What Factors Affect Foreign Presence of Banks from European Union

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Master Thesis for International Business and Management

What Factors Affect Foreign Presence of Banks from European

Union

By Cong Zhang

Supervisor: Drs. Huib C. Stek

Referent: Dr. Christoph Dörrenbächer

University of Groningen Faculty of Economics and Business

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Abstract

This study examines factors which motivate foreign expansion of banks originated from European Union (EU), through analyzing a sample of 69 European banks originated from 10 EU nations. The results show that foreign presence of European banks is positively affected by FDI flowing into host countries and bilateral trade between European country and host country, while GDP of host country is not proved as attractive to motivate European bank’ expansion. Moreover, bilateral trade is verified as the most important motivation for bank expansion from EU, as 46.38% of total banks in the sample are motivated to expand by the two-way trade. And by performing regressions on individual home country in the sample, foreign presence of banks originated from Belgium, France, Germany, Greece, Netherlands and Spain are differently influenced by the motivations.

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1. Introduction ... 4

2. Literature review ... 8

2.1 Theoretical literature and relevant studies ... 8

2.2 Background of European Union (EU) and its banking sector ... 13

3. Methodology... 17

3.1 Sample ... 17

3.2 Variables: ... 18

Dependent variable... 18

Independent variables... 19

3.3 Data sources ... 20

4. Descriptive results:... 22

4.1 Basic information for sample banks ... 22

4.2 Descriptive statistics for dependent variables and independent

variables... 22

5. Establishing models and testing hypotheses ... 25

5.1 Logarithmic transformation... 25

5.2 Model and Regression results ... 26

6. Conclusions and Discussions ... 30

7. Limitations and future research ... 33

8. Reference:... 35

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1. Introduction

After World WarⅡ, international banks start to expand abroad impressively. There are few financial developments as striking as the growth of international banking in the 1960’s and 1970’s. Between 1966 and 1980, the foreign assets of the world’s deposit banks increased, by the IMF’s recording, from 51.8 billion dollars to 1711.3 billion dollars, increasing by 28.4% per annum on average (Swoboda, 1993). Brealey and Kaplanis (1996) also show in their study that foreign branching increased very rapidly from about 1960 to the mid-1980s. During those 20 years, international banks mainly expand banking activities into the developed countries or districts. However, after 1985 this expansion trend of international banks slows significantly. Until in the last fifteen years, a rapid increase turns out in the activity of foreign banks in several developing economies (Hryckiewicz and Kowalewski, 2008).

With the increasingly development of foreign activities of international banks, people were attracted to research on this phenomenon, such as why banks become multinational and expand abroad, what motivations or factors encourage domestic banks to choose a new location overseas and what effects their expansion will have on both domestic and host countries’ banking sectors. (Claessens et al. 2001) show that foreign banks participation can help develop a more efficient and robust financial system. This result is also confirmed by many other evidences that increased foreign banking will positively improve the efficiency of the domestic banking sectors and helps strengthen countries’ financial systems (Hryckiewicz and Kowalewski, 2008).Therefore, it is important to know what factors will attract foreign banks to invest in a certain country.

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overseas in order to provide banking service to their customer in that country. By following their clients abroad, banks could defend their bank-clients relationship from being supplanted by a new domestic bank in the host country. Therefore it is obvious that the larger presence of foreign business activities in a country, the more likely foreign banks will enter that country. When applied to the banking internationalization, Eclectic theory develops market seeking as one of the motivations for banking expansion. Banks with comparative advantages are considered as eager to seek new markets for opportunities. Therefore, countries with greater market growth are more likely to attract foreign banks entry. Besides, there are other factors encouraging banks to develop abroad. For instance, host countries with low tax, few restrictions and regulations and stable political and economic environment will also attract foreign banks entry.

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My study attempts to fill the gap to some extent by looking at what factors affect foreign expansion of banks from European Union (EU)5. The first reason why EU is chosen is that, as the second largest economic entity, it has attracted much attention within academia. Literature on banking sector of EU are abundant, however the researches to examine motivations for expansion of banks from EU are still limited. Second, various legislations have been issued to promote the integration of European banking and financial markets since EU was established in 1993. For example, “Investment Services Directive” established for investment firms and securities markets services in 1993, and Financial Services Action Plan (FSAP) issued for the Single Market in financial services in 1999 (Goddard and others, 2007). Although barriers among member of EU are not completely eliminated because of different national economic conditions, cultures, languages and differences in fiscal and legal systems (Berger et al., 2001), several emergence of large cross-border banking operations have been issued within the EU. Besides, the deregulation and diminishing barriers inside EU turn the country-specific advantages to Union-specific advantages for each member country. Therefore, banking sector in EU is more likely to be considered as an entire sector than just a combination of banking sectors from each EU nation. And thus the motivations for expansion of EU banking sector might be different from those for expansion of banks from each member country. These specialists make it interesting to see what factors have impacts on foreign expansion of banks from EU at EU level and individual country level. To be convenient, this study refers European banks as banks originated from EU and applies it in the entire text. Therefore the research question is formulated as follows,

What factors motivate banks originated from EU countries to establish banking

presence in the foreign country?

In order to explain the factors which have impacts on European banks’ expansion into various countries, this paper incorporates different perspectives due to the former literature. As briefly introduced before, customer following strategy, market seeking strategy and economic integration

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are considered as three main motivations for foreign banks’ expansion. Through a careful examination, the paper will provide a detailed explanation for motivations for European banks’ foreign expansion.

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2. Literature review

2.1 Theoretical literature and relevant studies

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foreign countries. The similar result comes out in the cases of foreign banks entry into US market. Through examining the determinants of foreign banks participation in U.S. markets, Hulman and McGee (1989) conclude that FDI have positive relationship with the growing foreign presence in U.S. bank subsidiaries. The conclusion supports that establishing operations in foreign countries enables them to better serve foreign operations of domestic corporations, which will in turn defend their existing clients and search for new opportunities. Except the investigations on U.S., Yamori (1998) show that FDI of manufacturing industry is a crucial determinant of the location choice of Japanese financial institutions when he examines the motivations for location choice of Japanese multinational financial institutions. And when examining foreign banks’ entry into some CEE countries, following the existing clients and supporting the local clients are considered as vital motivations by Uiboupin and Sõrg (2006).

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and technology could overcome competitions from domestic rivals through applying these advantages at low to zero costs. Besides, when domestic markets cannot provide new opportunities and profitability, banks are motivated to expand into countries with high market potentials. They could gain more profitability through achieving economics of scales. Finally, investment in countries with high market potentials helps banks with large scales to distribute business risks. Therefore, both two aspects indicate that multinational banks with comparative advantages are motivated to expand into foreign markets to seek for new opportunities and profitability. The higher potential the markets have, the more attractive they are to multinational banks. This is because their chances of obtaining higher returns are better in such markets.

Goldberg et al. (1989) suggest that the local banking opportunity is an important determinant of foreign bank location within the US. Yamori (1998) and Brealy and Kaplanis(1996) show that foreign bank entry is positively correlated with GDP per capita. Claessens and others (2000) find the similar results with low taxes and high per capita income by modeling foreign bank presence across 80 countries in 1988-1995. Focarelli and Pozzolo (2000) find that higher expected rate of economic growth will attract greater foreign banks entry. When examining what factors affect the location choice of Japanese multinational financial institutions, Yamori (1998) states that the local banking opportunities in the host country also attract the Japanese financial institutions. Uiboupin and Sõrg (2006)’s survey on the entry process of foreign banks’ entry in CEE countries also support this approach. Their analysis indicates that searching for new business opportunities are interpreted as the dominating entry motives.

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concluding that US trade is significantly conducive to the growth of US banks in UK. When extend the host country from UK to a number of host countries, Goldberg and Johnson (1990) finds that per capita GDP as well as FDI from US companies and US trade are important influential factors regarding the location choice of US banks. The similar results come out when investigating the factors determining the location choices of foreign banks entry into US markets. Hultman and McGee (1989, 1990) and Grosse and Goldberg (1991) examine the determinants of foreign banking activities in US markets by the country of origin. They show that the foreign investment in the US, foreign trade with the US, and the size of the banking sector in the foreign country are positively correlated with that country's bank presence in the US. Goldberg et al. (1989), Goldberg and Grosse (1994) and Bagchi-Sen (1995), using the state-level data, examine the determinants of the spatial distribution of foreign financial activities in the US. According to their results, the total values of imports and exports and the share of employment in the financial sector in a state are closely related to the level of foreign banking activities in that state.

Aliber (1984) and Miller and Parkhe (1998) also show that foreign banks’ expansion has positive relationship with bilateral trade and FDI into the host countries. In addition, the more two-way trade that takes place between the home country and the foreign country, the greater will be the presence of banks from the home country in the foreign country (Sabi, 1988; Goldberg and Johnson, 1990; Brealey and Kaplanis, 1996; Yamori, 1998). This result has been supported by Brealey and Kaplanis (1996). They suggest that trade and foreign direct investments have a significant influence on the pattern of bank location. During the regression for different measures of trade, they find that the exports to each parent country, imports and FDI from each parent country are significantly positively related to the number of banks in the host countries. Similar results were presented by Magri et al. (2005) in a study on entry decisions and activity levels of foreign banks operating in Italy. The authors report that trade influences both entry decision and activity levels of foreign banks entry in Italy.

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2.2 Background of European Union (EU) and its banking sector

On 1st of November 1993, under the third Delors Commission, the Maastricht Treaty (Treaty on the European Union) became effective, creating the European Union with its pillar system including foreign and home affairs alongside the European Community. The European Union (EU) is a geo-political entity covering a large portion of the European continent. It is founded upon numerous treaties and has undergone expansions that have taken it from 6 member states to 27, a majority of states in Europe6. Before 2004, EU was comprised of 15 countries, which is named as EU15. And the present EU consisting of 27 member countries is known as EU27.

As the territory of the EU consists of the combined territories of its 27 member states with some exceptions, for example, the territory of the EU is not the same as that of Europe, as parts of the continent are outside the EU, such as Switzerland, Norway, European Russia, and Iceland. The island country of Cyprus, a member of the EU, is closer to Turkey than to mainland Europe and is often considered part of Asia7, member countries of EU15 are more closer than those of EU27 on geographic extent. Besides, 12 of 15 member countries of EU15 share Euro as the common currency, which is a higher percentage than that of EU27 as well. Therefore, according to the geographic proximity and similar cultures among European countries, EU15 is considered as more like a whole entity than EU27. However, this paper would like to exclude United Kingdom out of EU15 first because the UK is arguably an exceptional case with other member countries primarily due to the status of London as an international banking and financial center. Second, as well, unlike other 14 nations, the UK does not use Euro as its currency and is not connected by land with the European Continent (Berger, 2007). Thus this study takes EU15/UK as a better whole entity than EU27. Moreover, banks from EU15/UK member countries explicitly try to create a single banking market with a single license which can be used cross borders within EU. Since late-1970s legalistic changes at EU level have contributed to integration of European banking industry and financial market (Goddard, 2007), for instance, Investment Services

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History of the European Union, http://en.wikipedia.org/wiki/History_of_the_European_Union; 7

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Directive issued in 1993 to make legislative framework for investment firms and securities markets, providing for a single passport for investment services, and Financial Services Action Plan (FSAP) established in1999 aims for the Single Market in financial services. Besides, the member countries have removed many of explicit barriers and regulations to foreign bank entry. Technological advance and telecommunication processing encourage international banking system across borders. Therefore banking sector of EU15/UK is rather likely to be taken as a whole banking industry as well than only a combination of banking industries of each member country. As to be convenient this study takes EU to replace EU15/UK in the following text if no special explanation is made.

In the previous part literature on the relationships between each motivation and foreign presence of banks and relevant studies on U.S., UK, other developed countries and some developing countries are showed. In the following part, studies on European countries and EU prove the relationships between each motivation and European banks’ foreign presence. By analyzing the location of nearly 2000 overseas offices across 37 parent and 82 host countries, Brealey and Kaplanis (1996) show that foreign presence of banks from Belgium, France, Germany, Italy, Spain are positively affected by GDP of the host country banks decide to enter, meanwhile foreign presence of banks from France, Germany, Italy, Netherlands, Spain have positive relationships with FDI inflow of that foreign country. Seth and others (1998) find that Netherlands allocated most of its bank loans to nondutch country borrowers when investigating the lending patterns of US-based banks from Japan, Canada, France, Germany, the Netherlands and the United Kingdom. Their results indicate that Dutch banks presence doesn’t follow their customers abroad. Buch (2000) find that foreign activities of Germany banking sector are positively related to demand conditions on the local market, foreign activities of German firms, and the presence of financial centers. This supports the hypotheses that German banks follow their clients abroad and they are likely to be attracted by foreign countries with great market potentials.

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H1: Presence in a foreign country established by banks originated from a European country is positively related to non-financial investment from domestic industries of that European country;

H2: Presence in a foreign country established by banks originated from a European country is positively related to market potentials of that foreign country;

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3. Methodology

In this part sample, variables and data sources are discussed.

3.1 Sample

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member countries of EU. According to the definition for country of origin, IKB Deutsche Industriebank located in Germany is originated from U.S. Therefore, banks owned by non-European countries are excluded from the study. Besides, some banks were merged or taken over by other banks, for instance, Fortis Bank of Belgium was mergered by BNP bank in France in 2007 and SanPaolo IMI from Italy was taken over by Intesa Sanpaolo. Therefore, these kinds of banks are also excluded from my study. In the end, the sample comprises 69 large banks originated from 10 European countries in total.

3.2 Variables:

In order to examine the former assumptions, multiple regressions are introduced in the study. In the following part, dependent variable and independent variables are indicated.

Dependent variable

European banks’ presence in foreign countries

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circumstances the parent bank prefers to establish other organizational forms, which could put them in the more secured position. However this doesn’t occur for the parent to set up a subsidiary. Therefore, if this paper takes the number of branches in a host country as the measure of a European bank’s presence, its sensitivity to the location-specific risk will increase the possibility of bias in the results. For example, the smaller number of branches may be caused by high risks in host country rather than by lower domestic FDI, or lower GDP value of the host country. Besides, a subsidiary is engaged in a broader range of financial services than branches. Due to the reasons above, this paper takes the number of subsidiaries in a host country as the

measure of a European bank’ presence in that country.

SubNo

_ijis used as the indicator of

number of subsidiaries, which is defined as the number of subsidiaries set up in host country j by banks from home country i.

Independent variables

Non-financial investment from domestic industries

Hulman and McGee (1989) conclude that FDI have positive relationship with the growing foreign presence in U.S. bank subsidiaries. And Sabi (1988) also states a similar result that US banking activities are significantly influenced by the US FDI in that country. In this paper, FDI from one European country to a host country is defined as the measure of Non-financial

investment from that European country. As illustrated by Brealey and Kaplanis (1996), the

outward FDI have little effect on influencing the home countries to choose the new locations, it is ignored in this study and inward FDI is collected to measure the FDI impacts on the location

choice of foreign banks. In the estimation,

FDI

_j is used as an indicator for foreign direct

investment from a home country i to a host country j.

Market potentials of host countries

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considers GDP of each host country as the variable of economic developments. Besides, Yamori (1998) and Brealy and Kaplanis(1996) show GDP per capita has relationships with foreign banks presence.. Therefore, in this paper GDP of host country is adopted as proxy of Market potentials

of host countries. In the estimation,

GDP

_j is used as an indicator of GDP of each host country j.

Bilateral trade

Brealey and Kaplanis (1996) suggest that trade and foreign direct investments have a significant influence on the pattern of bank location. During their regression, they use exports to each parent country and imports from each parent country as different measures of trade. The authors find that they are both significantly positively related to the number of banks in the host countries. Goldberg et al. (1989), Goldberg and Grosse (1994) and Bagchi-Sen (1995) use the total values of imports and exports to measure the bilateral trade when examining the level of foreign banking activities in the states of Unite States. This paper adopts their measure for bilateral trade, using the sum volume of exports and imports between home country and host country as proxies

of trade variable. For a given host country j,

Trade

_ij represents the sum of exports and imports

between home country i and host country j.

3.3 Data sources

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an online FDI Statistics Database.

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4. Descriptive results:

4.1 Basic information for sample banks

Among the 69 sample banks, most of them are commercial banks and investment

banks. 20 of them are originated from Germany, 13 are from Spain, 9 are from Italy

and 7 are from Netherlands, accounting for 71% of the total. The details for the

distribution of home countries for the sample banks are illustrated in

Figure 1

. The

total assets of the sample banks have a huge range, with 1,447.20 million Euros as

the minimum owned by

Banca Lombarda from Italy and 616,474 million Euros as the maximum owned by Commerzbank from Germany.

Figure 1: Distribution of sample banks by home countries

Distribution of sample banks

0 5 10 15 20 25

Blegium France Germany France Ireland Italy

Luxembourg_Netherlan ds

Portugal spain

4.2 Descriptive statistics for dependent variables and independent variables

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different motives from one home country to a host country. This paper adopts his way to build up pair countries. Each pair contains one home country and one host country. Finally, there are 287 valid cells with positive number of subsidiaries established by European banks from 10 home countries into 89 host countries; each cell obtains the data of number of subsidiaries the banks from the home country set in the host country, exports from host countries to the home countries and imports from home countries to host countries, FDI flows into the host countries and GDP of host countries. All values of imports, exports, FDI and GDP are transferred to US dollars, and the value of number of subsidiaries is accounted by unit. The details about the variables are described in table 1 as follows.

Table 1: Descriptive statistics for raw data

N Minimum Maximum Sum Mean

Std. Deviation

Skewness

Statistic Statistic Statistic Statistic Statistic Statistic Statistic Std. Error

subno 287 1 205 2806 9.78 20.887 5.172 .144

GDP 287 7.35E4 1.381E9 3.330E10 1.16036E8 2489.956616 4.188 .144

FDI 287 2.7E7 2.414E11 1.E13 5.04E10 674895.624 1.673 .144

Trade ₂₈₇ _1.59E5 _2.22E10 _5.64E11 _1.9645E9 _38732.72834 _3.015 _.144

European banks’ presence in host countries

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about the number of subsidiaries set up by sample banks categorized by the home country are illustrated in the Figure 2.

The locations of subsidiaries from each home country are presented in Appendix B. Each column shows a host country and each row shows a home country. The sample provides a total of 2806 overseas subsidiaries into 89 host countries, and the appendix show 287 cells with positive subsidiary numbers. The table shows that European banks set up subsidiaries mostly in U.S. and UK.

Figure 2: Number of subsidiaries set up by banks from each home country.

402 482 731 168 198 37 237 187 ₁₆₁ 248 0 100 200 300 400 500 600 700 800 Bleg ium

France _Germany Greece _Ireland Italy Luxembo

urg

Netherlands Port

ugal _Spain

Non-financial investment from domestic industries, Market potentials of host countries and bilateral trade (Imports and Export)

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5. Establishing models and testing hypotheses

In this part the model for testing hypotheses is established, and the relevant results are provided at the same time.

5.1 Logarithmic transformation

Before building the model, it is crucial to make sure that data of variables are normally distributed, which is the preconditions for making regressions and t-tests in the estimation. Skewness value is taken as a predictor to examine whether data of variables are normally distributed. When the skewness value is 0, the variables are considered as normally distributed. When the skewness value is relatively lower or higher than 0, the variables are taken as skewed distributed, and it is necessary to transform data of variables into normally distributed using transformations.8 Examining the raw variables described in Table 1, skewness values for each variable are found to range from 1.673 to 5.172 which are relatively higher than 0. Therefore, this study decides to use the logarithmic transformation to change the data of raw variables. Table 2 provides the descriptive statistics for log values of each variable, and Lsubno indicates log values of variable of subno, LFDI represents log values of FDI, LGDP shows log values of GDP, LTrade indicates log values of Trade.

Table 2: Descriptive statistics for log values of each variable

N Minimum Maximum Sum Mean Std. Deviation Skewness

Statistic Statistic Statistic Statistic Statistic Statistic Statistic Std. Error

Lsubno 287 .00 2.31 164.22 .5722 .54396 .789 .144

LFDI 287 7.43 11.38 2926.49 10.1968 .80988 -.622 .144

LGDP 287 4.87 9.14 2138.63 7.4517 .81703 -.353 .144

LTrade ₂₈₇ _1.00 _26.73 _5098.23 _17.7639 _4.76154 _-.531 _.144

Compared the skewness values in Table 2 to those in Table 1, it is clear that skewness

value of number of subsidiaries declines from 5.172 to 0.789, that of FDI decreases

from 1.673 to -0.622, that of GDP declines from 4.188 to -0.353 and that of Trade

decreases from 3.015 to -0.531. The results show that after transforming the raw

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values of variables into log values, the skewness values decline sharply and approach

0, which indicate that the log values of raw variables are more normally distributed

than raw variables. Therefore in the following part, the log values of variables are

applied in the estimation.

5.2 Model and Regression results

Prior studies in the literature review prove the positive impacts of FDI, GDP and Trade on motivating international banks’ expansion into foreign countries by examining the cases in UK, US and several European countries, like Germany and Italy. Based on the literature, the hypotheses assume positive relationships between European banks’ presence in foreign countries and FDI, GDP and Trade. A linear regression model is established to examine the relationships assumed by hypotheses, and log values of each variable are used in the estimation as explained in the prior part.

ij

LSubNo

=a +b

LGDP

_i+c

LTrade

_ij+ d

LFDI

_i (i=1, 2, 3……10; j=1, 2, 3…89);

In the model,

LSubNo

_ij indicates log value of the number of subsidiaries which banks from

home country i set up in host country j.

LTrade

_ij represents log value of sum of exports and

imports between home country i and host country j.

LFDI

_i shows log value of FDI inflows to

host country j and

LGDP

_i indicates log value of GDP of host country j. For all i and j in the

model, i ranges from 1 to 10 and j ranges from 1 to 89.

In order to estimate the hypotheses, regression analyses are performed. Table 4 gives the summary of regression model and Table 5 provides regression results for coefficients on each variable. Table 4: Model Summary

R R Square

Adjusted R Square

Std. Error of

the Estimate F Sig.

.519a .270 .262 .46729 34.850 .000a

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Table 5: Regression results for coefficients

Unstandardized Coefficients Standardized Coefficients Model

B Std. Error Beta t Sig.

(Constant) -1.729 .372 -4.641 .000

LFDI _.094 _.044 _.140 _2.154 _.032

LGDP _.090 _.047 _.135 _1.903 _.058

LTrade _.038 _.007 _.329 _5.010 _.000

a. Dependent Variable: Lsubno

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Table 6 Regressions of foreign banks subsidiaries on FDI, GDP and Trade for individual home countries.

In order to measure which factors affect European banks presence from each home country is affected by different factors, regressions are performed for individual home country in the sample. The results are showed in Table 6. According to the results, 6 of 10 regressions show positive coefficient of FDI and in two of these cases they are significant at 95% level. It indicates that foreign presence of European banks from France and Netherlands are positively affected by the domestic FDI into host country. That is, banks from France and Netherlands set up subsidiaries in the host country where domestic FDI flows into. When comes to GDP, 4 of 10 regressions show positive coefficients of GDP and only that in the regression for Spain is significant at 95% level. That is, presence of banks from Spain in a host country is positively affected by GDP of that country. When comes to Trade factor, in 9 of 10 regressions the coefficient on Trade is positive and in 4 of these cases it is significant at 95% level. From the

Coefficients and significance value of each variable

Home country Constant LFDI LGDP LTrade

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regression results, presence of banks from Belgium, Germany and Greece in the host countries are positively related with bilateral trade between home country and that host country. Presence of banks from France in a host country is positively related with FDI from France to that country and Trade between both countries. Banks from Netherlands are attracted to set up subsidiaries in the host country where FDI of Netherlands flow into. Banks from Spain are attracted to establish operations in the host country with high GDP, which indicates great market opportunities. However, the regression results don’t provide supports for positive relationships between foreign presence of banks from Ireland, Italy, Luxemburg and Portugal and FDI, GDP and Trade. The regression results also indicate that FDI inward foreign country, GDP of that foreign country and bilateral trade are not proved as motivations for banks presence of Ireland, Italy, Luxemburg and Portugal in that host country.

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6. Conclusions and Discussions

From 1960 to the mid-1980s, owing to foreign investments, trade and high improved communication technology, banks expansion reaches its peak time. And in the recent 15 years, there is an increasing trend of banks investment in the developing countries. Based on these circumstances this paper aims to investigate the factors which have impacts on banks expansion from European countries. According to customer following approach, market seeking approach, and economic integration, the effects of FDI, GDP of host country and Trade on attracting European banks entry are examined. This paper contributes to prior literatures by examining motivations for foreign expansion of banks originated from European countries at EU level, and testing those on individual member countries which has not been investigated yet.

In this study, the regression results show that FDI into the host country has a positive impact on European banks’ presence in that country and the more is bilateral trade between a European country and host country, the larger is European banks’ presence in that host country. It indicates that European banks originated from European Union are attracted to establish banking presence in the foreign country where non-financial FDI from home country flows into and which has a great market potential. Hypotheses 1 and 3 are supported by my study.

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Besides, the high entry barrier for foreign banks into the EU banking market grants European banks advantages than foreign banks. The above possible reasons might provide explanations on why European banks are not motivated to expand into a market with high potentials. .

When examining the relationships between each motivation and European banks’ foreign presence by individual home country in the sample, the regression results show that banks originated from Belgium are attracted to establish banking presence in the country which has large volume of two-way trade with Belgium. French banks establish banking presence in the country where non-financial domestic FDI flows into and which has bilateral trade with France. Foreign presence of banks originated from Germany and Greece are both positively affected by the bilateral trade between home country and host country. Banks from Netherlands are proved to set up subsidiaries following domestic FDI abroad as the coefficient for FDI is significant positive. Banks from Spain are attracted to expand into countries with great market potentials. Finally foreign presence of banks from Ireland, Italy, Luxemburg and Portugal are not found to be affected by domestic FDI flows, GDP of a foreign country or bilateral trade. Among the above results, several have been confirmed by earlier researches. The positive relationship between foreign presence of banks from France and non-financial domestic FDI and positive impact of GDP on the foreign presence of banks from Spain confirm the prior studies by Brealey and Kaplanis (1996), the positive relationship between foreign presence of banks from Germany and bilateral trade has been proved by earlier studies by Buch (2000). The result on banks from Netherlands is contrary to prior research. My result shows that banks from Netherlands establish banking presence following their customers abroad, while Seth and others (1998) indicate that Dutch banks’ foreign presence doesn’t follow their customers abroad.

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7. Limitations and future research

As being of an empirical character, this research certainly also inhibits some limitations. First limitation is that in the estimation only data in 2007 are employed. The results can only explain the motivations for European banks’ expansion in one year and cannot be applied to interpret the effects of these factors on banks’ expansion in a time period.

Second limitation of this study is that European banks’ foreign presence is only measured by the number of subsidiaries in the host country. It is arguable whether this measurement conveys accurate enough information about a bank’s presence in a foreign country. Some European banks choose to join in cooperation with local banks; some European banks expand into a foreign country through M&A (mergers and acquisitions). In all these cases, foreign subsidiaries are not able to gauge foreign presence of banks accurately. As more information are disclosed on the European banks, it might be feasible to incorporate other data including number of co-operations and M&A to give a more accurate measurement for banks’ foreign presence.

Finally, the scale of sample limits this study. According to statistics rules, the optimistic number of observations for each variable ranges from 20 to 25, 69 banks for 3 variables could be considered as a sample with optimal scale for regression analysis. However, this study is based on the EU level that contains 14 member countries with thousands of banks in the banking industry; a larger scale of sample might gain results approaching the real expansion performance of EU banks.

For Future research on examining motivations on European banks’ foreign presence, it might be useful to conduct this research in a longer time period, for example 10 years or 15 years. It will give a detailed explanation for how banks foreign presence changes according to the changes of different factors.

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together to deeply investigate motivations for European banks’ foreign expansion.

Furthermore, it could be useful to take all the possible foreign presence of bank in a country into consideration in future study. The total assets of subsidiaries, branches, shares in cooperated organizations and M&As might be a more comprehensive method to measure the foreign presence of a bank in a foreign country than the number of subsidiaries.

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8. Reference:

Aliber, R. Z., International banking, a survey, Journal of Money, Credit and Banking, 16, pp.661-678, 1984.

Allen N. Berger, Obstacles to a global banking system: “Old Europe’’ versus ‘‘New Europe’’,

Journal of Banking & Finance 31, pp. 1955–1973, 2007;

Bagchi-Sen, S. FDI in US producer services: A temporal analysis of foreign direct investment, in the Finance, Insurance and Real Estate Sectors, Regional Studies 29, pp. 159-170, 1995.

Berger, A.N., De Young, R., Udell, G., Eﬃciency barriers to the consolidation of the European ﬁnancial services industry, European Financial Management 7, pp.117–130, 2001.

Blandón Josep García, Cross-border banking in Europe: An empirical investigation, Universitat Pompeu Fabra. http://www.econ.upf.edu/docs/papers/downloads/509.pdf.

Brealey R. A .and Kaplanis E C, The determination of foreign banking location Journal of

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9. Appendix

A: Data about 69 banks selected in the sample, country of origin, assets and the number of their subsidiaries until 2007.

Bankinter

spain

Germany

202913.00

68

(39)

DZ BANK Deutsche

Zentral-Genossenschaftsbank

Germany

431337.00

468

Eurohypo

Germany

214215.00

60

F. van Lanschot Bankiers

Netherlands

31,793.00

39

Groupe Banques Populaires

France

163790.30

20

Groupe Caisse d’Epargne

France

601453.00

1133

Grupo Bancaja

spain

99,584.90

216

Hamburger Sparkasse (Haspa)

Germany

Germany

88,642.40

46

(40)

B: the distribution of each banks’ subsidiaries from home country (countries in the first column) to the host country (countries in the first row)

location of Subsidiaries / Home country

Host country

Blegium FR

Germany Greece

Ireland Italy

Luxembourg

NL

Portugal Spain

Albania

O

2 O

O

Angola

O

2 O

Argentina

O

2 O

O

10 Australia

7

1

6 O

1 O

O

4

1

6 Austria

6

3

22 O

O

7

1 O

1 Bahamas

O

Belgium

O

65

7 O

O

2

3

1 O

1 Bolivia, Plurinational State of

O

1 Bosnia and Herzegovina

O

2 O

O

Brazil

2

10

4 O

O

1 O

3

4

3 Bulgaria

3 O

1

33

1 O

O

Burkina Faso

O

1 O

O

Canada

10

7

14 O

6 O

O

2 O

15 Chile

O

11 China

O

19

4 O

O

6

3 O

O

Congo, the Democratic Republic of the

O

1 O

O

(41)

(42)

Madagascar

O

1 O

O

Malaysia

2 O

O

1

1 O

Mali

O

1 O

O

Malta

O

1

2 O

O

Mauritania

O

1 O

O

Mauritius

O

1 O

O

Mexico

2

1 O

O

1

43 Morocco

O

7 O

O

1 O

Mozambique

O

2 O

Netherlands

20

48

20

1

3

1

6 O

5

3 New Zealand

O

3

1 O

O

Niger

O

1 O

O

Nigeria

O

1 O

O

Norway

2

6

6 O

O

3

1 O

O

Oman

O

1 O

O

2 O

O

Pakistan

O

1 O

O

Panama

1

4 O

1 O

O

1 Papua New Guinea

O

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Singapore

7

8

7 O

1 O

1

3 O

O

Slovenia

1 O

4 O

O

South Africa

O

1

1 O

O

1

2 O

Spain

4

16

8 O

O

2

7

18 O

Sweden

3

6

10 O

O

1 O

1

1 Switzerland

12

13

46 O

4

1

7

5

1

2 Thailand

O

1 O

O

1 O

Tunisia

O

1 O

O

Turkey

3

6

20

11 O

O

2

1 O

Ukraine

O

2 O

O

United Kingdom

24

71

84

26

33

3

13

34

5

10 United States

60

44

205

4

141

5

10

67

6

90 Uruguay

O

2 Venezuela, Bolivarian Republic of

O

1 O

O

Yemen

O

1 O

O

N.A

O

3

15 O

O

2 O

4 O

O

Subsidiaries in foreign countries in

(44)

C:

GDP of each host country and FDI inflows in host country in 2007 (billions

of US dollars)

Host country GDP of host countries FDI inflow

Albania 10.865 4,770.00 Angola 59.263 -8,930.00 Argentina 260.402 64,620.00 Australia 909.743 395,960.00 Austria 371.219 307,170.00 Bahamas 7.234 7,130.00 Belgium 459.029 721,950.00 Bolivia 13.292 2,040.00

Bosnia and Herzegovina 15.165 21,110.00

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Israel 164.103 96,640.00 Italy 2,117.52 400,400.00 Japan 4,384.38 221,800.00 Kazakhstan 104.85 101,890.00 Korea, Republic of 1,049.32 15,790.00 Kuwait 111.755 1,190.00 Latvia 28.766 22,470.00 Lebanon 25.044 28,450.00 Liberia 0.735 1,320.00 Lithuania 38.886 20,170.00 Luxembourg 49.724 1,881,190.00 Madagascar 7.354 9,970.00 Malaysia 186.718 84,560.00 Mali 7.156 3,600.00 Malta 7.513 9,320.00 Mauritania 2.819 1,530.00 Mauritius 6.927 3,390.00 Mexico 1,025.43 246,860.00 Morocco 75.116 28,070.00 Mozambique 8.069 4,270.00 Netherlands 777.241 1,236,090.00 New Zealand 128.906 27,530.00 Niger 4.252 270.00 Nigeria 167.435 60,870.00 Norway 389.517 37,880.00 Oman 40.391 23,760.00 Pakistan 144.032 53,330.00 Panama 19.485 19,070.00

Papua New Guinea 6.388 960.00

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D: Regression results for individual home countries in the sample

Belgium Coefficientsa Unstandardized Coefficients Standardized Coefficients

Model _B _{Std. Error} _Beta t Sig.

(Constant) -2.461 1.462 -1.683 .102

LFDI .135 .113 .157 1.194 .241

LGDP -.042 .170 -.050 -.251 .804

1

LTrade .109 .033 .689 3.338 .002

France:

Coefficientsa

Unstandardized Coefficients

Standardized Coefficients

(Constant) -2.232 .605 -3.688 .001

LFDI .215 .089 .381 2.414 .020

LGDP -.141 .107 -.238 -1.315 .195

1

LTrade .092 .026 .656 3.599 .001

Germany:

Coefficientsa

(Constant) -2.402 1.138 -2.111 .040

LFDI .045 .128 .054 .354 .725

LGDP .160 .154 .198 1.035 .306

1

LTrade .070 .034 .426 2.045 .046

(48)

Greece:

Coefficientsa

(Constant) -.286 1.380 -.207 .839

LFDI .051 .181 .087 .282 .782

LGDP -.206 .198 -.371 -1.041 .318

1

LTrade .134 .056 .786 2.379 .035

Ireland:

Coefficientsa

(Constant) -1.498 3.920 -.382 .709

LFDI -.078 .264 -.083 -.296 .772

LGDP .175 .343 .209 .509 .620

1

LTrade .079 .070 .495 1.131 .280

Italy:

Coefficientsa

(Constant) .792 1.706 .464 .653

LFDI -.073 .168 -.174 -.437 .673

LGDP -.056 .199 -.182 -.283 .784

1

LTrade .037 .057 .455 .639 .539

(49)

Luxemburg:

Coefficientsa

(Constant) -.324 2.143 -.151 .881

LFDI -.188 .167 -.281 -1.127 .272

LGDP .316 .200 .411 1.578 .129

1

LTrade .035 .031 .379 1.150 .263

NL:

Coefficientsa

(Constant) -1.801 1.558 -1.156 .258

LFDI .340 .162 .550 2.092 .046

LGDP -.231 .284 -.391 -.812 .424

1

LTrade .030 .047 .298 .638 .529

Portugal:

Coefficientsa

(Constant) -1.198 1.429 -.838 .411

LFDI .251 .150 .383 1.668 .110

LGDP -.239 .163 -.393 -1.461 .159

1

LTrade .054 .039 .378 1.396 .177

(50)

Spain:

Coefficientsa

(Constant) -2.514 1.555 -1.616 .120

LFDI -.005 .166 -.007 -.028 .978

LGDP .449 .209 .647 2.148 .043

1

LTrade -.014 .048 -.104 -.298 .768

What Factors Affect Foreign Presence of Banks from European Union