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Internationalization of Banks: Strategic Patterns and Performance

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  • Morten Balling
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  • Alfred Slager
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    Abstract

    This essay investigates the relationship between the internationalization of banks, profitability and shareholder value. We argue that in general internationalization has not contributed to profitability, and shareholders have not gained by investing in banks with more international activities. A database with internationalization measures is constructed for the 3 to 5 largest banks in 8 countries between 1980 and 2003, leading to a sample of 44 banks. The transnationality index is calculated for each bank, combining foreign assets, foreign income and foreign staff into one index. To examine the relationship between internationalization and performance, we calculated the difference between foreign and domestic profitability. We also investigate if more internationalization is related to more profitability. The key finding is that foreign profitability tends to be lower than domestic, and a negative relationship exists between total profitability and internationalization. Also, a " J-curve" shape appears, suggesting that up to a certain degree of internationalization (roughly 40% of foreign staff, income and assets), costs tend to outrun benefits. A similar pattern emerges for shareholder return: banks that either strongly or moderately increased their internationalization activities generated the lowest shareholder return as a group, while banks that retreated generated the most. For the future, we identify banks which are likely in the near future to reassess their internationalization strategy, either to develop a business model where internationalization activities are a stable and profitable source of income, or where banks refocus their attention to the domestic banking market.

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    Bibliographic Info

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    This book is provided by SUERF - The European Money and Finance Forum in its series SUERF Studies with number 2005/4 and published in 2005.

    ISBN: 978-3-902109-29-3
    Handle: RePEc:erf:erfstu:37

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    Related research

    Keywords: internationalization; banking; value creation; performance;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. David T. Llewellyn, 2002. "The Future for Small & Regional Banks in Europe," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    2. Peter R Haiss & Gerhard Fink, 1998. "Seven Years of Financial Market Reform in Central Europe," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    3. Cem Karacadag & Michael W. Taylor, 2000. "The New Capital Adequacy Framework - Institutional Constraints and Incentive Structures," SUERF Studies, SUERF - The European Money and Finance Forum, number 8 edited by Morten Balling.
    4. Alan M Rugman, 1976. "Risk Reduction by International Diversification," Journal of International Business Studies, Palgrave Macmillan, vol. 7(2), pages 75-80, June.
    5. Rolf Skog, 1997. "Does Sweden Need a Mandatory Bid Rule? A critical analysis," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    6. Sunil Sharma & Sushil Bikhchandani, 2000. "herd Behavior in Financial Markets - A Review," IMF Working Papers 00/48, International Monetary Fund.
    7. John Calverley & Sarah Hewin & Kevin Grice, 2000. "Emerging Stock Markets After the Crisis," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    8. Ricardo Brogi & Paolo Santella, 2004. "Two New Measures of Bankruptcy Efficiency," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    9. Daniel Sullivan, 1994. "Measuring the Degree of Internationalization of a Firm," Journal of International Business Studies, Palgrave Macmillan, vol. 25(2), pages 325-342, June.
    10. Adrian E Tschoegl, 1987. "International Retail Banking as a Strategy: An Assessment," Journal of International Business Studies, Palgrave Macmillan, vol. 18(2), pages 67-88, June.
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    Cited by:
    1. Victor Gorshkov, 2013. "Inward entry of Japanese banks into the Russian market," KIER Working Papers 864, Kyoto University, Institute of Economic Research.

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