve as a defensive move in wake of expected restructuring in the European banking market. This usually was accompanied by share exchanges.Alliances to acquire or share specific skillsAlliances to ensure future market position Royal Bank of Scotland Santandar (1990) BNP Dresdner (1988-2000) Socit Gnrale BSCH (2000) BBVA UniCredi