The Service Industries Journal

ISSN: 0264-2069 (Print) 1743-9507 (Online) Journal homepage: https://www.tandfonline.com/loi/fsij20

Internationalization of multinational banks: a

study of foreign direct investment in seven Latin
American countries

Alejandro Santana Mariscal , Yingying Zhang & Joaquin López Pascual

To cite this article: Alejandro Santana Mariscal , Yingying Zhang & Joaquin López Pascual
(2012) Internationalization of multinational banks: a study of foreign direct investment in
seven Latin American countries, The Service Industries Journal, 32:7, 1149-1170, DOI:
10.1080/02642069.2012.662494

To link to this article: https://doi.org/10.1080/02642069.2012.662494

Published online: 13 Mar 2012.

Submit your article to this journal

Article views: 356

View related articles

Citing articles: 1 View citing articles

Full Terms & Conditions of access and use can be found at

https://www.tandfonline.com/action/journalInformation?journalCode=fsij20
The Service Industries Journal
Vol. 32, No. 7, May 2012, 1149– 1170

Internationalization of multinational banks: a study of foreign direct

investment in seven Latin American countries
Alejandro Santana Mariscala, Yingying Zhangb∗ and Joaquin López Pascualb
a
ESADE, Ramon Llull University, Av. Pedralbes 60 –62, Barcelona, 08034, Spain; bCUNEF,
Complutense University of Madrid, Serrano Anguita 9, Madrid, 28004, Spain
(Received 25 December 2011; final version received 3 January 2012)

The article attempts to explore and contrast the different factors that influence the
foreign direct investment (FDI) decisions of multinational banks. Employing eclectic
theory, an estimation model with panel data from seven Latin American countries is
set to test the proposed hypotheses. The results highlight an increase in foreign
assets, removal of banking restriction, banking concentration, and capital cost
differential in the local banking system as determinants of specific location
advantages for attracting banking FDI. Other factors such as cultural proximity and
crisis also have a significant impact on banking FDI. Discussions and implications
are debated before conclusions are drawn for a future research agenda.

Keywords: foreign direct investment; location advantages; internationalization; Latin

America; multinational banks

Introduction
Among the service industries, internationalization of the banking industry started to grow
in importance in the 1970s (Grubel, 1997). Given its considerable weight in today’s global
business world and an emerging interest in understanding this particular phenomenon,
numerous studies have been dedicated to exploring the motives, impact, and behaviors
of multinational banks (MNBs) in this process (e.g. Aliber, 1984; Casson, 1990; Giddy,
1983). In the case of developing countries, there was a rapid increase in MNBs acquiring
local banks in the 1990s, to provide a broad range of local financial services. By the end of
the 1990s and early 2000s this process was provoking much interest in analyzing the
impact and behaviors of international banks in these local emerging markets, with
various studies devoted to the topic (e.g. Barajas & Steiner, 2000; Claessens, Demir-
güç-Kunt, & Huizinga, 2001; Konopielko, 1999).
In this study of the banking industry’s internationalization, different elements and
factors have been highlighted to explain the phenomenon. For instance, Clarke, Cull,
Martı́nez Perı́a, & Sánchez (2002) consider that empirical research has been focussed
on four fundamental issues: the factors that have drawn MNBs to carry out operations
in developing countries, the activities that they engage in, their entry modes
(e.g. Sanchez-Peinado & Pla-Barber, 2006), and the organizational format that they
adopt. Meanwhile, Heffernan (1996) emphasizes three key factors in explaining MNB
investment decision making: locational efficiency, barrier to free trade, and imperfec-
tions in the market place.

∗
Corresponding author. Email: yzhang@cunef.edu

ISSN 0264-2069 print/ISSN 1743-9507 online

# 2012 Taylor & Francis
http://dx.doi.org/10.1080/02642069.2012.662494
http://www.tandfonline.com
1150 A. Santana Mariscal et al.

As with multinational enterprises, MNBs emerged to carry out their activities through
cross-border branches or subsidiaries (Heffernan, 1996). Therefore, some of these under-
lying issues are in line with the general internationalization theory derived from studies of
the manufacturing industry (e.g. Buckley & Casson, 1976), while others may be peculiar to
the banking industry. That is, as a part of the services industry, banking services are per-
ceived as intangible and invisible, and require simultaneous production and consumption
(Clegg, 1993; Erramilli & Rao, 1990); and banks possess a number of intangible assets that
cannot be traded in the market place (Meng, 2009).
In the case of factors influencing foreign direct investment (FDI) decisions in banking,
empirical studies have been focussing on developed countries such as the USA, the UK,
and Japan with little light shed on developing and emerging markets, though the latter
have received a significant increase of banking FDI (Meng, 2009). For example, strong
banking FDI in Latin America took place in the second half of the 1990s, with acquisitions
led by Spanish banks (see Table 1). The participation of MNBs in the region has doubled
or more than doubled in many countries, and banking concentration has increased as a
consequence of the consolidation process via mergers and acquisitions often triggered
by the financial crisis and regulatory tightening (Levy & Micco, 2007), as shown in
Table 2.
However, existing studies have focused on explaining the impacts of the entry of
foreign banks in Latin American countries in terms of efficiency, and particularly, their
relevance for the growth and stability of local banking systems (Barajas & Steiner,
2000; Goldberg, 2001; Levy & Micco, 2007; Martı́nez Perı́a & Mody, 2004; Peek &
Rosengren, 2000). Others have concentrated on empirically demonstrating the role that
foreign banks have played in financing Latin-American countries’ economic activities
(Clarke, Cull, D’Amato, & Molinari, 2000; Clarke, Cull, & Martı́nez Perı́a, 2001;
Clarke et al., 2002; Goldberg & White, 1998). Nonetheless, factors influencing MNB
decisions on international investment have received less attention in the Latin American
region. Given the interest in exploring different factors shown in current literatures regard-
ing MNBs, this article aims to contrast these factors’ influence on their FDI decisions,
especially in developing markets. That is, it attempts to identify determinants for the
MNBs’ FDI decision making, focussing on location-specific advantages as decisions on
the latter become increasingly sophisticated (Buckley & Ghauri, 2004).

Table 1. Foreign banks’ percentage of total bank assets and the weight of Spanish banks.
Country 1994 2000 2008 2007 Spanish banking FDI†
Argentina 18 49 48 31.0
Brazil 8 17 30 19.7
Chile 16 54 48 55.3
Colombia 6 18 38 38.4
Mexico 1 82 82 43.6
Peru 7 33 46 35.8
Venezuela 1 42 34 63.7
Source: Own elaboration based on International Monetary Fund (2009) and Jara and Tovar (2008, p. 48).
†
The percentage of Spanish banking investment among the total foreign banking investment. According to Jara
and Tovar (2008), these percentages of Spanish banking investment are the highest amongst other principal
foreign investors, i.e. German, British, and American.
 The Service Industries Journal 1151

Table 2. Latin American: first-generation reforms of the financial system.

Start of an intensive Adoption of capital Reform followed
Liberalization of period of adequacy after tension (1) or
interest rates privatization requirements systemic crises (2)†
Argentina 1989 1995 1991 1995 (2)
Brazil 1989 1997 1995 1994 (1)
Chile 1974 1974 and 1987 1989 1982 (2)
Colombia 1979 1993 1992 1998 (2)
Mexico 1988 1992 1994 1994 (2)
Peru 1991 1993 1993 1995 (1)
Venezuela 1989 1996 1993 1994 (2)
Source: Foreign investment in Latin American and the Caribbean (ECLAC, 2002, p. 105).
†
(1) refers to a financial reform which was carried out after tension in the respective year; and (2) to systemic
crises.

The rest of article is structured as follows: first, we carry out a literature review of the
internationalization of MNBs based on the eclectic theory; then hypotheses are generated
with methodology intended to contrast the hypotheses; after the presentation of an esti-
mation panel data model for further econometric testing, the analysis and results are
described, with discussion and conclusions for future research.

Literature review and hypotheses development

In this section, we carry out a literature review on the determinants for the internationali-
zation decisions of MNBs based on the eclectic theory, with a special focus on markets in
developing countries. The following subsections present different concepts of relevance in
the field study, and consequently hypotheses are developed for further contrast in the later
sections.

The determinants of MNB internationalization: eclectic theory

The banking industry is part of the service industries, and shares most of the general fea-
tures of service. With intensive human skills and knowledge embedded in the industry, the
characteristics of non-tradability of banking products (Meng, 2009) determine the location
and mode of entry in their internationalization process. In terms of determinants for FDI,
one of the most popular theoretical frameworks of firm’s internationalization is Dunning’s
eclectic theory, which stresses the importance of location-specific, ownership-specific and
internalization-specific factors in the FDI decisions of MNBs (Williams, 1997). It explains
why banks decide to invest abroad, where they invest, and why they select FDI to enter
foreign markets and obtain profits. Location-specific factors refer to the attractiveness
of a host country and include market seeking and competition within that country.
In terms of ownership-specific factors, MNBs need to possess distinctive advantages
that can overcome local competitors with competitive operating costs in the host
country. Internalization-specific factors refer to the benefits generated as a consequence
of reducing transaction costs by replacing the market mechanism with an internal
organization.
We approach MNB internationalization by examining the location-specific factors,
given their increasing sophistication (Buckley & Ghauri, 2004). The eclectic paradigm
analyzes location-specific factors with the economic integration between host country
1152 A. Santana Mariscal et al.

and country of origin, the characteristics of the local banking system and other specific
characteristics of the host country, such as banking market size and market opportunity
(Gray & Gray, 1981; Yannopoulos, 1983). In this sense, studies have shown that the
activities of MNBs are dependent on their internationalization process being developed
by the firm from the country of origin and on the bilateral trade relations of these two
countries (Goldberg & Saunders, 1980, 1981a, 1981b; Gray & Gray, 1981). These tra-
ditional explanatory factors for MNB FDI are related to the strategy of following clients
from their country of origin. Known as a defensive expansion of banks to maintain
clients’ information, this is supposed to offer a competitive advantage in comparison
with local banks in the host countries (Williams, 1997). However, following clients
as an explanatory factor for a banking FDI decision is losing ground due to intensified
competition in the globalizing banking industry, especially in the developing countries.
As Clarke, Cull, and Martı́nez Perı́a (2003) point out, the presence of foreign entities in
the developing countries is not only intended to follow clients from their countries of
origin but to exploit local market opportunities. Further empirical research is needed
to explain the determining factors of this phenomenon.
Another relevant but under-studied location-specific factor is cultural proximity
between the country of origin and the host country. Common cultural aspects have been
considered as a determinant for the internationalization process of MNBs (Buch, 2003;
Guillén & Tshoegl, 2000). Nevertheless, this location-specific factor has not been con-
firmed with empirical evidence in banking FDI in developing countries, though cultural
proximity is felt to influence Spanish banks in investing in Latin American countries
(Guillén & Tshoegl, 2000).
In terms of the characteristics of the host country’s local banking system, institutional
banking aspects such as regulation, concentration level, and local banks’ efficiency are
considered as determinants for banking FDI decision (Focarelli & Pozzolo, 2005, Moshir-
ian, 2001; Yannopoulos, 1983). The elimination of barriers to the entry of foreign banks
could incentivize the participation of MNBs in this country (Focarelli & Pozzolo, 2001).
This factor complements ownership-specific factors related to the advantages possessed by
MNBs in overcoming other advantages enjoyed by domestic banks due to their incum-
bency (Williams, 1997). The removal of barriers allows MNBs to obtain benefits by enter-
ing a less efficient banking market or a highly concentrated developing market. Levy and
Micco (2007) argue that MNBs may be simply capturing a market liberalization effect: the
fact of a highly protected local banking industry generates inefficient institutions and sub-
standard regulation and supervision. These factors allow MBNs to obtain outstanding
profits because of a higher level of operational efficiency. As a trade-off, local authorities
in developing countries expect to receive MNBs in order to contribute to building up a
more efficient local banking system (Barajas & Steiner, 2000; Martı́nez Perı́a &
Mody, 2004).
In terms of country-specific characteristics, profit opportunities and market size in
the host country are other determinants for MNB FDI decisions (Focarelli & Pozzolo,
2005; Grosse & Goldberg, 1991). However, Sagari (1992) does not find a positive
effect from market size (measured by gross domestic product – GDP) on the pattern
of international expansion of US banks. As Miller and Parkhe (1998) suggest, banks
may prefer investing in countries where the banking sector is more developed. Nonethe-
less, while these authors only find a positive relation between assets held abroad by
banks and the degree of financial market development in the host country for developed
countries, this becomes negative for developing countries. Hultman and McGee (1989)
show that foreign banking activity is positively related with economic growth in the
 The Service Industries Journal 1153

USA. This empirical evidence is not conclusive and invites further empirical studies to
explore the factors of market opportunity, macroeconomic conditions, and market size of
the host country.
Given that international operations of MNBs involve substantial flows of foreign
currencies, the exchange rate is also considered as a relevant factor in banking FDI
decisions. When the currency of a host country appreciates, foreign investors may
expect an appreciation of their investment in this country (Cushman, 1988; Hultman
& McGee, 1989). In addition, MNBs take capital cost into account to determine
investment decisions in the host country (McCauley & Zimmer, 1991). These two
variables have been considered as relevant factors in MNB decision making in
internationalization.
Taking into account the above factors for MNB FDI decisions and the controversies
addressed, different variables related to location-specific factors are overviewed in the
next subsection to propose corresponding hypotheses for further comparison.

Factors determining MNB FDI: hypotheses development

The continuous FDI in the globalizing banking industry has motivated research to
explain the determinants that affect this phenomenon (Goldberg & Johnson, 1990; Gold-
berg & Saunders, 1981a, 1981b; Grosse & Goldberg, 1991; Williams, 1997). Supported
by the studies of Moshirian (2001) and Williams (1997), the current study is based on the
eclectic theory, to describe the model explaining the factors that influence banking FDI
in developing countries, focussing on the seven principal Latin American countries. The
following factors, predominantly location-specific factors based on the eclectic theory,
have been chosen to describe the model for analyzing location determinants of MNB
internationalization: foreign assets in the host country, economic integration between
host country and country of origin, host country’s banking market size, business oppor-
tunities, regulation barriers, spreads of capital cost, exchange rate, and cultural
proximity.

Foreign assets in the host country

The existence of foreign assets has been considered to increase banking FDI in the host
country (Moshirian, 2001). Moshirian (2001) points out that foreign presence in host
countries makes it easier for banks to expand their international lending activities and
make these activities easier and more effective. For that reason, the establishment of
MNB subsidiaries facilitates loan activities in the local markets of host countries. More-
over, these presences could also reduce operational transaction costs in the host countries,
such as those referring to telecommunications, obtaining and processing information, and
facilitating international loan expansion.
In the case of developing countries, Clarke et al. (2003) consider that foreign banks
enter the local market through the acquisition of a local bank or the establishment of
new operations and try to benefit from the market potential of these countries. Conse-
quently, increasing foreign assets could be a motive for MNBs to expand their business
in developing countries and hence augment banking FDI in the destination. Therefore,
the first hypothesis is proposed for further test:
H1: An increase of foreign assets in the host country produces larger banking FDI in this
country.
1154 A. Santana Mariscal et al.

Economic integration between host country and country of origin

To examine the level of economic integration between the host country and the country of
origin of the FDI, two factors have been considered as relevant to explain the determinants
which influence and attract banking FDI: the FDI made in non-financial industries in the
host countries, and commercial relations between the country of origin and the host
country (Focarelli & Pozzolo, 2005; Moshirian, 2001).

FDI in non-financial industries. The internationalization process of banking activities is

strongly tied to the internationalization process of manufacturing firms at the beginning
of its expansion. While seeking to internalize and extend the existing bank-client relation-
ship, MNBs internationalize to satisfy their existing clients so as to avoid being affected by
other local and foreign banking relationships. There are numerous studies explaining the
existence of a positive relation between FDI in the manufacturing industry of the host
country and banking expansion in these countries (e.g. Gray & Gray, 1981). Other
authors have also demonstrated evidence of a positive relation between the foreign activi-
ties of American banks and American FDI (e.g. Brealey & Kaplanis, 1996; Goldberg &
Johnson, 1990; Goldberg & Saunders, 1980; Grosse & Goldberg, 1991). These studies
expose a defensive approach of ‘following the client’: MNBs follow the manufacturing
firms of their countries of origin with the aim of providing them with financial services
for operations in foreign countries.
However, in the developing countries, the relation between FDI in manufacturing activities
and MNB expansion seems less applicable. Miller and Parkhe (1998) study banking activities
of American banks in 32 countries in the period from 1987 to 1995, and find that the FDI flows
to these countries are associated with the entry of foreign banks, except in the case of develop-
ing countries. One of the potential explanations of this phenomenon is that the existence of low
competition in the developing countries’ local banking industry makes it easier for foreign
banks to acquire existing domestic banks. Thus, the principal motives for banking FDI in devel-
oping countries are to seek markets and gain market share rather than to solely follow clients
from their country of origin (Clarke et al., 2003). Though considering that non-financial FDI
possibly does not determine the decision of MNBs to enter developing countries, the fact of a
high level of banking FDI concentration in Latin American countries (i.e. a strong presence of
Spanish banks in the region – Guillén & Tshoegl, 2000; Peek & Rosengren, 2000) drives the
hypothesis of a positive relationship:
H2: Banking FDI in the host country is positively related to FDI in the non-financial industry
in this country.

Bilateral trade. Empirical studies have also evidenced a positive direct relationship
between commercial activities of two countries and reciprocal investment between them
(Agarwal, 1980; Roemer, 1975). The same relationship is presented in banking activities
in foreign countries, as demonstrated in the study of Jain (1986). The analysis of a 46-
country sample supports the theory that there is a positive relationship between partici-
pation of the USA in the total commerce of host countries and its participation in the
banking assets in these countries. The analysis of Nigh, Cho, and Krishnan (1986) of
foreign banks’ activities in 13 countries in Asia, Latin America and Europe shows a posi-
tive effect of the activity of American firms on that of American bank subsidiaries in these
countries. Both studies confirm the existence of a positive relationship between bilateral
commerce and foreign banking activities.
 The Service Industries Journal 1155

Nonetheless, based on a sample of 260 big banks of the OECD countries, Focarelli and
Pozzolo (2005) reveal that the level of integration of the country of origin with the FDI
destination has a positive effect, but it is marginal in comparison with institutional charac-
teristics and business opportunities. Based on this contradictory evidence, the following
hypothesis is proposed for further testing:
H3: There is a positive relationship between banking FDI in the host country and bilateral
trade between this country and the country of origin.

Cultural proximity
Most studies that analyze explanatory factors of banking FDI in developing countries have
not exhibited much evidence about the importance of the cultural proximity of the inves-
tors’ country of origin with the host country. Nonetheless, this factor may be relevant, as
Guillén and Tshoegl (2000) and Buch (2003) coincide that a common culture between two
countries is a relevant factor for MNB investment decision.
According to a study carried out by Guillén and Tshoegl (2000) on the internationa-
lization process of Spanish banks in Latin America, cultural proximity facilitates the
communication of Spanish banks in their activities in the region. They also demonstrate
that language is important in explaining the degree of internationalization of Spanish
banks in the region, since the native language of both Spain and the majority of Latin
American countries is Spanish. The fourth hypothesis is therefore generated as the
follows:
H4: Cultural proximity between the country of origin and the host country is positively related
to the banking FDI that the latter receives.

Banking market size in the host country

One of the factors measuring the strategy of market seeking for international expansion
is the host country’s market size, which is also often considered as one of the most
relevant location factors for international banking investment. O’Sullivan (1985) sup-
ports this idea, sustaining that the market size of the host country determines the FDI
flow.
Consequently, the size of the host country’s banking market is considered and put
forward as one of the location-specific factors for banking FDI. According to Levine
and Zevros (1998), the development of banking and capital markets may be determining
factors for economic growth. That is, these market potentials attract foreign investors to
invest in a developing economy where growth is foreseen; thus entrance allows achieve-
ment of the objective of obtaining potential advantages. Therefore, the fifth hypothesis is
proposed as the follows:
H5: There is a positive relationship between local banking market size and banking FDI in the
host country.

Market opportunities in the host country

Many empirical studies have also supported the thesis that foreign banks establish oper-
ations in a foreign country for the profit opportunity offered there. Claessens et al.
(2001) examine the effects of MNB entry in 80 countries during the period 1988 – 1995,
demonstrating that MNBs tend to establish their operations in markets with low taxation
and high income per capita. Focarelli and Pozzolo (2001) analyze the activities of 2500
1156 A. Santana Mariscal et al.

banks with at least one foreign shareholder in 29 countries, regarding the relationship
between foreign presence and possibility of economic growth in the host country. Empiri-
cal evidence shows that there is a positive relationship between foreign presence in these
countries and strong economic growth. Moreover, their conclusion points out that the host
country’s GDP per capita and inflation are negatively associated with foreign presence. As
a consequence, they consider that MNBs would enter these countries with strong economic
growth but low inflation rate.
Focarelli and Pozzolo (2001) have also found that there is a strong foreign presence
where local banks have high costs, low net interest margin and high cash flows. These con-
clusions are more evident in the developing countries in their study (i.e. South Korea, the
Czech Republic, Hungry, Mexico, Poland, and Turkey). The study suggests that local
banks are weaker than MNBs in developing countries, which confirms that banking FDI
in these countries may respond to the greater efficiency of MNBs (Claessens et al.,
2001). Thus, MNBs are more interested in exploiting business opportunities in these
local markets.
Based on these studies, economic growth and local banking system efficiency are
presumed to affect the banking FDI flow in developing countries. Moreover, the charac-
teristics of the host country’s banking industry may also affect the probability of foreign
entry (Boot, 1999). The rise in entry of foreign banks in these countries has occurred in
the context of high levels of banking concentration (Martı́nez Perı́a & Mody, 2004).
Mergers and acquisitions between foreign and local banks produce economies of
scale, so the process increases concentration and efficiency (Demirgüç-Kunt &
Levine, 2000). This evidence is based on banking situations in which consolidations
are voluntary. Therefore, it is feasible that a major banking concentration in the host
country will incentivize the entry of MNBs because they may benefit more than operat-
ing in a competitive banking market (Levy & Micco, 2007). The following hypotheses
are proposed:
H6: The higher the economic growth in the host country, the higher the banking FDI in this
country.
H7: Inflation rate is negatively related to the host country’s banking FDI.
H8: The less efficient the local banking system, the higher the banking FDI in this country.
H9: Concentration of the local banking system in the host country attracts banking FDI to this
country.

Regulation barriers in the host country

The restriction of MNB entrance reduces the degree of internationalization of a host
country’s banking market (Goldberg & Johnson, 1990; Sagari, 1992). In developing
countries, restrictions of foreign banking investment, limits on banking industry com-
petition and protection of inefficient local banks have been considered to limit MNB
presence (Clarke et al., 2003). Focarelli and Pozzolo (2001) demonstrate that foreign
banks prefer investing in countries with few legal limitations on their banking activity,
and restriction on banking FDI may also prevent foreign banks from carrying out an
internationalization process. Taking into account that the variable used to measure
the impact of banking FDI regulation is a dummy variable representing the total elim-
ination of restrictions for foreign bank entry, the 10th hypothesis is proposed as
follows:
H10: The removal of banking investment restriction favours banking FDI in the host country.
 The Service Industries Journal 1157

The differential of capital cost

The differential cost of capital in the host country and the country of origin is considered as
a relevant factor in banking FDI (Moshirian, 2001). Defined as the minimum rate of return
required by the investor, the bank cost of capital is also deemed as the spread or fee to be
charged on financial products that allows the required regulatory capital to earn the rate of
return demanded by the market (McCauley & Zimmer, 1989).
Foreign investors have to consider capital cost in their country of origin compared to
the host country to determine their investment decision. Earlier studies use the price-profit
ratio of American bank shares as an indicator for share purchase (Goldberg & Saunders,
1981a; Hultman & Mcgee, 1989). Nonetheless, this ratio presents certain difficulties in
measuring the cost of capital, particularly between country of origin and destination
(Poterba, 1991). In this study we use the cost of capital concept proposed by McCauley
and Zimmer (1991) as a determinant for banking FDI, since this is the concept often
employed by banking executives to charge financial product fees to cover these costs.
If more spread can be obtained by MNBs to cover their capital costs in the host
country, their position is more competitive. Hence, the 11th hypothesis is presented as
follows:
H11: The differential to cover capital cost obtained by MNBs in the host country is positively
related to the banking FDI in this country.

Exchange rate
The operations of investors in a foreign country involve a variation of foreign curren-
cies. According to Moshirian (2001), exchange rate should be considered by banks in
their decision on a possible international investment. An explanation for the possible
positive relation between exchange rate and banking FDI is the valuation of banking
assets in the currency of the host country (Froot & Stein, 1991; Goldberg & Saunders,
1981a). Foreign investors perceive increase of investment value when there is an
appreciation of the host country’s currency, given that MNB standard accounting
practice is to adjust the book value of non-domestic assets to reflect variations in
exchange rate (Hultman & McGee, 1989). So when the host country’s currency
appreciates with respect to the country of origin, the banking FDI received by the
host country will increase (Cushman, 1988; Golberg & Saunders, 1981a). In other
words, an appreciation of local currency will give foreign investors a higher margin
since local productive assets are controlled. The 12th hypothesis is formulated in the
following form:
H12: The variation of the currency value of the host country is positively related to the
banking FDI in the host country.

Methodology
For the power of hypothesis tests and efficiency of estimators, econometrics methodology
is employed to examine the hypotheses proposed. In addition, a panel data model is
used for an accurate inference of model parameters. The panel data model usually
contains higher degrees of freedom and sample variability than cross-sectional data.
Hence, it improves the efficiency of econometric estimates. The technique of feasible gen-
eralized least squares is used to estimate unknown parameters in the linear regression
model.
1158 A. Santana Mariscal et al.

Estimation model of banking FDI in the host country

In order to measure the importance of the determinants borne by banking FDI in develop-
ing countries, we propose to analyze these factors with the following estimation:

Xi = f (BAi , Bij , Li , Zi ) for i = 1, 2, . . . , N, and t = 1, 2, . . . , T.

In this estimation model, Xi represents banking FDI flows in country i. BAi is the vari-
able of foreign bank assets (H1). Bij is the vector of specific variables that describes the
relation between the banking FDI host country and the country of origin (i.e. FDI in the
nonfinancial industry H2, bilateral trade H3, and cultural proximity H4). Li is the vector
of specific variables of the host country’s local banking system (i.e. local banking
market size H5, efficiency of local banking system H8, local banking concentration
system H9, removal of banking investment restrictions H10, and differential of capital
cost H11). Zi is the vector of specific variables of the host countries (i.e. market opportu-
nity for economic growth H6, inflation rate H7, and exchange rate H12).
As stated above, the panel data model allows us to analyze changes in the dependent
variable banking FDI and the interrelation of different determinants of location-specific
factors between host countries. To facilitate measuring the determinants of banking FDI
in host countries, the estimation model provides scope for greater control of the individual
heterogeneity of the sample, greater variability and less colinearity between variables, as
well as a higher degree of freedom and efficiency (Baltagi, 1995).

Data collection
In total, 98 observations were collected in panel data from the seven principal Latin Amer-
ican countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela, during
the period 1995 and 2008 (see variables statistical summary in Table 3 and country
statistics summary in Table 4). Different variables and data in different periods of
each country were obtained from different sources, which are detailed in the following.
The variables foreign assets, local banking market size (measured by stock-market
capitalization and banking market loans), and exchange rates were obtained from the
World Bank database, World Development Statistics. The variables bilateral trade
and market opportunity in the host country (measured by GDP, GDP per capita, and
inflation rate) were obtained from the statistical database created by the Economic
Commission for Latin America. This regional organization offers information on the
historical series of annual exportations and importations per country and their principal
partners.
Data on FDI in the banking industry and the non-financial industry in these countries
was obtained from the United Nations Conference on Trade and Development’s publi-
cation on the profiles of member countries’ investors. This publication also contains infor-
mation on annual FDI flows until 2002. Data on the period 2003 – 2008 were collected
from the web pages of the central bank or governmental entity of each country that
offers FDI data on the host country by country and economic activity.
Data relevant to measuring the efficiency of the local banking system (i.e. net interest
margin, operational cost, return on assets, and return on equity) were obtained from
the database of Bankscope and the governmental organisms that supervise banking
entities in the studied countries. Data such as net interest margin and overheads were
obtained from the Bankscope’s database for the period 2001– 2008. Data for the period
1995 – 2000 were obtained from the governmental entities that supervise the banking
 The Service Industries Journal 1159

Table 3. Statistical summary of variables.

Variable Mean Standard deviation Minimum Maximum Observations
Fdibanking 1479.10 2191.169 2851.00 16462.70 98
Factiveb 8442.52 10039.14 199.4 45434.91 98
Fdinonbanking 8657.92 7678.69 21066 40083.73 98
Trade 1.92 0.56 0.97 3.44 98
Loan 160751.40 251939.20 6224.16 1593940.00 98
Marketcap 113422.80 177450.70 3655.00 1370377.00 98
Gdp 284038.20 254783.70 47170.45 854042.60 98
Gdppercapita 4715.274 1954.653 1971.43 9884.87 98
Inflation 10.95 14.26 21.81 103.24 98
Nim 3.72 2.78 20.04 8.65 98
Overheads 119.42 413.44 8.75 4143.88 98
Roa 20.26 2.92 228.30 2.38 98
Roe 22.54 18.72 259.07 12.83 98
Concenbank 0.51 0.13 0.30 0.83 98
Capitalcost 13.12 12.97 2.21 58.36 98
Exchange 8.09 8.09 0.19 40.49 98
Notes: The description of each variable is in the following: Fdibanking is the banking FDI in the host country in
millions of dollars. Factiveb is the foreign assets in the local banking industry in millions of dollars.
Fdinonbanking is the FDI of non-financial firms in the host country in millions of dollars. Trade is the ratio of
bilateral trade between country of origin and host country. Loan is the total loans in the local banking industry of
the host country in millions of dollars. Marketcap is the capitalization of the stock market in the host country in
millions of dollars. Gdp is the real gross domestic product in the host country in millions of dollars. Gdppercapita
is GDP per capita in the host country in millions of dollars. Inflation is the inflation rate in the host country. Nim is
net interest margin; and overheads are administrative costs in the local banking system in the host country; both
are ratios over total assets in the local banking system of the host country. Roa is the return on assets in the local
banking system in the host country. Roe is the return on equity in the local banking system in the host country.
Concenbank is the assets of the three largest banks as a share of the assets of all commercial banks. Capital cost is
the spread of the lending rate minus the deposit rate. Exchange is the exchange rate of the local currency related to
the currencies basket.

activities of the local banking sector, through their web pages. In the case of return on
assets (Roa), return on equity (Roe) and banking concentration, data were obtained
from the World Development Statistics. In the case of banking concentration, the variable
is measured by the market participation of the top three banks in the local banking system
in terms of assets.
Regarding the measure of removal of banking investment restriction, a dummy vari-
able is set to determine if the investment receptor country has totally eliminated restric-
tions for foreign bank entrance or not. ‘0’ is the value if there is some or total
restriction and ‘1’ is the value if foreign banks are allowed to carry out full banking oper-
ations in the host country.
To measure the spread obtained to cover capital cost, a proxy variable representing the
differential between interest on loans and interest on deposits is used to measure the bank’s
capital cost differential. These data were obtained from the World Development Statistics
and central banks through their web pages.
Since Guillén and Tshoegl (2000) considered the use of the same language as the fun-
damental cultural proximity in the internationalization of Spanish banks in Latin America,
language is used to measure cultural proximity in this study. A dummy variable regarding
whether or not using same native language is introduced to measure its impact on banking
FDI. Therefore, ‘0’ is assigned as the value if the native language of the principal foreign
investors (i.e. Spanish as indicated in the note of Table 1) is not the same as that of the host
 1160
Table 4. Country statistics summary (means).
Variable Argentina Brazil Chile Colombia Mexico Peru Venezuela
Fdibanking 629.68 2546.23 273.08 618.97 3993.15 1666.89 625.73

A. Santana Mariscal et al.

Factiveb 8442.40 22346.05 2074.04 3155.30 19928.94 1583.57 1567.34
Fdinonbanking 6764.64 20459.38 3712.60 3815.68 14185.33 9953.71 1714.06
Trade 1.67 1.74 1.88 2.52 1.17 2.82 1.68
Loan 79062.76 644166.10 68664.5 47941.25 249825.80 13213.09 22386.05
Marketcap 78463.99 375397.50 96852.19 31616.93 176176.30 28226.78 7225.69
Gdp 296542.2 683562.6 81678.5 104563.3 637508.50 59294.72 125117.40
Gdppercapita 7903.356 3839.18 5191.829 2556.86 6316.14 2224.25 4975.32
Inflation 6.23 7.86 4.46 10.20 12.30 4.47 31.16
Nim 3.72 4.82 3.43 4.46 6.77 5.75 7.11
Overheads 368.45 76.73 144.96 61.03 66.35 58.81 59.61
Roa 21.86 0.02 0.01 0.01 20.04 0.01 0.04
Roe 22.54 0.12 0.08 0.07 0.03 0.69 0.30
Concenbank 0.38 0.47 0.89 0.41 0.63 0.08 0.43
Capitalcost 5.25 37.56 4.12 7.95 7.66 20.85 8.47
Exchange 6.70 6.52 11.50 14.87 5.34 5.73 5.96
 The Service Industries Journal 1161

country. ‘1’ is the value if the native language of the principal investors is the same as that
of the host country. In the countries studied, most Latin American countries have Spanish
as their native language except for Brazil, where Portuguese is used.
Finally, another dummy variable is introduced to represent the economic crisis that
occurred in Mexico (1994), Asia (1997– 1998), Russia (1998), and Argentina (2001).
This variable is used as a control measure for the effects of these economic crises on
banking FDI in the Latin American countries studied. ‘0’ is assigned as the value if
there was no economic crisis in that period. ‘1’ is the value for an economic crisis year,
as mentioned above.

Contrasts of the estimation model

The first step in estimating the equation panel data model is to establish whether the vari-
ables are stationary or not. For this purpose, Levin, Lin, and Chu’s (2002) panel data unit
root test was employed. We consider that the power of the panel-based unit root test is
higher than that of performing a separate unit root test for each individual time series.
Levin, Lin, and Chu (2002) argue that contrary to the standard distribution of unit root
test statistics for a single time series, the panel test statistics has a limiting normal
distribution.
The results of Levin, Lin, and Chu (LLC) test can be viewed in Table 5, which shows that
all the variables are stationary. This suggests that the variables have constant means and
variances.
In Table 6, different tests contrasting the estimation model are exhibited. We can
observe the result of the Breusch and Pagan Lagrarian multiplier test (Baltagi, 1995) to
determine whether each country in the sample has a different intercept or is the same
for all. The result suggests that the intercept is the same for all countries. In the case of
the F test of fixed effects (Baltagi, 1995) to determine whether differences between
countries are constant or fixed, the results show that banking FDI is better explained by
a model containing a constant term.
To finalize these tests on the estimation model, tests are carried out to determine the
existence of serial correlation within each country. Results suggest that there is a
problem of autocorrelation of errors which needs to be corrected. In addition, there is
the Wald test for groupwise heteroskedasticity (Baltagi, 1995) to determine whether the
estimation has problems of heteroskedasticity, which presumes that the variance of the
errors of each transversal unit is not constant.
These tests demonstrate that the most suitable model to contrast the factors determin-
ing banking FDI is the one that contains a constant term for all countries and a coefficient
for all variables used. But a contrast of the estimation model also shows that there is a
problem of autocorrelation and heteroskedasticity. For that reason, a model of feasible
generalized least squared is used which allows an estimation in the presence of autocorre-
lation and heteroskedasticity in and across panels.

Results of the estimation model

The results of the estimation are presented in Table 7 and the correlation matrix in
Table 8. The variable foreign assets (factiveb) is observed to be significantly and posi-
tively related to banking FDI (fdibanking) in the country sample studied. Therefore, H1
is confirmed.
1162 A. Santana Mariscal et al.

Table 5. Test of unit roots panel data for all variables† Levin, Lin, and Chu (LLC) test (Levin,
Lin, & Chu, 2002).
Variable T p.t
Fdibanking 27.2622 (4)∗∗∗ 0.0000
Factiveb 236.3288 (5)∗∗∗ 0.0000
Fdinonbanking 24.1548 (6)∗∗∗ 0.0000
Trade 24.1162 (7)∗∗ 0.0000
Loan 28.2914 (4)∗∗∗ 0.0000
Marketcap 29.1636 (4)∗∗∗ 0.0000
Gdp 24.7935 (4)∗∗∗ 0.0000
Gdppercapita 24.6736 (4)∗∗∗ 0.0000
Inflation 28.6801 (1)∗∗∗ 0.0000
Nim 24.3161 (3)∗∗∗ 0.0000
Overheads 25.7925 (4)∗∗∗ 0.0000
Roa 7.1525 (4)∗∗∗ 0.0000
Roe 24.7920 (1)∗∗∗ 0.0000
Concenbank 24.2399 (5)∗∗∗ 0.0000
Capitalcost 27.2484 (1)∗∗∗ 0.0000
Exchange 24.7961 (1)∗∗∗ 0.0000
†
The test includes lags to fit the correlation in error terms. In addition, it assumes that uj,t of the individual time
series in the panel should be cross-sectionally and independently distributed, for all members of the panel test in
order to allow the LLC test to have asymptotic properties and finite samples. These presume that there is no
contemporary cross correlation between members of the panel. The LLC test specifies the null hypothesis of unit
roots and the alternative as: Ho: bj ¡ ¼ b ¼ 0, H1: Bi ¼ B , 0 for Vj. The variables include the seven-country
sample as a whole; and the panel means are for all included variables. In the test of estimation, the variables trade,
loan, Gdp, and Gdppercapita include a time trend; while the variable concenbank does not include constant or
time trend. The lags appear in parenthesis and are selected with Aikake information criteria. The statistics t
contrasts the null hypothesis that the variables in the panel data model have unit roots.
∗
Significant level of 10%.
∗∗
Significant level of 5%.
∗∗∗
Significant level of 1%.

Table 6. Test to determine the panel data model.

Test x2 p . x2
Breusch and Pagan Lagrarian multiplier test 1.86∗∗∗ 0.173
F test to fixed effects 0.80 0.570
Hausman test 4.59 0.949
Wooldridge test for autocorrelation 80.32 0.000
Wald test for groupwise heteroskedasticity 9311.97∗∗∗ 0.000
Breusch– Pagan LM test for correlation matrix 34.147∗∗ 0.035
Observations 98
Number of countries 7
Notes: The Breusch Pagan Lagrarian multiplier test is to contrast whether the best estimator is the random effects
model or ordinary least square. The null hypothesis is that variance u ¼ 0. The F test is to contrast whether the
best estimator is the fixed effect model or ordinary least square. The null hypothesis is that all the dichotomies
variables in simple are equal to 0. The Hausman test to determine what is the adequate model: the estimation,
random effect, or fixed effect model. The null hypothesis is that the random effect model estimation and fixed
effect model estimation are not significantly different. The Wooldridge test for autocorrelation to contrast
whether there is autocorrelation between different units. The null hypothesis is that there is no autocorrelation in
error terms related to time. The Wald test for group-wise heteroskedasticity. The null hypothesis is that there is no
heteroskedasticity. Lastly, the Breusch–Pagan LM test for autocorrelation matrix detects contemporary
correlation between observations of some units in the same time period. The null hypothesis is that there is no
independence between observations of units.
∗
Significant level of 10%.
∗∗
Significant level of 5%.
∗∗∗
Significant level of 1%.
 The Service Industries Journal 1163

Table 7. Empirical results of studied banking FDI in Latin American countries.

Variable Coefficient p . |z|
∗∗∗
Factiveb 0.893 0.003
Fdinonbanking 0.025 0.373
Trade 2199.495 0.542
Language† 543.143∗ 0.114
Loans 20.002∗ 0.190
Marketcap 0.000 0.983
Gdp 0.002 0.299
Gdppercapita 20.141∗ 0.132
Inflation 1.260 0.898
Nim 249.758 0.231
Overheads 20.247 0.860
Roa 285.909 0.767
Roe 30.244 0.529
Concenbank 3128.966∗∗∗ 0.004
Liberal 701.910∗ 0.119
Capitalcost 32.058∗∗ 0.094
Exchange 8.854 0.446
Crisis‡ 311.794∗∗ 0.045
Wald test 2 (18)§ 81.51∗∗∗ 0.000
Observations 98
Number of countries 7
†
Language is a dummy variable. ‘0’ is assigned as the value if the native language of the principal investors is not
the same as that of the host country. ‘1’ is the value if the native language of the principal investors is the same as
that of the host country.
‡
Crisis is a dummy variable. ‘0’ is assigned as the value of not being in a crisis period. ‘1’ is assigned as the value
of being in a period of crisis.
§
Wald test 2 (18) indicates the explanation variables of the model are jointly significant.
∗
Significant level of 10%.
∗∗
Significant level of 5%.
∗∗∗
Significant level of 1%.

In terms of relations between the host country and the country of origin, the results
demonstrate a positive but insignificant relation between non-financial FDI (Fdinonbank-
ing) and banking FDI in the host country. Another economic integration variable bilateral
trade (trade) shows a negative but also insignificant relation with banking FDI. Thus, H2
about a positive relation between non-financial FDI and banking FDI and H3 related to
bilateral trade are not confirmed. On the other hand, the coefficient of cultural proximity
(measured from use of the same language) between host country and country of origin is
positive and significant, which confirms H4.
In terms of market size, an insignificant relation between the measure of stock market
capitalization (marketcap) and banking FDI is observed. Though another measure, loans,
shows a negative but significant coefficient with banking FDI, the result is only significant
at the level of 10%. Therefore, H5 is not considered to be confirmed.
In terms of market opportunity variables in the countries studied, the economic growth
of the host country (Gdp) shows a positive sign but this is not significant. In terms of GDP
per capita, the estimation shows a negative coefficient, only significant at the level of 10%.
Complementarily, the inflation rate (Inflation) presents an insignificant negative coeffi-
cient. Therefore, H6 and H7 are not considered to be confirmed.
Regarding another market opportunity variable for the efficiency of the local banking
system, the estimation demonstrates that net interest margin (Nim), overheads
 1164
Table 8. Correlation matrix of studied banking FDI in Latin American countries.

Variable Factiveb Fdinonbanking Trade Language Loans Marketcap Gdp Gdppercapita Inflation Nim Overheads Roa Roe Liberal Concenbank Capitalcost Exchange Crisis

A. Santana Mariscal et al.

Factiveb 1.0000
Fdinonbanking 0.7706 1.0000
Trade 20.4347 20.1380 1.0000
Language 20.4543 20.5249 0.0028 1.0000
Loans 0.8220 0.7763 20.2339 0.6540 1.0000
Marketcap 0.7110 0.6503 20.1666 20.4916 0.8612 1.0000
Gdp 0.8845 0.7509 20.5797 20.5047 0.7828 0.6624 1.0000
Gdppercapita 0.2747 0.0129 20.6877 0.2425 0.0391 0.1020 0.3437 1.0000
Inflation 20.2100 20.2981 0.2082 0.1059 20.1445 20.1828 0.0935 0.0102 1.0000
Nim 0.0403 0.0307 0.0392 20.0050 0.0146 0.0696 0.0532 20.0320 0.1094 1.0000
Overheads 20.0540 20.1203 20.0500 0.0538 20.0437 20.0093 20.0296 0.0984 0.1967 20.1206 1.0000
Roa 0.0355 0.1197 0.0359 20.0451 0.0350 0.0007 0.0204 20.0549 20.1996 0.0886 0.9767 1.0000
Roe 0.0316 0.1190 0.0250 20.0256 0.0224 20.0132 0.0348 0.0391 20.1666 0.0611 20.8686 0.9438 1.0000
Liberal 0.1312 0.1531 20.1568 0.0687 0.0985 0.1030 0.1407 0.1400 20.2232 20.1053 0.0253 20.0174 0.0131 1.0000
Concenbank 0.1825 0.3771 0.2668 0.0569 0.1859 0.2180 0.1212 20.1884 20.0991 0.1895 20.1001 0.0665 0.0395 20.0163 1.0000
Capitalcost 0.3213 0.5972 0.1341 20.7435 0.5461 0.3915 0.4044 20.4107 20.0429 0.0164 20.0248 20.0046 20.0308 20.0577 0.1304 1.0000
Exchange 20.2724 20.2786 0.0734 0.0064 20.1671 20.1883 20.2540 20.2541 0.1593 20.0621 0.0009 0.0385 0.0171 20.2815 20.3445 20.0805 1.0000
Crisis 20.0253 20.0939 20.0475 20.0864 20.0094 0.0322 20.0313 20.0099 0.0660 0.1316 20.0619 0.0841 0.1025 0.2384 20.0719 0.0438 0.2632 1.0000
 The Service Industries Journal 1165

(Overheads) and return on assets (Roa) are negatively but insignificantly related to
banking FDI in Latin American countries. Similarly, the relation with return on equity
(Roe) is not significant though positive. As a consequence, H8 is not considered confirmed
given the controversies in the presented results of the measures studied. However, the vari-
able banking concentration (Concenbank) does show a significant (at the level of 1%) and
positive coefficient with banking FDI, which confirms H9.
Meanwhile, the removal of regulation barriers in the host country (Liberal) demon-
strates a positive sign, but its coefficient is significant only at the level of 10%. The
cost of capital differential (Capitalcost) presents a positive and significant relation with
banking FDI in the host country. Therefore, H10 and H11 are confirmed. Meanwhile,
the coefficient related to exchange rate (Exchange) shows a positive but insignificant
sign. Hence, H12 is not confirmed. Finally, the control measure, dummy variable crisis
presents a positive coefficient with high significant relation to banking FDI in the host
countries. This refers to a significant interference of economic crisis in determining
banking FDI.
The exhibited results suggest 5 out of the 12 proposed hypotheses have been con-
firmed, while others were simply not confirmed. The confirmed hypotheses are H1, H4,
H9, H10, and H11, which correspond to a significant and positive effect of foreign
assets, cultural proximity, banking concentration, investment barrier removal, and differ-
ential of capital cost on banking FDI in the host country.

Discussion and implications

As a consequence of banking reforms adopted in most Latin American countries,
especially after a financial tension or systematic crises, local authorities have removed
banking investment restriction in order to attract banking FDI, with the intention of
improving the efficiency of the local banking system and reducing the recapitalization
cost of the local banking system (ECLAC, 2002). The removal of these restrictions has
effectively had a positive and significant effect on the banking FDI in Latin American
countries and has influenced foreign banks’ mode of entry into this region. In practice,
confirmation of this positive relation suggests that the removal of investment restriction
is effective in attracting banking FDI.
The effect of both economic integration factors (i.e. FDI in non-financial industries and
bilateral trade) on banking FDI has not been confirmed. These facts demonstrate that the
strategy of following clients is not confirmed in the studied sample in Latin American
countries. Interestingly, another relation between country of origin and host country,
not the economic but the cultural relation, cultural proximity, is confirmed to positively
and significantly affect banking FDI. Though it is arguable whether use of the same
language fully represents proximity of culture, this is a proxy to measure this concept,
especially in the context of Latin American countries, where previous studies (i.e.
Guillén & Tshoegl, 2003) have suggested the relevance of this issue in the internationali-
zation of Spanish banking. However, this result may have its limitation in its generaliz-
ation in another context. For instance, the principal Spanish banks are at the stage of
international expansion in different geographical areas such as the UK, Asia, and
Eastern Europe, where Spanish is not the native language. Therefore the language
measure may have limitations in further explaining this phenomenon, and it is probably
fluid communication due to the use of the same language that affects performance
(Zhang, Dolan, Lingham, & Altman, 2009). We may speculate that this factor could be
critical for the Spanish banks’ initial phase of internationalization, while further
1166 A. Santana Mariscal et al.

cultural proximity factors need to be sought in later stages of the internationalization

process.
Foreign assets have been proved to be significantly and positively related to banking
FDI. As an effective mode for controlling core banking business with own invested
assets, increasing foreign assets in the host country is an effective motive for increasing
FDI in this destination for MNB internationalization. These results may encourage specu-
lation that in spite of such strong interrelations, the latter four factors have no significant
impact on banking FDI, due to a possible high explanation power of foreign assets. What
remains uncertain is whether the factor of foreign assets is only a cause or an effect of
banking FDI. Further exploration is needed to better illustrate this insight.
As mentioned above, both market size variables total loans and stock-market capitali-
zation are demonstrated not to significantly impact banking FDI in the Latin American
sample studied. In terms of other market opportunity variables, neither of the economic
growth variables, GDP and inflation, showed any significant effect on banking FDI;
similar insignificant results are exhibited in other banking efficiency variables measured,
net interest margin, overheads, Roa, and Roe. However, banking concentration does have a
significant and positive effect on banking FDI. The consequence of bank closures, mergers
and acquisitions of local banks following crises generated a banking concentration that
facilitated foreign banks’ participation in Latin American countries (i.e. Martı́nez Perı́a
& Mody, 2004). This result reveals the relevance of this factor among other market oppor-
tunity factors, which may require further study to focus on this motive for the banking FDI
decision.
Another confirmed significant correlation is of the spread of capital cost to banking
FDI, which indicates a rational financial analysis influencing and motivating investment
decision making in this specific service industry. In terms of exchange rate, free fluctuation
of the currency (except in Venezuela) does not seem to significantly impact on banking
FDI, which may not be considered as a strategic factor in the FDI decision making. None-
theless, the control measure crisis does show a significant and positive correlation with
banking FDI. One speculation on this is that the globalizing banking industry seeks
market refuge for financial capital when a financial crisis occurs in other locations than
the region studied, but takes the chance of an entrance opportunity when this occurs in
Latin America. This result highlights the need for a further study on the effect on financial
crisis of banking FDI.
The results discussed show a possible tendency of banking FDI in Latin American
countries which is not based on the strategy of following clients, but on a rational
opportunity analysis: the removal of investment restrictions, high differential of capital
costs, and banking concentration (which often means high profitability in the industry).
These three variables are certainly market related in the location-specific advantage
factors.

Conclusions and future research

The estimation analyzed in feasible generalized least squares based on the sample of seven
Latin American countries and 98 observations demonstrates that three factors are highly
significant as location-specific advantages in determining banking FDI: the removal of
banking FDI restrictions, banking concentration and high differential of capital costs;
while the factors indicating the strategy of following clients, such as bilateral trade, are
not confirmed. Other highlighted significant factors for banking FDI are foreign assets,
total loans, GDP per capita, cultural proximity, and crisis.
 The Service Industries Journal 1167

Whereas the debate is about whether MNBs internationalize with the strategy of
following clients or seeking markets continues, this study helps to demonstrate a more
market-seeking behavior in the context of banking FDI in Latin American countries.
Our empirical evidence shows that hypotheses related to foreign assets, language,
banking concentration, elimination of investment restriction, and capital cost differential
have been confirmed to affect banking FDI. These factors are relevant to the market-
seeking strategy of MNBs.
The process of foreign investors acquiring local banks is an important factor to
analyze as a cause producing an increase of foreign assets. Financial reforms in Latin
American countries produced a liberalization of the local banking system, which may
cause major interest from MNBs in expanding in this area and acquiring inefficient
local banks to reach a greater banking concentration. It will be important to make
efforts to further research the relation of the acquisition process in these countries and
other advantage factors and their impact on banking FDI in Latin American countries.
In this case, a qualitative approach in the methodology could probably provide more
insights on these issues.
The results of banking concentration support the view that foreign banks prefer invest-
ing in a less competitive local banking system. The concentration of a local banking industry
also suggests an easier approach to rapidly gaining market share if the acquisition deal is
done. As an effect factor, the entrance of MNBs into Latin American countries also suggests
a strong foreign presence, whose market positioning power produces greater concentration
in the industry. As shown in Table 1, certain countries even reached a presence of 82%
foreign assets in 2000 and 2008 (i.e. Mexico). However, other efficiency-related factors
in the local banking system are not confirmed to be significant for banking FDI decisions.
Further research on these factors may be needed to revisit the theory and its development.
Cultural proximity is revealed to be relevant for banking FDI decisions in the sample
studied in Latin American countries, especially given the strong presence of Spanish banks
in this region (see Table 1). However, this measure using only language simplifies the
relationship, and the significance is only at the level of 10%. Previous studies in the
field of cross-cultural studies have developed much more in this context, adding factors
of cultural values, communication and other cultural dimensions. Further comparative
studies aggregating more complexity to the cultural proximity concept are desirable for
a better understanding of the globalizing banking industry.
This article demonstrates that the location-specific advantages of banking FDI in
Latin American countries are the removal of banking FDI restrictions, banking concen-
tration, and differential of capital costs. Besides, following the customer seems an unim-
portant determinant of banking FDI in Latin American countries, suggesting that MNBs
are more interested in exploiting opportunities in the host countries of the region. More
research in other developing economies is needed to further explore the banking FDI
phenomenon, which may eventually contribute to a better general understanding of
the service industries internationalization theory. The conclusion of this study helps
revisit literature on MNB’s internationalization, especially when they are becoming
more and more global, with gradual market opening in many countries toward foreign
banking investors.

Acknowledgement
The authors wish to express their gratitude to the Spanish Banking Foundation for Finan-
cial Studies for their financial support in this study through CUNEF research fund.
1168 A. Santana Mariscal et al.

References
Agarwal, J. (1980). Determinants of foreign direct investment: A survey. Weltwirtschaftliches
Archiv, 116, 739– 773.
Aliber, R.Z. (1984). International banking, a survey. Journal of Money, Credit and Banking, 16,
661 –678.
Baltagi , B.H. (1995). Econometric analysis of panel data. Canada: John Wiley & Sons.
Barajas, A., & Steiner, R. (2000). The impact of liberalization and foreign investment in Colombiás
financial sector. Journal of Economics Developments, 63(1), 157– 196.
Boot, A.W.A. (1999). European lessons on consolidation banking. Journal of Banking and Finance,
23, 609 –613.
Brealey, R.A., & Kaplanis, E.C. (1996). The determination of foreign banking location. Journal of
International Money and Finance, 15(4), 577–597.
Buch, C.M (2003). Information or regulation: What is driving the international activities of commer-
cial banks? Journal of Money, Credit and Banking, 35, 851– 869.
Buckley, P.J., & Casson, M. (1976). A theory of the multinational enterprise. London: Macmillan.
Buckley, P.J., & Ghauri, P.N. (2004). Globalisation, economic geography and the strategy of multi-
national enterprises. Journal of International Business Studies, 35(2), 81–98.
Casson, M. (1990). Evolution of multinationals banks: A theoretical perspective. In G. Jones (Ed.),
Banks as multinationals (pp. 14 –29). London: Routledge.
Claessens, S., Demirgüç-Kunt, A., & Huizinga, H. (2001). How does foreign bank entry affect dom-
estic banking markets? Journal of Banking and Finance, 25, 891–911.
Clarke, G., Cull, R., D’Amato, L., & Molinari, A. (2000). On the kindness of strangers? The impact
of foreign entry on domestic banks in Argentina. In S. Claessens & M. Jansen (Eds.), The
internationalization of financial services: Issues and lessons for developing countries
(pp. 351 –364). Boston, MA: Kluwer Academic.
Clarke, G., Cull, R., & Martı́nez Perı́a, M.S. (2001). Foreign bank participation reduce access to
credit across firms in developing countries. Journal of Economics Development, 34(4),
774 –795.
Clarke, G., Cull, R., & Martı́nez Perı́a, M.S. (2003). Foreign banks entry: Experience implications
for developing countries, and agenda for future research. The World Bank Research Observer,
18(1), 25 –59.
Clarke, G., Cull, R., Martı́nez Perı́a, M.S., & Sánchez, S.M. (2002). Bank lending to small businesses
in Latin America: Does bank origin matter? Journal of Money, Credit and Banking, 37(1),
83 –118.
Clegg, J. (1993). Investigating the determinants of service sector foreign direct investment. In H.
Cox, J. Clegg, & G. Ietto-Gillies (Eds.), The growth of global business (pp. 27 –41).
London: Routledge.
Cushman, D. (1988). Exchange rate uncertainty and foreign direct investment in the U.S.
Welwirtschaftliches Archiv, 124(2), 322 –336.
Demirgüç-Kunt, A., & Levine, R. (2000). Bank concentration: Cross-Country Evidence (Policy
Working Paper 27828). Washington, DC: World Bank.
ECLAC (Economic Commission for Latin America and the Caribbean). 2002. III. Transnational
banks in Latin America corporate strategies and regional (Foreign investment in Latin
America and the Caribbean Report). Retrieved from ECLAC: http://www.cepal.org/
publicaciones/xml/1/12151/ForeignInvestment2002.pdf
Erramilli, M.K., & Rao, C.P. (1990). Choice of foreign market entry modes by service firms: Role of
market knowledge. Management International Review, 30(2), 135–150.
Focarelli, D., & Pozzolo, A. (2001). The patterns cross-border bank mergers and shareholdings in
OECD Countries. Journal of Banking and Finance, 25, 2305 –2337.
Focarelli, D., & Pozzolo, A. (2005). Where do banks expand abroad? An empirical analysis. Journal
of Business, 78(6), 2435– 2463.
Froot, K., & Stein, J. (1991). Exchange rates and foreign direct investment: An imperfect capital
markets approach. The Quarterly Journal of Economics, 106(4), 1191–1217.
Giddy, J. (1983). The theory of industrial organization of international banking. In Hawkins, Levich,
& Wihlbord (Eds.), Internationalization of financial markets and national economic policy
(pp. 195 –243). New York: JAI Press.
 The Service Industries Journal 1169

Goldberg L.B. (2001). When is U.S. banks lending to emerging markets volatile? (Staff Report 119).
New York: Federal Reserve Bank of New York.[‘Federal Reserve Bank of Nueva York’ has
been changed to ‘Federal Reserve Bank of New York’]
Goldberg, L.G., & Johnson, D. (1990). The determinant of U.S. banking activity abroad. Journal of
International Money and Finance, 9(2), 123 –137.
Goldberg, L.G., & Saunders, A. (1980). The cause of U.S bank expansion overseas: The case of
Great Britain. Journal of Money, Credit and Banking, 12(4), 630–643.
Goldberg, L.G., & Saunders, A. (1981a). The determinants of foreign banking activity in the United
States. Journal of Banking and Finance, 5(1), 17 –32.
Goldberg, L.G., & Saunders, A. (1981b). The growth of organizational forms of foreign banks in the
U.S.: A note. Journal of Money, Credit and Banking, 13(3), 365–374.
Goldberg, L.G., & White, L.J. (1998). De Novo banks and lending to small business: An empirical
analysis. Journal of Banking and Finance, 22(6), 851–867.
Gray, J.M., & Gray, H.P. (1981). The multinational bank: A financial MNC? Journal of Banking and
Finance, 5(1), 33 –63.
Grosse, R., & Goldberg, L.G. (1991). Foreign bank activity in the United States: An analysis by
country of origin. Journal of Banking and Finance, 15, 1092–1112.
Grubel, H. (1977). A theory of multinational banking. Banca Nazionale del Lavoro, Quarterly
Review, 123, 349 –363.
Guillén, M.F., & Tshoegl, A.E. (2000). The internationalization of retail banking: The case of the
Spanish banks in Latin America. Transnational Corporations, 9(3), 67–97.
Heffernan, S.A. (1996). Modern banking theory and practice. London: John Wiley & Son.
Hultman, C.W., & McGee, R. (1989). Factors affecting the foreign banking presence in the United
States. Journal of Banking and Finance, 13(3), 386–393.
International Monetary Fund. (2009). International Financial Statistics. International Monetary
Fund, 62(7), 345 –347.
Jain, A.K. (1986). International lending patterns of US commercial banks. Journal of International
Business Studies, 17(3), 73–88.
Jara, A., & Tovar, C.E. (2008). Monetary and financial stability of capital flows in Latin America and
the Caribbean (BIS Paper No. 43). Basel: Bank for International Settlements (BIS).
Konopielko, L. (1999). Foreign banks’ entry into central and east European markets: Motives and
activities. Post-Communist Economies, 11(4), 463–485.
Levin, A., Lin, C.F., & Chu, C.S.J. (2002). Unit root tests in panel data: Asymptotic and finite-
sample properties. Journal of Econometrics, 108, 1– 24.
Levine, R., & Zevros, S. (1998). Stock markets, banks, and growth. American Economic Review,
88(3), 537 –558.
Levy, Y.E., & Micco, A. (2007). Concentration and foreign penetration in Latin America banking
sectors: Impact on competition and risk. Journal of Banking and Finance, 31, 1633–1647.
Martı́nez Perı́a, M.S., & Mody, A. (2004). How foreign participation and market concentration
impact bank spreads: Evidence for Latin America. Journal of Money, Credit and Banking,
36(3), 511 –538.
McCauley, R.N., & Zimmer, S.A. (1989). Bank cost of capital and international competition.
Federal Reserve Banks of New York Quarterly Review, 15, 33–39.
McCauley, R.N., & Zimmer, S.A. (1991). Cost of capital for industry and banks. Business
Economics, 26, 14– 18.
Meng, C. (2009). Multinational banking in China: Theory and practice. Cheltenham: Edward Elgar.
Miller, S.R., & Parkhe, A. (1998). Patterns in the expansion of U.S. banks’ foreign operations.
Journal of International Business Studies, 29(2), 359–390.
Moshirian, F. (2001). International investment in financial services. Journal of Banking and Finance,
25, 317 –337.
Nigh, D., Cho, R., & Krishnan, S. (1986). The role of location-related factors in US banking invest-
ment abroad: An examination. Journal of International Business Studies, 17(3), 59–72.
O’Sullivan, P. (1985). Determinants and impact of private foreign direct investment in host
countries. Management International Review, 25, 28 –35.
Peek, J., & Rosengren, E.S. (2000). Implication of the globalization of the banking sector: The Latin
American experience. Federal Reserve Bank of Boston New England Economic Review,
(September/October), 17– 36.
1170 A. Santana Mariscal et al.

Poterba, J. (1991). Comparing the cost of capital in the US and Japan: A survey of methods. Federal
Reserve Bank of New York Quarterly Review, 15, 1520–1532.
Roemer, J.E. (1975). US–Japanese competition in international markets: A study of the trade-invest-
ment cycle in modern capitalism [Research series 22]. Berkeley: University of California,
Institute of International Studies.
Sagari, S.B. (1992). United States foreign direct investment in the banking industry. Transnational
Corporations, 1, 93 –124.
Sanchez-Peinado, E., & Pla-Barber, J. (2006). A multidimensional concept of uncertainty and its
influence on the entry mode choice: An empirical analysis in the service sector.
International Business Review, 15(3), 215 –232.
Williams, B. (1997). Positive theories of multinational banking: Eclectic theory versus internaliz-
ation theory. Journal of Economic Surveys, 11(1), 71–100.
Yannopoulos, G. (1983). The growth of transnational banking. In M. Casson (Ed.), The growth of
international business. London: George Allen and Irwin.
Zhang, Y., Dolan, S.L., Lingham, T., & Altman, Y. (2009). International strategic human resource
management: A comparative case analysis of Spanish firms in China. Management and
Organization Review, 5(2), 195 –222.