Abstract
The paper develops a theoretical link between foreign investment, scale and reversibility in the banking industry. This link is used to formulate hypotheses that are empirically examined with a unique data set collected through interviews with senior managers of multinational banks in London. Findings reveal that banks do not set up large operations to service domestic customers or get a foothold, but do so to create hubs. Banks with confident beliefs set up large operations, and use large offices to lock themselves into the market. These results explain the cross-sectional variation in the size of foreign investments in the industry. Robustness checks do not reveal presence of influential data points; regressions are stable over time and consistent with what we know from secondary samples.
Highlights
The theory of internalization applied to the banking firm explains the ownership and location of bank offices in foreign markets (Buckley and Casson, 1976; Aliber, 1976; 1984)
Banks with confident beliefs set up large operations, and use large offices to lock themselves into the market
This paper empirically examines the choice of scale by foreign banks with a unique data set gathered through a survey on managers of banks in London
Summary
The theory of internalization applied to the banking firm explains the ownership and location of bank offices in foreign markets (Buckley and Casson, 1976; Aliber, 1976; 1984). Banks that do not intend to commit all resources at the outset (or do not have resources to set up large operations) specialize in offering similar but not identical tailormade financial packages (Diamond and Dybvig, 1983) and monitoring of market conditions (Diamond, 1984). In this case a small foothold is sufficient to aid physical interaction and face-to-face communication.
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