The Defensive Expansion Approach to Multinational Banking: Evidence to Date

Abstract

This paper integrates the defensive expansion hypothesis in multinational banking with the internalisation approach to the multinational enterprise. This framework is then used to structure a review of the literature to date regarding the proposition that multinational banks follow their clients abroad, otherwise called the defensive expansion hypothesis. Both theoretical and empirical issues relevant to the study of the defensive expansion hypothesis are canvassed. The paper concludes that the defensive expansion hypothesis is best modelled using firm level data, and that investment measures are a preferred proxy for following clients. Furthermore, studies considering the defensive expansion hypothesis should control for the effects of parent firm size and economic cycles. The paper concludes that defensive expansion increases multinational size, but has little impact upon multinational bank profits. There is some evidence that defensive expansion impacts upon the type of organisational form adopted by the multinational bank in the host nation.

Stability of CEE Banks in the Crisis Years. Capital Adequacy and Too-Big-to-Fail Parent Banks in CEE

“…2 Berger et al (2001) assume a global advantage of multinational banks in comparison to domestic banks, as multinationals have access to better technology to evaluate and monitor the risks and better practices to treat moral hazard. According to Goldberg and Saunders (1981), Brealey and Kaplanis (1996), Konopielko (1999), Buch (2000), Moshirian (2001) and Williams (2002), banks follow their customers. Others (Claessens et al, 2001;Hymer, 1979) are of the view that banks seek efficiency and higher profitability, which can be achieved by extending the market or the number of foreign customers.…”

An exploration into the home field, global advantage and liability of unfamiliarness hypotheses in multinational banking

“…Moreover, banks may have a clear interest in keeping other financial institutions away from developing a relationship with its corporate clients. In other words, a bank's expansion abroad can sometimes be a defensive reaction to avoid losing important corporate clients at home (Williams, 2002).…”

“…The focus of these studies has been the determinants and methods of multinational banks' entry into foreign markets (see among others Cerutti, Ariccia, & Peria, 2005;Seth, Nolle, & Mohanty, 1998;Williams, 2002). On the other hand, studies concerning the efficiency of multinational banks as a subset of the literature on the eclectic theory are relatively scanty (see among others Williams, 1996).…”

Who owns the major US subsidiaries of foreign banks?

“…In his survey article on FDI in banking, Williams (1997) argues that internalization of the market for intangible assets, especially relationships with clients provides an adequate general explanation. In a second survey Williams (2002) assembles the evidence supporting the motive of following the client, which he terms the defensive expansion argument. However, defensive expansion is most applicable to what Grubel (1977) calls the wholesale and corporate markets.…”