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A commentary on home‐region internationalization in financial groups from

emerging economies

Article  in  Multinational Business Review · July 2013

DOI: 10.1108/MBR-03-2013-0013

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Emerging
A commentary on home-region economies
internationalization in financial
groups from emerging economies
195
J. François Outreville
Department of Finance, HEC Montreal, Montreal, Canada

Abstract
Purpose – The purpose of this paper is to examine where large financial firms are expanding their
operations, including financial firms from emerging economies. This paper has two objectives. The
first is the documentation of the relative importance of the largest financial groups in emerging
countries. The second objective is to describe the regional nature of financial firms.
Design/methodology/approach – The analysis of the internationalization process of these groups
is based on a list of top 50 financial groups ranked by total assets in 2010.
Findings – The paper shows that the majority of the largest financial institutions from emerging
countries are expanding their business in the home region where they are headquartered. This result
provides support to the debate on the home-region preference.
Research limitations/implications – The paper provides an example on preferences for the
home-region orientation but does not provide an analysis of the determinants of FDI in the financial
sector.
Originality/value – The paper examines where large financial firms are expanding their operations,
including financial firms from emerging economies.
Keywords Multinational companies, Emerging markets, Multinational corporations,
Home-region orientation, Financial groups, Emerging countries
Paper type Viewpoint

Introduction
Recent papers by Wolf et al. (2012) and Verbeke and Kano (2012) in this journal offer an
analysis to explain the home-region orientation phenomenon of large firms. Here we
apply this thinking to the internationalization of financial services. Before the 1970s,
the operations of the multinational banks mainly took the form of establishing
branches, offices or subsidiaries abroad to support the activities of non-financial
companies. In response to foreign market opportunities made available by
deregulation and globalization, many financial firms have increased their foreign
direct investment (FDI) and acquired other companies in part because of the belief that
only very large players will have the cost advantages necessary to remain competitive
in emerging global markets[1].
The question of whether and how internationalization of activities affects the
performance of a firm is also one of the most addressed research problems in strategic
management and international business (Glaum and Oesterle, 2007; Hejazi and Santor,
2010). International diversification can be defined as a firm’s expansion beyond the
borders of its home country across different countries and geographical regions. Firms The Multinational Business Review
Vol. 21 No. 2, 2013
with strong competencies that are developed at home can utilize these in international pp. 195-206
markets (Bartlett and Ghoshal, 1989) to generate growth, but it has also been suggested q Emerald Group Publishing Limited
1525-383X
that international diversification tends to take place in markets that are physically and DOI 10.1108/MBR-03-2013-0013
MBR culturally close and that other factors such as logistics and trade barriers are likely to
21,2 increase the cost of operations rather than providing economies of scale (Katrishen and
Scordis, 1998).
The controversy over globalization and its implications has been debated in the
literature (Rugman, 2005; Rugman and Verbeke, 2004, 2005, 2008; Dunning et al.,
2007; Wolf et al., 2012). Rugman and Verbeke (2004) showed that a large percentage
196 of companies were oriented within their own home region and that only a small
percentage of companies were truly global. Several other studies have confirmed
these basic findings (Rugman and Brain, 2003; Delios and Beamish, 2005; Banalieva
and Dhanaraj, 2013). In the financial services sector, Grosse (2005) found that the
majority of the largest institutions were expanding their business in the home region
of the triad in which they are headquartered. One institution (HSBC) earned the bulk
of its income in two regions (Asia and Europe), which is explained by its historical
orientation towards Asia. A similar result was reported by Outreville (2007) for the 50
largest financial institutions in the world. Financial groups from the USA have a
dominant presence in Latin America and the Caribbean (LAC), and Canadian banks
are prevalent in the Caribbean as well. The Spanish banks, Banco Santander and
Banco Bilbao Vizcaya Argentaria, have the largest proportion of their affiliates in
LAC.
In recent years, there has been a strong increase in the demand for financial services
in emerging markets. At the same time, FDI in the financial sector of emerging
economies surged in the 1990s as some countries were eager to attract a number of
FDI-based activities by financial groups. Yin and Choi (2005) explored the patterns of
inward FDI into China, and they found that the majority of such investments stem
from Asia. This is an important result, since one might expect that in rapidly growing
emerging economies, a more even distribution across regions might exist.
There have been only a few empirical studies about the determinants of the number
of branches and offices a bank will have abroad. Goldberg and Johnson (1990)
examined factors, which determine the presence of US banks abroad. Moshirian’s
(2001) study is the first one that uses data on FDI in banking to measure US bank’s
activities abroad. Outreville (2007) examines where the largest financial firms are
expanding their operations and documents some of the factors that may explain the
most-favored locations of these financial groups.
The purpose of this paper is not to examine why financial firms from emerging
countries are increasing their international diversification but rather where they are
expanding their operations. To our knowledge, this topic has never been investigated
for financial firms in emerging countries. Thus, this paper has two objectives:
(1) to document the relative importance of the largest financial firms in these
emerging countries; and
(2) to examine where financial firms are expanding their operations as well as
explore the debate on home-region preference.

In the next section, we describe the data used for the largest financial groups in
emerging countries. In the following section, we provide an analysis of the
internationalization of these companies.
The largest financial groups from emerging countries Emerging
The home-country composition of the world’s largest financial groups has changed economies
dramatically in the past 20 years. European banks have taken over the lead from the
USA and Japanese firms. The rise to prominence of European banks has occurred in
parallel with their increasing participation in cross-border mergers and acquisitions
(M&As) since the end of the 1990s (BIS, 2001). Recently, the emergence of the Chinese
banks is the most striking event. In 2010, among the 24 largest banks with total assets 197
over US$1 billion, four of them are from China: the Industrial and Commercial Bank of
China ranks 12, China Construction Bank Corp. ranks 17, Agriculture Bank of China
ranks 20, and Bank of China ranks 21.
Large financial groups dominate the world financial services not only in total assets
but also in the increasing number of countries in which they operate. Obtaining
comparable data for all companies around the world is a difficult task because of
different reporting procedures. A list of the largest groups in emerging countries,
ranked by total assets, has been compiled using data on total assets and employees by
Bloomberg from 2010. Data on affiliates and host countries is based on the Dun
& Bradstreet “Who owns Whom” database. The listing of the 50 largest groups
(Table I) provides information on total assets, operating revenues and the total number
of employees. The list includes 28 groups from Eastern Asia (China, Taiwan, Hong
Kong and the Republic of Korea), three groups from South-East Asia (Singapore and
Malaysia), eight groups from South America (Brazil, Colombia and Chile), five groups
from South Africa and six groups from four other emerging countries (India, Mexico,
Egypt and Zimbabwe).
The degree of internationalization (DOI) can be analyzed from a number of
perspectives: the operations (assets, sales and employment), the stakeholders, the
spatial organization of the operations or the diversification of activities among several
countries. Given the range of perspectives and dimensions that can be considered for
each, the degree of transnationality of a firm cannot be fully captured by a single
synthetic measure[2]. In the financial sector, data on the foreign operations (assets,
income, and employment) of the companies is not readily available even when looking
at annual reports. In this paper, DOI is defined as a function of the extent to which a
firm’s activities are located abroad. An approach that measures this dimension of
transnationality is captured in the number of foreign affiliates and the number of host
countries in which a company has established its affiliates. The Geographical Spread
Index (GSI)[3] indicates high levels of ownership advantages as well as high
knowledge of market conditions in many countries.
Ranking the largest financial groups from emerging countries in terms of the
number of host countries for their foreign affiliates (Table II) gives a list that is not
necessarily correlated with the size measured by total assets. On the other hand, there
is a high correlation (as expected) between the number of host countries and the GSI
(last column of Table II). Among the top five groups in this list, two are from Brazil,
two are from Singapore and one is from India.

Internationalization of the financial groups in their home region

Geographic and cultural distances have received a great deal of attention in the
international business literature and have been identified as a key factor in explaining
foreign market attractiveness (Kogut and Singh, 1988; Focarelli and Pozzolo, 2008).
MBR
Operating
21,2 Total assets revenue (mil
Company name Country (mil USD) USD) Employees

Industrial & Commercial Bank of

China-ICBC China 1,725,938.00 45,149.00 389,827.00
198 China Construction Bank Corporation China 1,409,355.00 39,373.00 301,537.00
Agricultural Bank of China Limited China 1,300,868.00 32,552.00 441,144.00
Bank of China Limited China 1,281,183.00 32,760.00 204,818.00
China Development Bank Corporation China 664,869.00 11,267.00 6,711.00
Bank of Communications Co. Ltd China 484,628.00 11,947.00 79,122.00
Banco Do Brasil S.A. Brazil 407,118.00 29,060.00 n.a.
China Postal Savings Bank China 395,019.00 3,695.00 n.a.
Itausa-Investimentos Itau SA Brazil 353,920.00 38,072.00 n.a.
State Bank of India India 321,290.00 14,894.00 n.a.
China Merchants Bank Co Ltd China 302,853.00 7,541.00 40,340.00
Banco Bradesco SA Brazil 290,866.00 23,621.00 n.a.
Kingdom Financial Holdings Ltd Zimbabwe 255,608.00 186,114.00 n.a.
Woori Finance Holdings Co. Ltd Rep. of Korea 244,658.00 6,822.00 n.a.
Agricultural Development Bank of
China China 242,644.00 4,377.00 59,519.00
Shanghai Pudong Development Bank China 237,649.00 5,337.00 21,877.00
National Agricultural Cooperative
Federation – NACF Rep. of Korea 233,066.00 9,615.00 n.a.
Kb Financial Group, Inc Rep. of Korea 225,134.00 7,653.00 n.a.
Banco Nacional De Desenvolvimento
Economico E Social-Bndes Brazil 222,152.00 5,425.00 n.a.
Shinhan Financial Group Rep. of Korea 218,994.00 15,264.00 n.a.
China Minsheng Banking Corporation China 208,897.00 5,442.00 26,039.00
MBCA Bank Limited Zimbabwe 205,025.00 170,634.00 n.a.
CAIXA Economica Federal Brazil 196,410.00 12,120.00 n.a.
DBS Bank Ltd Singapore 184,313.00 4,705.00 n.a.
Standard Bank Group Limited South Africa 181,545.00 9,799.00 51,411.00
China Everbright Bank Co Ltd China 175,404.00 3,553.00 19,217.00
Chunghwa Post Co Ltd Taiwan 166,370.00 1,853.00 n.a.
Korea Finance Corporation Rep. of Korea 157,571.00 72.00 n.a.
BOC Hong Kong (Holdings) Ltd Hong Kong 156,378.00 3,360.00 n.a.
Industrial Bank Co Ltd China 149,372.00 4,353.00 19,536.00
Oversea-Chinese Banking
Corporation Limited OCBC Singapore 138,449.00 3,400.00 19,561.00
Cathay Financial Holdings Co Ltd Taiwan 134,269.00 2,192.00 43,340.00
Industrial Bank of Korea Rep. of Korea 132,684.00 3,731.00 n.a.
Hana Financial Group Rep. of Korea 129,084.00 5,022.00 n.a.
HUA XIA Bank Co., Limited China 123,839.00 2,511.00 12,301.00
Korea Development Bank Rep. of Korea 119,493.00 2,715.00 n.a.
Export-Import Bank of China – China
Eximbank China 116,010.00 866.00 1,503.00
Taiwan Financial Holdings Taiwan 113,378.00 790.00 8,675.00
Table I. ICICI Bank Limited India 108,419.00 8,594.00 n.a.
The 50 largest financial Hang Seng Bank Ltd Hong Kong 106,501.00 2,684.00 9,342.00
groups from emerging Firstr and Limited South Africa 105,381.00 5,685.00 n.a.
countries (continued)
 Emerging
Operating
Total assets revenue (mil economies
Company name Country (mil USD) USD) Employees

Malayan Banking Berhad –

Maybank Malaysia 103,361.00 3,951.00 n.a.
ABSA Group Limited South Africa 97,255.00 5,684.00 36,150.00 199
Nedbank Group Limited South Africa 77,331.00 3,822.00 27,037.00
National Bank of Egypt Egypt 46,384.00 1,034.00 n.a.
Grupo Financiero Banorte Mexico 43,430.00 2,478.00 n.a.
Investec Limited South Africa 37,778.00 1,274.00 n.a.
Grupo AVAL Acciones Y Valores SA Colombia 34,693.00 2,499.00 n.a.
Banco De Chile Chile 34,480.00 2,007.00 n.a.
Bancolombia Colombia 30,263.00 2,783.00 n.a.
Source: Bloomberg database Table I.

The home-region focus of international business activity has been discussed by

Rugman and Verbeke (2004, 2005), Dunning et al. (2007), Asmussen (2009) and Wolf
et al. (2012). Increasing performance through international expansion in proximate
foreign markets (Delios, 2011) also supports this hypothesis.
Empirical applications by Ahearne et al. (2000), Choi et al. (2002), Portes and Rey
(1999) and Wei and Wu (2001) show that distance influences international capital flows
and investment decisions of banks in a similar way as it influences international trade.
Buch and DeLong (2004) found that besides geographic proximity, sharing a common
language or a common legal system are likely to lower the operation costs. Sethi and
Elango (1999) demonstrate how the country of origin influences the decision of a firm
to expand in countries with geographic or cultural proximity. More recently, Banalieva
and Dhanaraj (2013) found empirical support to explain how technology is an
advantage for home orientation in international expansion strategies.
Table III illustrates the distribution of host regions for the affiliates of the largest
financial groups. Geographic distance clearly has a major impact on the results.
Companies from Asia have a dominant presence in Asia. For example, 54 percent of the
affiliates of Chinese groups are in neighboring Asian sub-regions. 35 percent of the
affiliates of groups from Singapore and Malaysia are established in their own region,
i.e. South-East Asia. Foreign affiliates from Indian groups are located in the Indian
Ocean region (Sri Lanka, Maldives and Mauritius). Similarly, 43 percent of the foreign
affiliates of the Brazilian groups are in Latin America and 30 percent of South-African
groups are in the South-African sub-region.
The concept of psychic distance, used in numerous studies on the
internationalization process, reflects managers’ perceptions of differences in
business-relevant characteristics between the home and host countries (Brewer,
2007). The concept includes different stages of economic development (Chetty and
Campbell-Hunt, 2004). Table III provides one example. Financial groups originating
from the Republic of Korea, with a much higher level of economic development, are
also, on average, more diversified. Their presence in Europe is explained by the
presence of large industrial groups headquartered in the Republic of Korea. Psychic
 21,2

200
MBR

Table II.

by number of host
countries, year 2010
largest financial groups
from emerging countries
Internationalization of the
Groups ranked by the number of host countries D&B 2010/2011
Total assets mil Domestic Foreign II Host
Company name Country USD affiliates affiliates Total index countries GSI

CAIXA Economica Federal Brazil 196,410.00 40 32 72 44.44 17 27.49

Oversea-Chinese Banking Corporation Singapore 138,449.00 47 47 94 50.00 15 27.39
Limited – OCBC
State Bank of India India 321,290.00 21 17 38 44.74 13 24.12
Itausa-Investimentos Itau SA Brazil 353,920.00 61 33 94 35.11 10 18.74
DBS Bank Ltd Singapore 184,313.00 45 40 85 47.06 8 19.40
Firstrand Limited South 105,381.00 39 23 62 37.10 8 17.23
Africa
Industrial & Commercial Bank of China – China 1,725,938.00 986 21 1,007 2.09 8 4.08
ICBC
Woori Finance Holdings Co. Ltd Rep. of 244,658.00 11 7 18 38.89 6 15.28
Korea
Shinhan Financial Group Rep. of 218,994.00 17 6 23 26.09 6 12.51
Korea
ICICI Bank Limited India 108,419.00 17 6 23 26.09 5 11.42
Malayan Banking Berhad – Maybank Malaysia 103,361.00 66 9 75 12.00 5 7.75
China Merchants Bank Co Ltd China 302,853.00 43 60 103 58.25 4 15.26
Cathay Financial Holdings Co Ltd Taiwan 134,269.00 11 4 15 26.67 4 10.33
Agricultural Bank of China Limited China 1,300,868.00 4 5 9 55.56 3 12.91
Bancolombia Colombia 30,263.00 10 8 18 44.44 3 11.55
Standard Bank Group Limited South 181,545.00 13 8 21 38.10 3 10.69
Africa
Investec Limited South 37,778.00 14 7 21 33.33 3 10.00
Africa
Hang Seng Bank Ltd Hong Kong 106,501.00 22 8 30 26.67 3 8.94
(continued)
Groups ranked by the number of host countries D&B 2010/2011
Total assets mil Domestic Foreign II Host
Company name Country USD affiliates affiliates Total index countries GSI

KB Financial Group, Inc Rep. of 225,134.00 9 3 12 25.00 3 8.66

Korea
Bank of Communications Co. Ltd China 484,628.00 8 9 17 52.94 2 10.29
Nedbank Group Limited South 77,331.00 7 3 10 30.00 2 7.75
Africa
Banco Bradesco SA Brazil 290,866.00 34 2 36 5.56 2 3.33
Grupo Financiero Banorte Mexico 43,430.00 51 3 54 5.56 2 3.33
National Bank of Egypt Egypt 46,384.00 2 1 3 33.33 1 5.77
BOC Hong Kong (Holdings) Ltd Hong Kong 156,378.00 5 1 6 16.67 1 4.08
Grupo Aval Acciones Y Valores SA Colombia 34,693.00 10 2 12 16.67 1 4.08
Hana Financial Group Rep. of 129,084.00 10 1 11 9.09 1 3.02
Korea
National Agricultural Cooperative Federation Rep. of 233,066.00 14 1 15 6.67 1 2.58
– NACF Korea
ABSA Group Limited South 97,255.00 16 1 17 5.88 1 2.43
Africa
Source: Dun & Bradstreet “Who owns Whom” database
economies
Emerging

201

Table II.
 21,2

202
MBR

Table III.

(in percent)
Breakdown of the
location of foreign
affiliates by host regions
Host region
Other North Latin
Eastern South-East South Japan UK Europe America America Caribbean South Other
Home country Asia (%) Asia (%) Asia (%) (%) (%) (%) (%) (%) islands (%) Africa (%) (%)

Asia
China, Hong Kong 27 27 0 5 9 9 14 0 9 0 0
and Taiwan (7)
Korea (Rep. of) (5) 23 16 0 4 6 26 13 0 6 0 6
Singapore and 18 35 0 0 11 11 7 0 11 0 7
Malaysia (3)
India (2) 0 18 18 0 11 0 18 0 6 11 18
South America
Brazil (3) 0 0 0 0 7 22 14 43 14 0 0
South Africa (5) 8 0 0 0 23 23 8 0 0 30 8
Note: In parentheses is the number of groups in the calculated average value
Source: Author’s calculations
distance also includes culture, religion and legal and political history (Dow, 2000; Dow Emerging
and Karunaratna, 2006). Therefore, groups from South Africa are located in the UK and economies
in The Netherlands for economic, cultural and historical reasons.
At the same time, financial services have also succumbed to the general trend
towards global markets and risks. Globalization, defined as the increasing
liberalization and integration of economies in terms of trade and investment, has
transformed financial and capital markets during the past two decades (Hausler, 2002). 203
Improvements in information processing, telecommunications, and financial
technologies have allowed the possibility of banks’ and other financial institutions’
management to carry out their activities in the various financial markets throughout
the world simultaneously. Banks, like other sectors of the economy, must compete with
each other globally as part of a broader process of political and economic integration
(Leyshon and Pollard, 2000).
Ranking the most preferred locations (countries) in terms of the number of foreign
affiliates of financial groups shows that the world’s largest financial cities are at the
top of the list. UK (London) is the most popular location, followed by Hong Kong and
the USA. The limited number of most favored host countries suggests that the
financial firms from emerging countries, and the commercial banking industry in
particular, currently remain far from globalized.

Conclusion
This paper documents the relative importance of the largest financial firms in
emerging countries and examines where financial firms are expanding their
operations. We found that the majority of the largest institutions are expanding
their businesses in the home region where they are headquartered. This result supports
the home-region preference hypothesis of large firms along with the empirical evidence
that institutions are regional, not global.
This finding is also in line with previous results. For example, Berger et al. (2003)
demonstrated that the financial services industry in general and the commercial
banking industry in particular, currently remain far from globalized. Rugman and
Brain (2004) found that most of the largest banks are heavily dependent on their home
region.
A shortcoming of this analysis is that other possible determinants of FDI in the
financial sector like the relative economic growth of markets or the differential in the
cost of capital in the host and home country are not investigated. Other factors like the
role of governance in host countries may have a strong impact on the determinants of
the internationalization process. Also, emerging markets have as many differences
between them as they do with developed markets. Despite these differences, emerging
markets do have several similarities including the potential for sustained growth and a
need to develop their financial systems in the long term.
Emerging markets are typically very different in terms of the health of their
banking systems; however, their banks are being forced to internationalize and to
make choices about the allocation of capital between countries and activities in order to
compete with their counterparts from developed countries. It is expected that their DOI
will increase, but there is also a danger that mandatory requirements for capital in the
“home” markets of banks located in developed economies will lead to a reduction in
capital allocation to other countries.
MBR Notes
21,2 1. The empirical literature on the determinants of bank mergers generally supports the
hypothesis that deregulation has a substantial impact on merger decisions ( Jayaratne and
Strahan, 1998; Saunders, 1999). Berger et al. (2000) surveyed hundreds of papers on the
causes and consequences of consolidation, covering the topics of efficiency, market power,
managerial and government motives and consequences.
204 2. For recent work based on multidimensional measures of internationalization see, for
instance, Fisch and Oesterle (2003), Goerzen and Beamish (2003), UNCTAD (2007), Sommer
(2009), Rugman and Oh (2011).
3. UNCTAD (2006) defined the Geographical Spread Index (GSI) as the square root of the
Internationalization Index (the number of foreign affiliates divided by the total number of
affiliates) multiplied by the number of host countries.

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Corresponding author
J. François Outreville can be contacted at: J-francois.outreville@hec.ca

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