Despite the increasing literature related to the topics of Foreign Direct Investment(FDI) in manufacturing sector of European transitional economies, the ones related to FDI in the banking sector have received little attention. Nevertheless, over the past years numerous studies and theories have emerged in an attempt to explain the motives behind foreign bank entry in CEE countries. Although there is not a universally accepted theory explaining the motives behind a Banks decision to start it operations abroad several reasons are addressed in the existing literature.). Research has revealed factors like the degree of economic integration between the home and host country, market opportunities available and entry restrictions like the factors that affect a banks decision to start its operations on a foreign market.
Contents
Follow the customer / level of integration between home and host country
One of the most important reason that affects a banks decision to entry a foreign market is to “follow the customer” also called the defensive hypothesis. Foreign banks building upon the expertise in their home country they can differentiate themselves from their competitors in the host country by offering complex and specialized services to their home country corporate customers. Years of long-lasting relationship have provided the banks with crucial information about the unique financial needs that their clients have, the knowledge of which is unavailable to host country institutions. In addition, through this relationship banks are able to develop a competitive advantage stemming through the lower marginal costs that those banks experience when dealing with loan renewals over their local competitors. Unlike manufacturing where knowledge can be protected through patterns and other means, commercial intelligence can be easily gained by any bank with an interest in starting its operations in specific market or industries. In addition, letting other financial institutions to develop a relationship with its existing corporate clients can result in the loss of market share in the banks home county. In order to prevent this from happening banks are obliged to follow the client by opening an office (branch, subsidiary) abroad themselves in order to defend their unique bank client relationship.
Attractiveness of the host country
The attractiveness of the host country is another motive that according to scholars drives foreign bank entry into a foreign market. According to this argument a number of factors like GDP, size, distance, financial development, and profit opportunities are identified as the ones that shape the overall attractiveness of the market.
Host country regulation
Foreign banks will to engage themselves in banking FDI may have long existed, however the ability to do so was restricted by barriers to entry that existed in many Emerging Markets Economies until recently. Only after the authorities of those countries in the mid-1990s begun to actively pursue a policy aiming to the privatisation of their domestic banking institutions through the participation of foreign investors’ foreign bank entry was allowed. The effects of host country regulations on foreign bank entry are straightforward since restrictions on foreign bank present generally limits competition and protect inefficient domestic banks. Since the majority of those countries are now in a transition process towards a democratic market economy the degree to which the reform process has taken place (level of economic reforms, and political freedom) is an important consideration that foreign banks are taken into account before entering the country. Countries that have successfully introduced reforms aiming at establishing transparent and enforceable rules regarding their financial markets are the ones that considered more attractive for foreign banks.