Internationalization strategies for financial
6.5 Macro level drivers of internationalization
At the macro-level, there is a series of developments in the business environment which make internationalization an increasingly attractive activity. The different forms that such internationalization can take are discussed in greater detail in the next section, where specific distinctions are drawn between global, international and transnational strategies.
Yip (1992) originally identified five drivers of globalization, namely market, cost, technology, government and competition. Lovelock and Yip (1996) subsequently explored the applicability of these factors in the service sector. The rest of this section explores the drivers for globalization in financial services, based on Yip’s framework.
Market drivers
This category refers to those features of the marketplace that encourage globalization.
The following are of particular significance are:
1. Common customer needs. In markets where customer needs are essentially the same across the world, globalization is thought to be an attractive strategy because a business can offer a relatively standardized product across a series of markets. In the global securities business the needs and expectation of investment houses are generally very similar across countries, and consequently the securi- ties houses that serve those customers are increasingly operating in a global market.
2. Global customers. If customers themselves operate globally, then again there is an incentive for the companies that supply them to operate on a similar scale. One of the important drivers in the internationalization of banking has been the inter- nationalization of the businesses that those banks serve. Equally, in the personal market, a company such as American Express needs to operate globally because the customers it serves are effectively global, not just in terms of where they live but also in the extent to which they travel.
3. Global distribution channels. If channels of distribution are themselves global, then it is much easier for companies that sell through those channels to operate globally. Although we tend to think of financial services as being characterized by relatively short distribution channels, it is important to remember that financial services are typically information-intensive and that developments in electronic distribution systems have, in some senses, created global distribution systems.
Networks such as Cirrus, for example, which allow customers to withdraw funds
from ATMs worldwide, provide a means by which banks can make some aspects of their service available to customers globally.
4. Transferable marketing. If marketing campaigns developed in one country are easily transferred to other countries, then global operations are much easier to implement. Marketing activities which are specific to a particular environment and not easily transferred increase the costs associated with operating overseas.
Indeed, many companies operating or looking to operate globally pay particular attention to ensuring that their campaigns are designed to be transferable. The HSBC brand-building exercise which demonstrates an understanding of cultural differences worldwide, supported by the claim to be ‘The World’s Local Bank’, is a case in point. Although the bank aims to localize its services to individual countries, it gains significant economies from a globally transferable marketing campaign and a global brand.
Cost drivers
Cost drivers are concerned with the extent to which expansion globally can enable a firm to reduce its costs. Most commonly, cost drivers are associated with economies of scale – the cost savings that are associated with expanding the scale of operations.
Such cost savings are often thought to be relatively unimportant in the service sector, including financial services. However, cost savings may arise in other ways, most obviously through access to lower-cost resources. In financial services the developments in IT have facilitated the separation of front- and back-office processing, and consequently one form of expansion overseas has been in the form of outsourcing business processes to lower-cost countries. This has more recently been augmented by the outsourcing of certain front-office functions, including outbound telemarketing and customer service. In the UK, a range of financial services providers (including Lloyds TSB, Barclays, Zurich Financial Services, Prudential and Capital One) have all outsourced a range of activities to India to benefit from lower costs in that market.
Technology drivers
Technology drivers are in many respects closely related to cost drivers – at least in a financial services context. Developments in information and communications technology have supported internationalization by facilitating global distribution and supporting outsourcing for a range of business processes.
Government drivers
Government drivers to globalization refer to any aspects of government or public policy that make it easy (or difficult) for foreign firms to operate in a domestic market. Most commonly, government drivers are the presence or absence of restric- tions on market entry, or the presence of regulatory systems which restrict what foreign entrants may do. Case study 6.1 outlines the consequences of China’s entry into the World Trade Organization for potential entrants to the banking and insurance sectors.
Competition drivers
Competition drivers relate to a range of factors associated with the nature and level of competition in different markets. A move into an international market might be prompted by the entry of a competitor into the home market. Equally, the entry of a competitor into a new market might create an incentive for a company to follow suit in order to maintain some degree of competitive parity.
6.5.1 The extent of internationalization in the financial services sector
Clearly, there are many examples of financial services providers operating interna- tionally and in many sectors of the industry, the macro-environment favours inter- national operations. In particular, financial services targeted towards large corporates lend themselves to international operations because of the similarity in customer needs and the fact that many customers themselves are global. In contrast, personal financial advice is more suited to domestic provision because needs do vary, distribution is essentially personal and regulations are very different.
Case study 6.1 China and the WTO
The World Trade Organization produced the following statement in response to the conclusions of negotiations on China’s accession.
Banking
Upon accession, foreign financial institutions will be permitted to provide services in China without client restrictions for foreign currency business. For local currency business, within two years of accession, foreign financial institu- tions will be permitted to provide services to Chinese enterprises. Within five years of accession, foreign financial institutions will be permitted to provide services to all Chinese clients.
Insurance
Foreign non-life insurers will be permitted to establish as a branch or as a joint venture with 51 per cent foreign ownership. Within two years of China’s accession, foreign non-life insurers will be permitted to establish as a wholly- owned subsidiary. Upon accession, foreign life insurers will be permitted 50 per cent foreign ownership in a joint venture with the partner of their choice.
For large-scale commercial risks, reinsurance and international marine, aviation and transport insurance and reinsurance, upon accession, joint ventures with foreign equity of no more than 50 per cent will be permitted; within three years of China’s accession, foreign equity share shall be increased to 51 per cent;
within five years of China’s accession, wholly foreign-owned subsidiaries will be permitted.
Source: WTO (2001).
In 1985 the European Commission published a White Paper, ‘Completing the Internal Market’, which proposed a series of measures to create a single internal market among the countries of the then European Community. This was codi- fied in the Single Europe Act of 1986, the first major amendment to the Treaty of Rome (which had initially established the European Union in 1957). This Act required that the measures outlined in the 1985 White Paper should be imple- mented by the end of 1992, and included provision for mutual recognition of national product standards and a range of other measures to eliminate barriers to trade within the Union. The Single European Market formally came into being in 1993, underpinned by the ‘four freedoms’ – free movement of goods, services, labour and capital.
In the case of financial services, the single European market aimed to eliminate restrictions on cross-border activity, thus encouraging greater competition, greater efficiency, lower prices and better service for customers. Given the high level of regulation in financial services and considerable differences in industry tradi- tion, the single market relied on the principle of mutual recognition – if a finan- cial services provider was licensed to operate in its home market, then it was effectively free to provide services to consumers throughout the European Union.
Although formal legal restrictions on cross-border activity in financial services have been largely removed as a consequence of the Single European Act, progress towards a genuine single market in retail financial services has been slow. Genuine cross-border trade in financial services failed to grow substan- tially, and most providers serving non-domestic markets did so by establishing a physical rather than an export presence, with that physical presence typically being via mergers and acquisition rather than greenfield developments. In prin- cipal, there is no reason why many retail financial services need to be provided locally; in practice, most are. Take the case of a mortgage; while it is technically possible for a resident of Germany to obtain a mortgage for a house in Germany from a Spanish bank, in practice many customers are nervous of non-domestic providers with no physical presence in the market. Equally, banks may be con- cerned about lending into a different legal environment where it may prove costly to recover the security (i.e. the house) in the event of default. Differences in tax treatment and consumer protection legislation between countries may also Retail banking is predominantly domestic, but there is a growing number of banks (e.g. HSBC, Citibank, Standard Chartered) offering their services in a range of mar- kets worldwide; some of the target market may be expatriate staff, but the rest will be domestic nationals and the service provided is usually broadly similar to that offered in other countries. Many insurers are following a similar strategy and estab- lishing networks of operations worldwide. Case study 6.2 outlines the experience of the European Union (EU) in trying to encourage greater international activity in financial services among member countries.
Case study 6.2 Internationalizing financial services in the European Union
As well as there being variety in the extent to which financial services providers operate globally, there are variations in the approaches that they adopt. The next section explores in some detail the different ways in which organizations may choose to operate in non-domestic markets.