An empirical study on multinational banks decision to go abroad.

Boubacar, Hamadou

INTRODUCTION

Literature related to Multionational banking [see for example Miller and Parkhe (1998), Blandon (1998 and 2000), Mutinelli and Piscitello (2001), Focarelli and Pozzolo (2005), Tschoegl (2004), and Cerutti and al. (2007)], mostly defends that economic and financial factors are decisive in the choice of the organizational form of representation that multinational banks (MNBs) choose when expanding abroad such as subsidiary, branch, affiliate-bank and representative office. The purpose of this paper is to consider parent-bank own characterics in its decision to choice an organizational form of establishment in foreign countries. Thus, our approach is different from macro-economic one, because it considers agency theory and resource-based theory to study the choice of organizational forms of representation abroad. As Fama and Jensen (1983) assert, the survival of an organization like multinational bank, depends on its capacity to solve agency problems that occur by doing its activities. This capacity depends on the type of organisational form chosed by the MNB to exert in a particular area of activity abroad. The agency theory make easy to understand more about the strategy of bank's internationalization. For example, in a multinational bank, agency problems which may be caused by the distance between home country and host country, would depend on the nature of the organizational form of representation abroad. The resource-based theory enables to take into account parent-bank specific characteristics such as capabilities in human resources and international experience.

Different from macro-economic approach, this study presents an important contribution because it allaows to understand better how do MNBs choise among many organizational forms when going abroad. It focuses on the following two research questions : (a) Why does a MNB hold several organizational forms of reprsentation in a same host country? (b) Why do MNBs from a same home country choose to be established via different organizational forms of representation in another foreign country?

The remainder of the paper is organized as follows. In the section 2, we review the literature relating to banking internationalization. Then, the section 3 describes the data and explains the methodology used in the empirical study. The section 4 presents and discusses the empirical results that show, when MNBs expand internationally, that the parent-bank specific characteristics play a leading role. Section 5 concludes.

REVIEW OF LITERATURE

The impact of banking regulations on MNBs and their decision to go abroad is therefore closely linked since it determines the conditions they must comply with in order to conduct their banking activities. According to Dalen and Olsen (2003), Calzolari and Loranth (2005), and Harr and Ronde (2005), from a legal point of view, there exists a significant difference between the branch and the subsidiary as organizational forms when establishing abroad. Indeed, when creating a branch, the parent-bank must conform to the home country's regulations while in the case of a subsidiary form (new creation or an acquisition of a local bank), it is the regulations in the host country which apply. In our research, we consider that the legal framework in a given country is characterized principally by corporate tax imposition and by administrative adherence to regulatory procedures and bodies (barriers to entry) whose compliance constitutes a precondition to any establishment for banks in foreign countries. Cerutti et al. (2007) assert that restrictions imposed on MNBs by the home country and the host country affect negatively and significantly the choice of the organizational form of representation. Thus, the barriers to entry have a negative effect on the establishment of the branch forms. What this implies is that the restrictions on the branches do not encourage the banks to set up this type of organisational form.

According to Bain et al. (2003), some countries like the United Kingdom and Switzerland adopted banking laws on the principle of reciprocity. Consequently, a foreign bank can be established in these countries only when its home country accommodates English and Swiss banks under similar conditions. Each country places conditions on the required capital for the setting up of a branch or a subsidiary as organizational forms of representation. One can also note a difference in taxation according to whether it is a branch or a subsidiary of a foreign banking institution. From a viewpoint of corporate taxation, the branch is more favourable than the subsidiary because tax on a bank branch is paid at a lower rate in the host country, and the benefits are exempted in the parent-bank's home country in which they are returned. Indeed, as Cerutti et al. (2007) assert, even in countries where the corporate tax is relatively high, the branch form is less taxed than the subsidiary form because it allows an easier transfer of tangible benefits towards the home country. On the other hand, for the subsidiary form, often the revenue is taxed, in part, twice. However, this last form presents some advantages, especially in taxation. For example, in France, foreign bank subsidiaries have profited for their international lending operations based in the host country, despite the competitive network and double taxation required by the country. By taking into account these advantages, some foreign banks, initially established in France through the branch form, have transformed their representations into subsidiary banks.

A well developed banking sector should provide many opportunities for the operating financial institutions. In such an environment, banks must, in order to compete, be able to offer a variety of financial products and services. According to Di Antonio et al. (2002), Italian MNBs prefer the branch and the subsidiary as organisational forms when the host country's banking sector is of considerable size and relative strength. Other studies measuring the economic development level as per the GDP per capita (see Cerutti et al., 2007) show a negative impact on the choice of the branch as organizational form of representation abroad. Such results are partly justified by the fact that foreign bank subsidiaries are often created following restructuring of local banks in difficulty in the developing countries. Another reason for the choice of the subsidiary in developing countries may be the fact that foreign banks consider these countries as opportunities "where they believe there is ample room for expansion and these are typically poorer economies, where the local banks are less developed and capitalized, and hence easier to compete against" Cerutti et al. (2007, p. 1686).

In politically unstable countries, foreign banks prefer subsidiary or affiliate-bank as organizational forms of representation in order to limit the in-country risk. If this is the case, one should note that the establishment of French banks in African countries where the political risk is relatively high are all subsidiary and/or affiliate-bank forms. According to Di Antonio et al. (2002), Italian MNBs are established in countries that have great financial centers, through branches as a first choice, and then via the subsidiary form as a second choice. The results of Cerutti et al. (2007) go in the same direction and attest that the banks prefer the branch to the subsidiary as organizational forms in countries which present less of an economical risk. In the same way, these authors stress that in the presence of a proven political risk (governmental interference in the businesses of foreign banks, civil wars, etc), foreign banks prefer the branch form in such environments. Indeed, in the event of civil war or of political interference, foreign bank branches are less state dependant than subsidiaries which have host country capital including important investments in fixed local assets.

Once established abroad, MNBs are inclined to generally concentrate on wholesale and retail banking activities. According to multinational banking theory (see Grubel, 1977; Gray and Gray, 1981; Aliber, 1984; Williams, 1997), MNBs go abroad in order to exploit specific advantages they themselves acquired on national markets. Ursacki and Vertinsky (1992) contend that banks also go abroad to benefit from more of the advantages locally acquired in wholesale and retail activity areas. Ursacki and Vertinsky (1992) use three ratios to measure the parent-bank business orientation. The first ratio (Credit Amount to Total Assets) indicates the importance that the parent bank grants to extend credit compared to other services such as investment services. The second ratio (Deposits to Total Assets) highlights the importance of deposits compared to other sources of funds (in particular inter-banking funds) and thus represents the existence or not of a large available domestic network. The third ratio (Credit Amount to Deposits Amount) can be regarded as an indicator of the level of the parent-bank financial intermediation. Accordingly, a high ratio means that the bank grants more credit than it receives through deposits, and should then have recourse to other funds such as inter-banking to replenish its funds and reduce or eliminate its deficit.

The parent-bank size reflects both its financial and human resources dimensions. Size is an important factor because MNBs need a minimum size in order to be able to develop an activity abroad and to compete successfully with local banks (Blandon, 1998). Indeed, considerable resources are needed for absorbing the high costs of marketing and taking advantage of the economies of scale, when they exist in foreign markets. Ball and Tschoegl (1982) find that bank size has been a main determinant of MNB expansion in California and Japan. Ursacki and Vertinsky (1992) obtain that whereas the size of the bank positively affects the setting up of foreign branch, it does not affect the establishment of representative offices abroad. The establishment of banks abroad, via branches and subsidiaries requires the deployment of great amounts of resources. The representative office and the affiliate-bank constitute means of internationalization less expensive than the subsidiary and the branch. However, concerning the activities to be exerted in the host country, the representative office and the affiliate-bank offer very reduced possibilities, contrary to subsidiary and branch. These last two organizational forms make possible for the parent bank to offer various products and financial services. In many researches, size is measured by the total asset. But, in our study, the size will be measured by the total staff number of the parent-bank in order to take into account, the overall bank capacity in terms of human resources for its internationalization strategy.

The international experience, that is the degree of familiarity with foreign countries allows the parent-bank to know more about the international environment. This is a factor expected to encourage the bank's expansion abroad. Foreign direct investments include many risks such as political risk, economic risk, financial risk and so one. The lack of international experience may cause the parent-bank to take inappropriate decisions or lead to errors in managing relations with customers, competitors, local authorities (Mutinelli and Piscitello, 2001). Blandon (1998) asserts that banks without this experience will hardly assume the risk associated with an important foreign direct investment like the acquisition of foreign banks. Such parent-banks are expected to start their foreign ventures via organizational forms which involve smaller amounts of investment, such as representative offices. According to Agarwal and Ramaswani (1992), firms with important international experience will enjoy a larger capability for adapting their activities in different countries at a lower cost. This simply means that, large and more experienced banks tend to establish themselves through branches and subsidiaries implying a high level of commitment with the host country. Similar results obtained by Mutinelli and Piscitello (2001) indicate that the establishment of Italian banks abroad through branches and representative offices depended on the experience obtained from the overseas markets. Banks with little international experience must, at the beginning of their expansion abroad, rely on the representative office and the affiliated-bank which limits the risk related to direct foreign investment.

Distance between home country and host country is considered to be physical distance or cultural distance. Physical distance is generally regarded as a factor which fosters the increase of monitoring costs of the parent bank's investments in foreign countries. In this scenario, distance constitutes a barrier of entry to international banking. For example, Blandon (1998) affirms that the distance between Madrid and other countries constitutes a barrier to the internationalization of the Spanish banks. When distance is important, the parent bank cannot manage its foreign entities without high control costs. Ball and Tschoegl (1982) report that the physical distance negatively affects the selection of foreign subsidiaries and branches as organizational options. International banking operations incur additional costs for remaining informed along with coordination costs insofar as the distance makes it considerably more difficult for MNBs to be kept informed about their operations abroad. Distance can be considered in terms of cultural differences between the country of origin and the host country. Cultural variations can then affect the type of activities that banks practice abroad. Regarded as an entry barrier, cultural distance is especially visible when foreign banks wish to practice in the retail banking in the host country.

HYPOTHESES

H1 We expect the host-country bank entry requirements to have a negative impact on the parent-bank decision to establish itself abroad by branch and/or representative office, and a positive effect on its decision to operate abroad via a subsidiary and/or affiliate- bank.

H2 We expect the corporate tax rate to have a positive effect on the parent-bank decision to establish itself abroad by branch and/or representative office, and a negative impact on its decision to operate abroad via subsidiary and/or affiliate-bank.

H3 We expect the host country banking sector development to have a positive effect on the parent-bank decision to establish itself abroad by branch and/or subsidiary, and a negative impact on its decision to operate abroad via representative office and/or affiliate-bank.

H4 We expect the host country-risk to have a positive effect on the parent-bank decision to establish itself abroad by affiliate-bank and/or subsidiary, and a negative impact on its decision to operate abroad via representative office and/or branch.

H5 We expect the parent-bank retail business orientation to have a positive effect on the parent-bank decision to establish itself abroad by affiliate-bank and/or subsidiary, and a negative impact on its decision to operate abroad via representative office and/or branch.

H6 We expect the parent-bank size to have a positive effect on the parent-bank decision to establish itsef abroad by branch and/or subsidiary, and a negative impact on its decision to operate abroad via representative office and/or affiliate-bank.

H7 We expect the international experience to have a positive effect on the parent-bank decision to establish itsef abroad by branch and/or subsidiary, and a negative impact on its decision to operate abroad via representative office and/or affiliate-bank.

H8a We expect the physical distance between home country and host country to have a positive effect on the parent-bank decision to establish itsef abroad by affiliate-bank and/or subsidiary, and a negative impact on its decision to operate abroad via representative office and/or branch.

H8b We expect the difference between home country and host country official languages to have a positive effect on the parent-bank decision to establish itsef abroad by affiliate-bank and/or subsidiary, and a negative impact on its decision to operate abroad via representative office and/or branch.

DATA AND METHODOLOGY

In order to conduct this study on the decision of MNBs to expand their activities abroad via representative office, affiliated-bank, subsidiary and branch as organizational forms, we collected data from both host countries and parent-banks. The economic, financial and lawful data relate to 25 host countries (five in each of these areas: Africa, South and Central America, Eastern Europe, South-East Asia and the Middle-East). (See table 1). By doing this, we avoided studying international banking within countries that are economically similar to their home countries. Initially, our sample consists of about 100 MNBs. From these, we retain only 82 which have operations in at least five countries. The constitution of the final sample led us to dismiss 19 MNBs for various reasons. For example, we excluded Almanij bank (Belgium) because it was absorbed in 2005 by another Belgium bank, KBC bank. Similarly, we eliminated Fleet National Bank (USA) acquired by Bank of America. Other MNBs such as the Belgolaise (Belgium), Le Credit Lyonnais (France), Lehmann Brothers (USA) and Sumitomo Trust Bank (Japan) were removed from our sample because of the unavailability of certain information required for the study. Finally, the sample is formed of 63 multinational banks (See table 2).

We then study how MNBs make a choice among the four organizational forms used abroad: representative office (RO), affiliated-bank (AB), subsidiary (SU) and branch (BR). We use a seemingly unrelated regression equation (SURE) model, where (RO), (AB), (SU) and (BR) are dependent variables defined by the same explanatory variables mainly related to parent-bank owned characteristics. The following SURE model was developed by Arnold Zellner (1962) and is a technique for analyzing a system of multiple equations with cross-equation parameter restrictions and correlated error terms.

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

ROij, ABij, SUij and BRij represent, respectively, the number of representative offices, affiliated banks, bank subsidiaries and bank branches of the parent bank (i) in the host country (j). It is equal to 1 if the bank (i) has at least one form of representation in the host country (j) and is equal to 0 if not. Business orientation (Bus_Orientation): bank retail activity is characterized by preponderance for financial intermediation (deposits and loans). We measured this variable as per Ursacki and Vertinsky (1992) by the ratio of credit to deposits. Parent Bank Size (Bank_Size): measures the capacity of parent-bank in human resources. To have "high quantity" of personnel constitutes a considerable asset. We calculated this variable by the effective total personnel. International experience (Inter_Exp): refers to the degree of the parent-bank's internationalism. This variable is calculated by the number of countries in which the parent bank has established offices. Physical Distance (Physical_Dist): is the distance between the home country and the foreign country where the bank is registered. Cultural Distance (Cultural_Dist): is a variable which is equal to 1 if the home country and the host country have the same official language and 0 if not. Host-Country Bank Entry Requirements (Rugulations): is an index that has values from 0 to 8, depending on the number of legal submissions required to obtain a license to operate as a bank in the host country. These requirements may include none, all or some of the following: (a) draft by laws, (b) proposed organizational chart, (c) first 3-year financial projections, (d) financial information on main potential shareholders, (e) background/experience of future directors, (f) background experience of future managers, (g) sources of funds to capitalize new bank and (h) intended differentiation of new bank from others. Restrictive entry regulations is likely to favour entry by acquisition and, hence, subsidiaries (see discussion above). This index is constructed using the data collected and methodology proposed by Barth et al. (2001). Corporate tax rate (Corp_Tax): refers to corporate tax rate in the host country. Home country banking sector development (Home_BSD): we considered the proportion of banks that each home country has in the top 50 of the largest banks of the world according to a classification of Bankers' almanac in 2006. Then we calculated the average number of banks in the top 50 per country. Home_BSD has a value of 1 if a given country has a number of banks higher than the average and 0 if not. Host country banking sector development (Host_BSD): this variable was measured by the relationship between bank deposits (USD) and the GDP (USD). Since a bank can be established in several countries, we calculated the average level of development of the countries where it is established. Host country risk (Count_Risk): is the host country risk. The OECD classifies countries on a scale of 0 (weak risk) to 7 (high risk). With data from this organization, we estimated country-risk as follows: on scale 7, the risk is considered to be very high and corresponds to a probability of realization is equal to 1%; on another scale, 3 for example, the probability of realization is equal to 42%; etc.

EMPIRICAL RESULTS AND DISCUSSION

Taking into account MNBs particular characteristics to better understand how they choose among many organizational forms available when going abroad....

Our results show that parent-bank business orientation affects negatively the bank decision to establish either a representative office or a branch, but it exerts a positive effect on the choice of a subsidiary as a form of representation abroad. As Cerutti et al. (2007) note, we find that MNBs with high capacity of intermediation are more encouraged to practice retail banking activities abroad by organizational forms like subsidiaries. It is important to note that the choice of the subsidiary relies considerably on the availability of an important network of potential customers in the host country. Among all of the four organizational forms of representation abroad, the subsidiary and the affiliate-bank are generally the two organizational forms that make it possible for MNBs to constitute quickly such a network. We find a negative relationship between the parent-bank business orientation variable and the decision to go abroad via branch form. This means that the branch form is adopted when competing on foreign financial markets where wholesale banking activities dominate.

When we measure bank size by the parent's total number of employees, we find that the size affects positively the decision to go abroad by establishing a branch. This result enables us to assert that MNBs which have sufficient human resources are ready to open branches abroad. In addition, our study permits us to conclude that international experience negatively affects the choice of representative office but exerts a positive impact on the choice of subsidiary and/or branch as organizational forms. According to the resource-based theory, the human capital of MNBs constitutes a source of competitive advantages. Therefore, any bank which plans to internationalize its activities must have qualified personnel able to be transferred to the host country to manage the new entity (subsidiary, branch). The need for transfers is especially inherent in the branch form and, to a certain extent, in the subsidiary company as well. Our results confirm the assertion of Merrett (2002; p. 391): "the expatriation of the human capital in the Australian banks stimulates the transfer of information and know-how".

The branch and the subsidiary as organizational forms of establishment abroad need appropriate international experience. This allows MNBs, through the subsidiary and the branch forms, to easily transfer knowledge via the competencies of the individuals transferred. Note that the role of the personnel transferred is to be the channel through which the parent bank transfers its expertise towards the host country. According to Huber (1991), the transfer of qualified managers constitutes an effective means for the subsidiary companies to increase their knowledge base as quickly as possible. It is abundantly clear, as mentioned by Tsang (2001), that when knowledge is tacitly transferred with the aim of changing the attitude of the recipients, it is essential that the transferred managers be present during the training process to act as anchors. The decision to go abroad through branch and subsidiary as organizational forms thus makes it possible for multinational corporations to transfer knowledge acquired in their home countries to overseas markets (Kogut and Zander, 1996). Indeed, we explained the preference of MNBs for these two organizational forms by the fact that they constitute a means of exploiting the rich knowledge-base from the personnel of their home countries and, similarly, to also acquire new knowledge from overseas markets, as Kogut and Zander (1992) asserted. In short, the establishment of a subsidiary company requires a transfer of knowledge and an important investment in human resources. Accordingly, the creation by BNP Paribas of a Development Centre of Competencies within its subsidiary bank of El Djazair in Algeria is a concrete example thus illustrating the positive relation which exists between the holdings of a subsidiary bank abroad and the capacity of the MNB (BNP Paribas) to provide its establishment abroad with qualified personnel. By opening this training centre, BNP Paribas transferred knowledge thereby making it possible "to develop the quality of human resources and to continue the improvement of such services for its customers" within this subsidiary bank created in 2002. The aforementioned experience and competency are necessary to develop the subsidiary and the branch forms in banking environments which are in the initial developmental stage, as is the case of the 25 host countries in our sample.

If experience with overseas markets constitutes an important factor, it should be noted that MNBs are also confronted with a problem of supervision related to the distance which separates their home countries from the host countries. We find that physical distance affects positively the choice of the branch but influences negatively the affiliated-bank and the subsidiary. The results, although in opposition of that which we predicted, are not very surprising because distance constitutes an obstacle to controlling the entity abroad. However, the necessity for control is undoubtedly more important in the subsidiary and the affiliated-bank then that in the branch. In the first two organizational forms, the parent-bank can be confronted with some problems of control because of the presence of other shareholders in the ownership structure of the foreign entity. The negative effects of -0.047 and -0.067 (respectively) are statistically significant at the 1% level on the choice of either the affiliated-bank and/or the subsidiary. This indicates that distance does not encourage MNBs to take participations in foreign banks. The distance creates, according to the agency theory (see Berger and DeYoung, 2001), an asymmetry of information between the subsidiary and the parent-bank since the interests of the subsidiary directors are often opposite to those of the persons in charge of the MNB's head office. Indeed, the persons in charge of the subsidiary could pursue personal secondary goals which are not in the interests of the subsidiary itself (Mishra and Gobeli, 1998). This arises from the fact that head office may be unable to control the opportunistic behaviours of the subsidiary directors without the higher costs such a control would entail.

Our results also indicate that physical distance exerts a positive effect of 0.085, statistically significant at the 1% level, on the MNB's decision to go abroad through a branch. In such an organizational form of representation abroad, management is centralized, thus implying that problems of control are less acute than in the subsidiary. In the branch form, the parent-bank holds mainly all the decision-making powers and can easily impose its values and methods of management. The strategic decisions concerning the branch are made according to the objectives and the interests of head office (Meier and Schier, 2005). The parent-bank exerts a permanent control on the branch which has only a weak autonomy. Key positions in the branch are primarily held by the personnel of the parent-bank and local executives occupy only a few positions of lesser importance since the expatriation is made from parent-bank towards the branch in order to transfer values and knowledge. Hence, all the individuals working in the branch must be devoted the underlying principals of the parent-bank.

... Whithout omitting economic and financial factors which are also decisive when banks decide to establish themselves abroad.

Host country-risk affects positively the choice of both subsidiary and representative office while it affects negatively the choice of branch. The results show that country-risk has a negative effect of--0.549 on the choice of the branch and a positive effect of 0.326 and of 0.207 respectively on the choice of representative office and subsidiary. The negative influence of this variable on a parent-bank's decision to go abroad via a branch confirms the results found by Spremann et al. (2000). According to them, political instability does not encourage MNBs to establish themselves abroad through branch forms. Similarly, our results coincide with those of Di Antonio et al. (2002) who support that in politically and economically stable countries, Italian banks prefer branch and subsidiary as organizational forms of representation. In addition, the positive relationship between the host country-risk and the decision to go abroad through a subsidiary can be explained in the context of political and economical instability where investors must be prudent, hence MNBs prefer to join other institutions in order to establish themselves abroad. This leads in particular to the creation of subsidiaries abroad. Finally, parent-banks prefer to orient their international strategies towards more prudent arrangements as representative office and/or affiliate-bank because these forms allow the risks involved in foreign direct investment to be reduced.

The results show that the variable "home country banking sector development" has a negative effect of -0.142 and is statistically significant at the 1% level on the choice of the representative office also has a positive effect of 0.122 and is statistically significant at the 1% level on the choice of the branch form. According to Heinkel and Levi (1992), MNBs from home countries with well developed markets choose to establish in the United States by the means of the branch form. However, our results make it possible to conclude that the establishment of the representative office is not sensitive to the fact that the parent-bank comes from a country with a developed banking sector and conductive environment. This mode of representation abroad, which makes it possible to seek and develop opportunities in the host country, is especially chosen by the MNBs when their home countries maintain important commercial relations with the host countries. Similarly, we find that the variable "host country banking sector development" affects positively the choice of the branch form. That implies that in the 25 host countries having a developed banking environment, the foreign banks prefer to use the branch form to conduct their financial transactions. Our results confirm the conclusions of the study by Di Antonio et al (2002) that Italian banks are established in countries having such a developed banking environment by means of the branch form. Also, according to Miller and Parkhe (1998), the level of development of the host banking market (measured by the total of the bank deposits) has a positive effect on the choice of the subsidiary and the branch forms in developed countries. To a certain extent, our results go in the same direction as those of Miller and Parkhe (1998) since we find a positive and statistically significant relationship between variable "host country banking sector development" and the choice of the branch form. Indeed, in countries like Singapore or Malaysia, the branch is chosen because foreign banks wish to fully exploit all the business opportunities that these emergent markets offer with very promising economical outlooks.

The banking regulations in the host country have a positive impact of 0.181 and are statistically significant at the 1% level on the choice of the representative office. In addition, banking regulations have a negative impact on the establishment of branches by foreign banks in the 25 host countries. Restrictive regulations have a dissuasive effect on the choice of the branch, as our results corroborate those of Cerutti et al (2007). For example, in South Africa, the banking laws restricted the conditions under which foreign banks could operate as branch forms. Similarly, in Mexico, regulators cannot authorize the establishment of bank branches whose loan activities are undertaken only with residents outside of Mexico. Also, in Morocco, according to Bank Al-Maghrib (Central Bank of Morocco), when "the application emanates from a financial company having its seat abroad, either for the creation of a subsidiary company, or for the opening of a branch in Morocco, this request must be accompanied by the opinion of the authority of the home country entitled to deliver such an opinion". The Central Bank of Morocco also ensures that legislative measures and laws applicable to financial companies of the home country are unlikely to block the monitoring of the subsidiary or the branch under consideration in Morocco. Our study shows a positive and significant effect of the variable "regulations'" on the choice of the representative office. As a form of representation abroad, the representative office does not authorize or require the parent-bank to undertake traditional banking activities (loans and deposits). Its mission simply consists in facilitating the commercial transactions for the customers of the parent-bank.

Apart from regulatory constraints, MNBs must also contend with linguistic barriers. By integrating (inserting) a binary variable in our model, the objective is to highlight the effects of cultural similarities and differences on the choice of the organizational form of representation abroad. Indeed, the following question must be answered: does a French MNB like Societe Generale decide to establish itself through the same organizational form in the Ivory Coast as in in Malaysia? Our results indicate that when the home country and the host country share the same linguistic values, banking internationalism is done more often via the affiliate-bank and the subsidiary forms without necessarily passing by the establishment of a representative office. In fact, many countries which have the same official language are, in the majority of cases, bound by historical ties such as colonization, which can explain the sharing of cultural values thus being an additional factor in supporting the acquisition of a bank in a former colony (host country) by a bank from the colonizing country (home country). Our study confirms the results of Focarelli and Pozzolo (2005) that MNBs have a preference for the subsidiary form to the detriment of the branch form when they decide to establish in countries using the same working language. We find a negative and statistically significant effect for the variable "language" on the choice of representative office as others authors have asserted because the representative office, according to its core mission, is not essential if the home and host countries share the same linguistic values.

CONCLUSION

The phenomenon of banking internationalization held the attention of many researchers who proposed answers to relative questions regarding the operational decisions of multinational banks and sometimes tried to explain the rationale of the MNBs decision to go abroad through a type of organizational form. These studies concentrated on macroeconomic theories and analysis, with little interest in any micro-economic approach however complementary. Thus, in our paper, we recognized that other factors had to be taken into account when studying the choice of organizational forms preferred when embarking on foreign markets. The consideration of these factors leads us to resort to certain theoretical currents such as the agency theory, which is not used often enough to treat banking internationalization. A very important motivation for bank internationalization is undoubtedly the increase in market shares and improvements in performance. Indeed, a good positioning abroad necessarily passes by a better knowledge of the host countries through a particular type of organizational form.

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Hamadou Boubacar, University of Moncton

Table 1: Distribution of the organizational forms of
representation by geographical areas

Forms                          RO    AB    SU    BR    Total

  Africa                       38    10    25    30     103
  South and central America    90     7    63    67     227
  Eastern Europe               28     9    43    24     104
  Middle-East                  34     4     4    43      85
  South-East Asia              64    14    44   143     265
  Total                       254    44   179   307     784

RO = Representative office, AB = Affiliate-bank,
SU = Subsidiary and BR = Branch

Table 2: Distribution of the sample of MNBs by home country

Home country          Number of MNBs

1. Australia                       3
2. Austria                         1
3. Belgium                         3
4. Canada                          5
5. China                           3
6. France                          6
7. Germany                        10
8. India                           1
9. Ireland                         1
10. Italy                          4
11. Japan                          4
12. Netherlands                    3
13. South Korea                    2
14. Spain                          2
15. Sweden                         2
16. Switzerland                    2
17. United Kingdom                 4
18. United States                  7
Total                             63

Table 3: The determinants of a MNB decision to establish
in a foreign country

Independent variables                        Dependent variables

                                              RO            AB

Retail business orientation                 -0,041        -0,004
                                           (-1,86) *      (-0,4)

Parent-bank size                            -0,006         0,006
                                            (-0,33)       (0,67)

International experience                    -0,061         0,014
                                          (-2,28) **      (1,03)

Physical distance                            0,021        -0,047
                                            (0,88)      (-3,62) ***

Cultural distance                           -0,258         0,114
                                          (-3,53) ***   (2,94) ***

Host-country bank entry requirements         0,181         0,012
                                          (2,83) ***      (0,35)

Corporate tax                               -0,256        -0,023
                                            (-0,98)       (-0,15)

Home-country banking sector development     -0,142         0,087
                                          (-2,80) ***     (0,26)

Host-country banking sector development      0,025         0,037
                                            (0,36)        (0,64)

Host country risk                            0,326         0,014
                                          (3,67) ***      (0,39)

Constant                                     0,600         0,342
                                           (2,18) **     (2,33) **

Number of observations                        503           503

[R.sup.2]                                   53,72%        54,17%

Independent variables                        Dependent variables

                                              SU            BR

Retail business orientation                  0,055        -0,051
                                          (2,79) ***    (-2,41) ***

Parent-bank size                             0,024         0,028
                                            (0,38)       (1,56) *

International experience                     0,046         0,090
                                           (1,88) *     (3,45) ***

Physical distance                           -0,067         0,085
                                          (-3,04) ***   (3,63) ***

Cultural distance                            0,209         0,074
                                          (3,16) ***      (1,05)

Host-country bank entry requirements        -0,075        -0,166
                                            (-1,32)     (-2,69) ***

Corporate tax                               -0,019         0,178
                                            (-0,17)       (0,63)

Home-country banking sector development     -0,033         0,122
                                            (-0,72)     (2,49) ***

Host-country banking sector development     -0,041         0,002
                                            (-1,35)      (2,11) **

Host country risk                            0,207        -0,549
                                          (2,56) ***    (-6,4) ***

Constant                                     0,557        -0,668
                                           (2,22) **    (-2,50) ***

Number of observations                        503           503

[R.sup.2]                                   58,08%        55,60%

(.) Test de Student, *: Significant at 10% level of significance,
**: Significant at 5% level of significance,  ***: Significant
at 1% level of significance.