Internationalization of Korean banks during crises: The network view of learning and commitment

International Business Review 23 (2014) 1040–1048

Contents lists available at ScienceDirect

International Business Review journal homepage: www.elsevier.com/locate/ibusrev

Internationalization of Korean banks during crises: The network view of learning and commitment Joong-Woo Lee a, Hong Sun Song b, Jooyoung Kwak c,* a

Department of Management, Inje University, Gimhae City, South Korea Fund and Pension Division, Korea Capital Market Institute, Seoul, South Korea c Yonsei School of Business, Yonsei University, Seoul, South Korea b

A R T I C L E I N F O

A B S T R A C T

Article history: Available online 6 July 2014

This study addresses the effect of crisis on bank internationalization from the perspective of network theory. Employing the internationalization process (IP) model, we particularly examine the role of learning and commitment in overseas expansion for banking services under stable and critical periods. Following the IP model and business network approach, the study develops a theoretical view for analysis of international banks from South Korea. South Korean banks are selected as they experienced two global crises, one in 1998 and the other in 2008. Findings show that while the first crisis in 1998 stopped internationalization, the 2008 crisis stimulated firms to find new markets, especially in developing countries. Different from the studies showing that commitment increases in stable periods and decreases in crisis, this study contributes to the finding that experiencing earlier crises enhances learning and increases commitment needed for expansion and strengthening of the business network. ß 2014 Elsevier Ltd. All rights reserved.

Keywords: Business network Crisis Internationalization of banks Internationalization process Korean banks Learning and commitment

1. Introduction Although service firms were relatively slow to globalize (Drogendijk & Hadjikhani, 2009), the recent growth of foreign investments in the service sector has been remarkable. Banks are one type of service firm actively going global. Establishing banks in foreign markets has often been regarded as a management strategy to increase flexibility during a crisis and is understood in the context of financial liberalization (Lee & Makhija, 2009). Others argue that internationalization is a strategic challenge for international financial service firms (IFSFs) (Grant & Venzin, 2009). There are several unique aspects to the process of internationalization of financial service firms. Unlike manufacturing firms that deal in physical and tangible goods, service firms rely on intangible and firm-specific resources tailored to the needs of individual customers. In addition, service firms are distinguished from manufacturing firms in that they integrate production and consumption simultaneously. In the process of internationalization, therefore, service firms prefer the wholly owned subsidiary entry mode, which offers a high level of control and allows IFSFs to replicate the entire value chain in host markets (Bouquet, Hebert, &

* Corresponding author. Tel.: +82 2 21236259; fax: +82 2 21238639. E-mail address: [email protected] (J. Kwak). http://dx.doi.org/10.1016/j.ibusrev.2014.06.009 0969-5931/ß 2014 Elsevier Ltd. All rights reserved.

Delios, 2004). These facts differentiate the foreign expansion of financial firms from that of manufacturing firms, making the former an interesting research topic in its own right (Engwall, 1992, 1994). Banking services are intangible, and transactions are tailored to each customer (Bouquet et al., 2004; Ford, 1990). Although many banking services now exist only online, the fundamental banking services—lending and borrowing—still require interaction between a bank and a customer. Further, banks always cooperate with domestic and international regulatory or non-regulatory units such as credit rating institutions. Although the banking industry is liberalized in many countries, many aspects of its activities are monitored and regulated by agencies. The ways in which various socio-political environments influence the conduct of business have long been a topic of scholarly attention (Keilor, Wilkinson, & Owens, 2005; Streeck, 1992). However, as Hadjikhani et al. (2008); Hadjikhani et al. (2008, 2013) point out, this topic has rarely been considered in the context of marketing or business networks. Furthermore, this line of research has done little to elucidate the behaviour of multinational enterprises (MNEs) in foreign markets. Given the background, the effects of changes in the international business environment regarding the internationalization of financial service firms constitute interesting issues (Hadjikhani, Hadjikhani, & Thilenius, 2014). The internationalization process (IP) model, mainly developed by Johanson and Vahlne (1977),

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048

explains internationalization as a function of learning and commitment, which are defined, respectively, as experiencedriven knowledge acquisition and as the consequence of the size of an investment and its degree of inflexibility (Forsgren, 2002; Johanson & Vahlne, 2009). Learning may be both general and specific. Commitment may decline or even cease depending upon performance and prospects. Studies employing the IP model have explained internationalization behaviour with the general assumption of ‘‘stable’’ market conditions (Bouquet et al., 2004; Eriksson, Johanson, Majkga˚rd, & Sharma, 1997). In contrast, relatively few studies have attempted to understand internationalization behaviour in unstable market conditions (Hadjikhani et al., 2014; Van Heerde, Helsen, & Dekimpe, 2007). Because a crisis substantially affects transaction costs, it may discourage internationalization, rendering a firm riskaverse. Alternatively, it may drive further internationalization in an effort to diversify risks. Thus, the relationship between crisis and internationalization is generally unclear, and it raises the following question for this study: What have been the roles of learning and commitment in the relationship between crisis and bank internationalization? Our study contributes to the understanding of the IP model, especially with regard to international expansion under turbulent conditions. There were two crises that changed Korean banks’ plans for internationalization: the Asian financial crisis in 1998 and the global financial crisis in 2008. In order to answer the question posed above, we approached the issue from a network perspective and conducted an aggregate analysis as well as firm-level case studies. This paper is structured as follows: in the next section, we provide an overview of the theoretical ideas underpinning our study. Then, we discuss our methodology, including the research setting, analytical approach, and data collection. We end with our findings and conclusions.

2. Relevant theories 2.1. The internationalization process model and international financial service firms The Uppsala internationalization process (IP) model is based on learning and commitment and the relation between them (Johanson & Vahlne, 1977, 2006). As seen in Fig. 1, the central question that this model addresses is how the learning and commitment of an internationalizing firm affect its overseas expansion, including sequential entry, establishment form, or functional management in the host market. The model is founded on the causal relation between learning (or knowledge), commitment, commitment building, and the current activities of foreign expansion (Forsgren, 2002).

Understanding of home government policies Understanding of local institutional constraints Networking with manufacturing firms Network Context

1041

The IP model assumes that foreign expansions are developed gradually as MNEs overcome uncertainties. The model also addresses uncertainties and risks, but it is concerned primarily with expansion strategies and path-dependence, usually as presented under stable market conditions (Blomstermo, Eriksson, & Sharma, 2002; Engwall & Johanson, 1990; Eriksson et al., 1997; Johanson & Vahlne, 1977). Attempts to overcome uncertainties in a turbulent environment or in a crisis have rarely been investigated, except by a handful of studies, such as those by Van Heerde et al. (2007) and Hadjikhani et al. (2014). Depending on the level of perceived risk from crisis management in bank services, the outcomes of the internationalization process appear to vary. In terms of timing, for instance, one can observe either the sequential establishment of overseas operations or concurrent establishment. MNEs acquire knowledge and if the knowledge acquisition is low, they postpone the next investment decision until knowledge accumulation is high enough to make the perceived risks low. If MNEs are not strongly committed to the host market, they would not run the risk of handling investment decisions simultaneously. Regarding the form of overseas businesses, transaction-cost economics explains that as firms have more knowledge (and thus face less uncertainty), MNEs are likely to choose greenfield investments over acquisitions. Making greenfield investments represents a stronger commitment to the host market, given that it becomes necessary for foreign entrants to justify more resource inputs. Compared to the timing and the form of overseas expansion, the issue of functional balance has received less attention. Functional balance is defined as a contribution to the host country relatively equal on the value chain. If MNEs have asymmetric learning or partial commitments, they will only develop in areas that they know or where they are committed. In fact, functional balance is often desired by the host government. Many developing countries are concerned with the possibility that MNEs exploit the large domestic market but do not effectively transfer knowledge to the host countries (Prahalad & Lieberthal, 2003). Lee, Abosag, and Kwak (2012) found that, in the case of the Chinese automobile industry, the Chinese government tended to favour foreign automobile manufacturers that not only procured local supplies, but also established R&D facilities. In the banking industry, given its sectorial characteristics, the functional balance may appear in the form of positions between lending and borrowing, between corporate and individual customers, or between host and home customers. Perceived risk is primarily a function of an MNE’s level of knowledge and commitment in a foreign market (Forsgren, 2002). The risk arises from unknown local regulations, unfamiliar local consumers, or disconnected local business actors, all of which constitute entry barriers for foreign firms. Specifically, the banking

Learning and

Development of Bank

Commitment

Establishments

● Local regulations

● Sequential entry

● Local consumers

● Establishment form

● Geographic locations

● Functional balance

The Internationalization Process Fig. 1. A conceptual model.

1042

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048

industry tends to impose high entry barriers. In his study of Swedish banks, Engwall (1992) found that the entry barriers designed to protect the domestic industry, motivated by defence and unemployment concerns, are reinforced not only by legal procedures but also by duties, standardization rules, and other non-tariff barriers. Therefore, the levels of learning and commitment are critical in determining whether a bank’s internationalization process follows the rule of incrementality. Given the entry barriers discussed in previous articles (Bergstro¨m, Engwall, & Wallerstedt, 1994; Engwall, 1994), learning and commitment are of particular importance in host countries, having a great bearing on relationships with local consumers, local business actors such as local banks, and local regulators (Engwall, 1992; Hadjikhani et al., 2008). Foreign banks are often limited in their ability to make relationships with geographical or client groups, because of the size of their operations, or their funding limits (on the supply side of the financial network). Occasionally, foreign banks face ‘‘all sorts of other barriers’’ when entering into a market dominated by local national banking networks (Engwall, 1992). Given this constraint, when MNEs and local consumers, local business actors, and local regulators are mutually committed to future business, this commitment can itself serve as a platform for learning. Furthermore, the interaction that comes with a commitment creates new knowledge. Learning and commitment help MNEs build trust and shared meaning in host countries, diminishing uncertainty, and improving the effectiveness of the initial and subsequent expansions (Johanson & Vahlne, 2006). Through this mechanism, MNEs overcome what other studies have labelled the ‘‘liability of foreignness’’ (Johanson & Vahlne, 2009; Zaheer, 1995). 2.2. Network view In contrast to the financial perspective implying that financial liberalization induces foreign direct investment in the banking sector (Thurbon, 2001; Yeyati & Micco, 2007), the IP model suggests that the internationalization proceeds in accordance with learning and commitment, in the relationships between MNEs and other firms. Extending this idea, the levels of learning and commitment may differ depending on changes in the international business environment, as illustrated in Fig. 1, such as home government policies, institutional constraints in host markets or the existing networks (Hadjikhani & Thilenius, 2005; Hadjikhani et al., 2008). According to Johanson and Mattsson (1988), differences in firms’ internationalization behaviours are related to the variances in the internationalization behaviours of other firms. In addition, the banking industry consists of banking networks, which include both central banks that connect depositors and borrowers and the relationships with other banks (Engwall & Johanson, 1990). Networking with other banks results in the exchange of financial resources and customers and, therefore, the generation of learning and commitment. For example, through continuous interaction with local business actors, some MNEs have introduced innovative products to local consumers (Akbar & McBride, 2004). Through the business network, MNEs obtain ‘‘insidership’’ and proceed with position building in a foreign market (Axelsson & Johanson, 1992; Johanson & Vahlne, 2009). To overcome the ‘‘liability of outsidership’’, foreign firms occasionally find help from firms in their home market networks that have connections in the host country (Johanson & Vahlne, 2009). When the liability of foreignness changes to the liability of outsidership for foreign firms, learning and commitment are important. While market-specific learning is usually highlighted for obtaining insidership, institutional knowledge helps firms

shorten the time to overcome the perceived cost of internationalization (Eriksson et al., 1997). This is particularly true in the banking industry, as banks are subject to government regulations. These regulations differentiate the levels and types of a bank’s resources and the knowledge necessary for internationalization. Understanding the governmental policies, accordingly, is essential for internationalization of IFSFs. When banks penetrate and expand into new foreign markets, they need to access resources that other firms have already built in the host market (Drogendijk & Hadjikhani, 2009). In this situation, adaptation to the local business environment is essential. Given that the banking industry is usually regulated by the government, it is critical to form relationships with not only the home government but also the host government, as banks settle into foreign markets (Hadjikhani et al., 2008). Absence of relationships with institutional business actors in the host country implies that foreign entrants have insufficient knowledge about the host country’s language, laws, and rules; this may constitute the liability of outsidership (Johanson & Vahlne, 2009). Recent research has examined pre-clustered entry, defined as entry into an integrated network followed by clustering among the core firm and the customer firms (Hatani, 2009). Pre-clustered entry is most common in Japanese and Korean business groups but is also popular among industries that do not compete directly (Hatani, 2009; Nohria & Ghoshal, 1997). The pre-clustered firms tend to help each other with resource sharing for a substantial part of their sales revenue. As a way to relocate an existing network, pre-clustered entry has the advantage of overcoming the liability of outsidership, especially when learning by doing is costly, when rapid internationalization is necessary (Delios & Henisz, 2000), or when high entry barriers exist for new foreign entrants (Lee & He, 2009). The IP model posits that learning and commitment are built gradually and that uncertainties are overcome with time. Extending this logic, if a bank has experience with foreign market entry, it is surely aware of the need to engage in relationship building in foreign markets and it is better at it than banks without any prior experience. Because learning is experiential and commitment addresses specific relationships, learning and commitment in bank internationalization are affected by, or begin with, an understanding of institutional networks and often involve the assistance of firms in an existing network. Overall, in Fig. 1, the above theoretical discussion is conceptualized into a model that specifies how the network context influences learning and commitment, thus determining the development of bank establishments. We posit that better understanding of home government policies, host government institutions, and existing networks particularly with the main client group will increase learning and thereby commitment, leading to active development in bank establishments. This model is fundamentally different from the argument that financial liberalization drives bank internationalization. In this model, learning and commitment bridge between the current position of banks and their foreign entries. 3. Methodology 3.1. Research setting This study aims to understand internationalization of banks in stable and critical periods. Considering the goal of our research, we necessarily adopted a research design appropriate for both exploratory and qualitative study, as we are trying to answer ‘‘how’’ and ‘‘why’’ questions (Ghauri & Grønhaug, 2010). The exploratory and qualitative approach obtains ‘‘thick’’, in-depth insights, which are particularly desirable for dynamically oriented studies (Yin, 2003).

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048

Our empirical study concerns the internationalization of banks in South Korea from 1997 to 2010. This setting offers an interesting context to examine how changes in the international business environment affect learning and commitment in the banks’ internationalization process. The banking industry in Korea experienced two external shocks, the Asian financial crisis in 1998 and the global financial crisis in 2008. During both the shocks, the Korean economy experienced turbulence and a severe recession. Interestingly, these shocks provided the stimulus for financial liberalization and, more importantly, bank internationalization. More specifically, the internationalization of Korean banks can be categorized into four periods before and after the crises: (1) pre1990 (up to 1989), (2) the 1990s until the Asian financial crisis in 1998 (1990–1997), (3) from the Asian financial crisis in 1998 until the global financial crisis in 2008 (1998–2007), and (4) after the global financial crisis (since 2008). 3.2. Data Given the fact that the banking industry in Korea has been oligopolistic, it is possible to identify the banks that pursued outward FDI. Before 1998, there were approximately 10 major national commercial banks in Korea. After 1998, only six remained. There were several regional commercial banks, but these could not afford internationalization. We therefore excluded regional banks from our research. The banking industry in Korea is structured as a set of banks with one central bank, one export–import bank, and six major commercial banks. The six major commercial Korean banks are as follows: the Korea Development Bank (KDB), Hana Bank (HNB), the Industrial Bank of Korea (IBK), Shinhan Bank (SHB), Woori Bank (WRB), and the Korean Exchange Bank (KEB). A careful examination of the characteristics of the banks does not reveal any significant outliers in the data on internationalization. The Korean banks have grown through mergers and provide a similar portfolio of financial products. The banks, except KDB, are the top five firms in terms of market shares estimated by the size of loans. To understand the big picture, we first conduct an aggregate analysis. However the more important question is how Korean banks acquired knowledge and built commitments. Considering this purpose, the case study method was chosen for the second part of our findings as it will enable us to understand the dynamic process of networking and internationalization in a complex setting (Ghauri & Grønhaug, 2010). For the aggregate analysis and case study, we use both archival data and interview data. Archival data include the banks’ websites or online sources related to investor relations as well as the banks’ internal reports. We also contacted the six major banks, and four agreed to meet with us. We asked the bank headquarters to arrange a meeting with the overseas subsidiaries at their ‘‘strategically important’’ locations. Overall, 26 interviews were conducted, including six in Beijing, three in Shenyang, three in Ho Chi Min City, two in Hong Kong, and 12 with the international operations division at their headquarters. The following table presents a summary of our interviews. Table 1. Table 1 Interview information. Interviewed bank

Business locations (Number of interviewees)

Woori Bank Hana Bank

Beijing (5) and Seoul (3) Beijing (1), Shenyang (3), and Seoul (3) Ho Chi Min (3) and Seoul (3) Hong Kong (2) and Seoul (3)

Shinhan Bank Korea Exchange Bank

1043

For the overseas interviews conducted from February to September 2012, we identified and interviewed subsidiary heads and managing directors who led the entire process of internationalization, including the initial and subsequent entries. They were responsible for strategic planning, negotiations with host governments, and local marketing. Interviews were administered in a semi-structured format and were conditional upon data confidentiality and non-disclosure of the respondents’ identities. All respondents worked for the subject firms before 1995, and all worked in the banking industry before and after the time covered by this study. They worked within the firm for more than 15 years on average and thus have extensive personal experience in business networking at the firm level. During our interviews, four Korean banks responded that China was ‘‘the most strategically important location’’ and that Beijing served as a platform for sequential entries in China, a role formerly filled by Hong Kong. Therefore, we included Beijing and Hong Kong in our cases, which represent a developing country and a global financial city. Interview data were cross-checked with peer banks; this was possible because, as all interviewed banks entered the Chinese market through Beijing and Hong Kong, their headquarters had knowledge about the two locations. All interviewers wrote a daily interpretive analysis based on their interview notes. After the interviews, interviewers met and compared what was written and analysed. Necessary information was sorted out upon the agreement of all interviewers and any unclear data were identified. Such data were clarified or further information was obtained the next day by phone or by additional interviews. We also interviewed in Ho Chi Min City and Shenyang for the case studies but could not cross-refer data at these locations. Nevertheless, the findings from Ho Chi Min City and Shenyang were consistent with the Beijing and Hong Kong case studies, in the sense that bank establishment was affected by learning and commitment, and networks played a significant role in enhancing learning and commitment. 4. Findings 4.1. An aggregate analysis of internationalization of Korean banks As stated earlier, the two critical periods for the Korean banks are the 1998 Asian financial crisis and the 2008 global financial crisis. While internationalization continued as Korean banks grew, the 1998 Asian financial crisis damaged the banking system in Korea. As seen in Tables 2a and 2b, all six banks in our study went through corporate restructuring; consequently, many offices and branches were shut down. During the crisis and the following years, the Korean government did not want domestic banks to go abroad for fear of worsening the shortage of foreign reserves. In fact, excluding the entry of KEB into Hanoi (Vietnam) in 1999, which had already been underway before the crisis, no Korean bank went abroad during 1999–2000. Overseas expansion resumed in 2000, when the global economy bounced back due to the booming information and telecommunication (IT) industry. Starting with the entry of HNB into Singapore in 2000, internationalization by Korean banks resumed. Because the hard line of the Korean government, although mitigated, did not change drastically, foreign entries were based mainly on bottom-up initiatives within the banks. During 1999–2007, a total of 19 entries were executed. What is most notable during this period is that Korean banks began to enter developing countries. Except for Beijing and Shanghai, most locations were manufacturing-oriented locations in which Korean manufacturing firms had been operating. This implies that the Korean banks were in step with Korean manufacturing firms, which had sought markets in developing countries.

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048

1044

Table 2a Event information: international expansion by selected Korean banks (Commercial oriented banking). Location Sydney New York Los Angeles London Singapore Tokyo Hong Kong Paris Toronto Moscow Amsterdam Shanghai Frankfurt Beijing Seattle Osaka Fukuoka

KDB

HNB

IBK

SHB

WRB

B (1997)

B (1979)

B (1990)

B (1997) B (1997) B (1991) S (1986); O (1986)

B (2000) B (1983) B (1994)

B (1989); S (1990) S (2006) B (1991) B (1990) B (1988); O (1988) B (2006); S (1982)

B B B B B B

B (2006) B (1991) B (1993)

KEB S (1986) S (2004) S (2004) B (1968) B (1973) B (1967) B (1967) B (1974) B, S (1981) O (2008) B (1979) B (2003) S (1992) B (1996) O B (1967)

(1976); S (1984) (1978) (1980) (1980) (1968) (1980); S (2006)

B; S (2009) O (2008) B (1996) O (1979) B (2008)

S (2008) B, O (2008) S (1994) B; S (2008)

S (2007)

B (1995) S (2007)

B (1986) B (1997)

Note: O denotes overseas office, B denotes overseas branch, and S denotes overseas subsidiary

During the early phase of the global financial crisis in 2008, the Korean government again regulated and deterred domestic banks from internationalization. Yet the policy stance within the government differed substantially from what it had been 10 years earlier. The attempt at deterrence was transitory, and the Korean government’s attitude was rather supportive and encouraging of internationalization. Most Korean banks, however, did not have sufficient knowledge of institutions in foreign countries and thus

entered where Korean manufacturing firms were already established. Using the long-term business relationship with Korean manufacturing firms, Korean banks came to understand local institutional constraints in targeted host markets. Local institutions’ policy stances differed between developed countries and developing countries. Although the movement for financial liberalization prevailed in developed countries even after the crisis in 2008, the U.S. and EU viewed negatively the acquisition

Table 2b Event information: international expansion by selected Korean banks (Commercial oriented banking). Location Gaesung Guangzhou Qingdao Tianjin Shenyang Yantai Suzhou Wuxi Dalian Ho Chi Minh Hanoi Manila Jakarta Bahrain Dubai Mumbai New Delhi Kuala Lumpur Dacca Phnom Penh Toshkent Atlanta Mississauga Vancouver Toronto Thorn Hill Burnaby Coquitlam Calgary Mexico City Panama Santiago Sao Paulo Dublin Budapest Almaty

KDB

HNB

IBK

SHB

WRB

KEB

B (2004) B (2005) B (2003) S (2009); B (1997) B (2005) B (2006) B (2007)

O (2006)

B (2008) B (2008)

B (1993); S (2011)

B (2008) O (2007)

B (2008) O (2009)

B (1995); S (2000)

S (2007)

B (2006) B (1997) S (1992) B (1983) O (2009)

O (2008)

B (1995) O (2002) B (1999) B (1995) S (1990) B (1977) O (2003)

B (1996) O (2008)

S (2006)

O (2007) O (2009) B (1996)

O (2008)

S (2007) O (2009) O B (1991) B (1983) B (1970) B (2002) B (1997) B (2002) B (2008)

B (2010)

O (2008)

S (2006) S (1997) S (2002; 2009)

Source: Information available via investor relations, provided by each bank. Note: O denotes overseas office, B denotes overseas branch, and S denotes overseas subsidiary

O (2009)

S (2008)

O; B (1980) O (2008) S (1998)

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048

of U.S. or European banks by banks from developing countries. It has been difficult for Korean banks to pass the criteria of large shareholder eligibility as set by U.S. or EU institutions. The barrier to Korean banks has remained high up to the present, and entry into developed countries is not easy. In contrast, entry into markets in developing countries was facilitated. One of the attractive locations among developing countries was China. Korean manufacturing FDI in China continued to increase, and the size of the banking sector in China is huge, as evidenced by the fact that China owns the largest commercial bank in the world, the China Construction Bank. There were active efforts to establish banks in China, given that Korean banks have a better understanding of the local institutional constraints due to Korea’s geographic proximity and the Korean manufacturing FDI plus market potentiality. Expansion into other developing countries, including Southeast Asian nations, was desired for the same reasons. The customers of Korean banks have been mainly Korean firms that went abroad. Accordingly, customer relations and the geographic locations selected by Korean banks were closely inter-related. Before 1989, only a few Korean manufacturing firms made overseas investments. The presence of these Korean manufacturing firms in global markets was quite limited, with examples being limited to export posts or distribution offices. However, as Korean FDI became more popular, particularly in developing countries, and after the Asian financial crisis, banks also became motivated to internationalize. Entry locations also differed depending on the time period. Table 3 suggests that before the Asian financial crisis, Korean banks expanded mainly in developed countries. Banks became more interested in expansion into developing countries after the crisis, as they entered 32 nonOECD countries after 1997 (12 during 1997–2007 and 20 since 2008), which is almost four times more than that of pre-1998 entries. To recap, there were two external crises in Korea, one in 1997– 1998 and the other in 2008 (see Fig. 2). The first crisis discouraged bank internationalization by all Korean banks. Because Korean banks learned from this crisis, however, the second crisis had unequal effects on banks’ internationalization. The timing of the resumption of internationalization differed among the banks depending on their levels of restructuring and the ownership changes that each bank had to implement in the aftermath of the crisis in 1998. Once overseas, however, the level of ‘‘being active in internationalization’’ depended upon local learning and commitment. Those who were active in foreign markets carried out sequential entries, established wholly owned subsidiaries, and expanded local customer bases. They also tried to maintain good relationships with manufacturing firms, jointly exploring new markets in developing countries. We examine this activity in the following case studies. 4.2. Case study 1: internationalization by Woori Bank into China The Asian financial crisis in 1998 significantly affected Woori Bank (WRB) in several ways. WRB underwent organizational Table 3 Internationalization by WRB (Woori Bank).

Urban locations Manufacturing locations In OECD countries In non-OECD countries

Before 1989

1990–1996

1997–2007

Since 2008

7 1

1 2

2 4

1 3

5 3

0 3

0 6

0 4

Source: Internal report provided by Woori Bank.

1045

Number of subsidiaries 300 259

250

Retreat

200

Re-Expansion

150

134

Growth

100

95

50 0

43 8

103

108

113

128

128

134

139

65

15

1970 1975 1980 1985 1990 1997 1998 2002 2004 2006 2008 2010 2012 2013

Fig. 2. Stages of bank internationalization in Korea. Note: Asian financial crisis in 1998 and global financial crisis in 2008.

restructuring with a succession of new CEOs. As a result, its internationalization initiative lost consistency. Yet, as a domestic economic recession followed the crisis, the most important lesson for WRB was the awareness that the financial service market in Korea is very small, saturated, and vulnerable to external shocks; these conditions warranted urgent internationalization. The financial crisis in 2008, in contrast, provided momentum for accelerating internationalization (see Table 3). The internal push for internationalization became stronger. Pressure also came from international investors, who asked banks to explore new markets because the Korean banking market was nearly saturated. More importantly, they feared the possibility that the Korean economy would again enter a recession. In order to integrate with emerging markets of high growth and with good market prospects, WRB focused on entries into non-OECD countries. For these reasons, WRB looked to China for market potential. Before December 11, 2006, foreign retail banks were not allowed in China. WRB entered China and established a wholly owned subsidiary on November 12, 2007, the earliest entrant among Korean banks. From its initial entry in Beijing in late 2007 until September 2011, WRB opened 15 additional offices over less than 4 years (see Table 4). While WRB in China continued to expand into locations known for manufacturing, such as Dalian, Jiangjiahang, and Tianjin, it also increased its presence in urban consumption areas. After establishing a wholly-owned subsidiary, it increased seven branches and seven offices to cover as many service areas as possible. While Korean banks tended to be active in foreign expansion as a response to the unstable Korean macro-economic environment, WRB showed more impressive performance. A manager at WRB in Beijing stated:

Table 4 Learning and commitment building: WRB in China regarding consumer learning and regulation learning. Time

Job description

November12, 2007 January 28, 2008 March 20, 2008 May 27, 2009 July7, 2009 December 7, 2009 March 23, 2010

Initial entry into China Start of online banking Approval of local retail banking Start of debit card business Introduction of corporate loans Introduction of private mortgage loans Start of international settlement system for Renminbi Approval of financial derivatives business M.O.U. with China Export Insurance Company Start of forward exchange business Start of overseas advance payments

April 27, 2010 May 6, 2010 September 19, 2011 November 16, 2011

Source: Internal report provided by Woori Bank.

1046

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048

While many banks maintain good relationships with the government, our bank had a change in the CEO position. Therefore, we had to institute a system of learning in the host market in order not to be affected by the change of the top management team. Another way to settle down in a turbulent environment is to befriend the host government by showing a strong commitment. It was also fortunate for us that all CEOs were aware of the need to explore new foreign markets, especially in developing countries. The efforts of WRB to generate knowledge and commit resources are demonstrated by the extent of its active sequential entries in China. Table 4 illustrates how WRB in China acquired learning and gradually built up its commitments. The first service introduced by WRB to Chinese customers was online banking in 2008, which is very popular in Korea. However, Chinese customers were not as interested owing to their deep-rooted practice of cash transactions. This was WRB’s first lesson, and after that it began to study its Chinese customers. The second attempt was the introduction of a debit card in 2009 that can be used in Korea, targeting the increasing number of Chinese visitors to Korea. This turned out to be highly successful. In the same year, WRB also introduced private mortgage loans in China, aware that younger people there wanted to purchase homes (owing to the real estate bubble) but lacked the cash to do so. These private mortgage loans were welcomed by urban salaried residents. At the same time, WRB in China continued learning about local regulations (see Table 4). The introduction of the debit card was not possible without an alliance with Union Pay, which is China’s government-sponsored electronic transaction system, like the Visa network. More importantly, learning about local regulations enabled WRB in China to expand its business network to include Chinese corporate customers. WRB said that the debit card success raised bank visibility among customers and convinced WRB of the importance of local learning and commitment. Subsequently, WRB in China began to provide financial loans and introduced financial derivatives to corporate customers. The recent moves by WRB in China obviously indicate that the bank began to attract Chinese firms as major customers, possibly representing a shift in focus from serving Korean firms to serving Chinese ones. Thus, it has become more integrated with local Chinese institutions. Major performance indicators also show learning and commitment building by WRB in China. Fig. 3 shows that the number of Chinese customers, including both private and corporate customers, continued to increase while the other customers, mainly Korean firms, also increased. In addition, the deposit amounts from Chinese customers also increased. The performance level achieved is particularly remarkable, as most local Chinese banks offer interest rates on savings which are higher than the fixed rate specified by the central bank of China, and the interest rate offered

by WRB in China follows the fixed rate. The evidence indicates that WRB in China has become more active in its customer relations. 4.3. Case study 2: internationalization by the Korea Exchange Bank into Hong Kong When Korean Exchange Bank (KEB) established a branch in Hong Kong in 1967, the main customers were Korean expatriates who wired money to or received money from Korea. Before the Asian financial crisis in 1998, Korean firms established local posts in Hong Kong to coordinate trade in Asia. By 1998, as Korean firms entered Hong Kong, KEB also increased, though modestly, the numbers of individual customers (expatriates) and corporate customers. It also served as a financial bridge between the Korean manufacturing subsidiaries in Hong Kong and their headquarters in Korea. Due to restrictions and the heavy regulation of foreign expansion in the mainland’s banking sector and a better understanding of institutions in the financial system in Hong Kong, Korean FDI in China relied on Korean banks in Hong Kong for an overseas base. However, the Asian financial crisis shut down the local offices in Hong Kong, as corporate restructuring in Korea proceeded. In addition, as a major part of Korean FDI, Hong Kong’s manufacturing sector relocated to mainland China and KEB in Hong Kong shrank accordingly. As the global economy bounced back, KEB in Hong Kong managed to stabilize its business. Nevertheless, because a majority of Korean manufacturers were heading to developing countries rather than Hong Kong, KEB in Hong Kong could not aggressively increase the number of branches or offices. Its role as an overseas financial centre was being replaced by bank subsidiaries in Beijing. A KEB manager who worked in the Hong Kong office stated the following: The first shock was that we gradually lost our customers, as the Korean manufacturing firms began to relocate to China or Vietnam. Then the next shock came suddenly as both Hong Kong and Seoul were battered during the Asian financial crisis. The Hong Kong office could not serve any longer as a profit centre. After the crisis, Hong Kong recovered and re-emerged as a hub for the finance industry in Asia. When we accordingly re-opened the office, two choices were clear to us. First, given that our old customers (Korean manufacturing firms) left, we should find a new business model, for example, investment banking. Second, we should stick to the existing role but locate to a new network. The banking industry in Hong Kong was dominated by the Hong Kong Shanghai Bank Corporation (HSBC) and the Bank of China. KEB had to find a new niche based on its local learning and commitment. Therefore, KEB in Hong Kong became networked with Korean

Fig. 3. Customer learning and commitment: number of customers and changes of deposits for WRB in China. Source: Internal report provided by Woori Bank.

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048

manufacturers moving into Southeast Asian countries. Due to its experience with local regulations and geographic location, KEB in Hong Kong offered services and related advice to manufacturers newly entering Southeast Asia. As a result, as Table 5 shows, its market share in terms of the net profits is four times higher than the deposit share. It means that KEB in Hong Kong makes profits from services other than deposit-related works. Another example of learning and commitment after the Asian financial crisis was that KEB in Hong Kong expanded to serve local Hong Kong and non-Korean multinational enterprises in Hong Kong. That was an innovative attempt given the duopolistic structure of the banking sector in Hong Kong. KEB in Hong Kong accumulated knowledge about local customers despite the limitation in geographic expansion. As KEB in Hong Kong gathered more knowledge about local regulations and local consumers, the business evolved from financial intermediation to investment banking. KEB began to specialize and established an investment banking subsidiary. It was KEB’s second entry into Hong Kong. Given that KEB in Hong Kong had to compete with global IFSFs, the expansion was gradual and less remarkable than KEB investments in developing countries. However, when the global financial crisis occurred in 2008, KEB in Hong Kong was experienced enough to survive the crisis and, indeed, accelerated its global networking. The 2008 crisis called for a spreading of risk due to the vulnerable domestic economy and market saturation in Korea, and KEB therefore tried to transform the Hong Kong branch into the hub for its Southeast Asian banking networks. At the same time, KEB in Hong Kong built a reputation as a knowledgeable commercial-oriented bank even among foreign banks. KEB managers in Hong Kong explained the reasons as follows: After experiencing two financial crises, we thought seriously about our competitiveness and our appeal in Hong Kong. In Hong Kong, everybody is so busy. Based on our experience and learning in Hong Kong, speed seems to be a strong competitive factor for KEB. We therefore developed our management system in Hong Kong to maximize transactional efficiency. In recognition of the fact that corporate customers in Southeast Asia need efficient communications with, and active feedback from, the headquarters in Korea, KEB established a finance centre in Hong Kong. Previously, remittance in dollars was processed after the banks opened in the U.S. and took at least one day. The KEB finance centre in Hong Kong, however, enabled real-time transactions with remittance, payment, and trade finance. Because the commitment required more support from skilled employees, KEB in Hong Kong has the largest expert pool of employees among the Korean banks in Hong Kong. The high speed international transactions and the introduction of various services related to trade finance made KEB in Hong Kong a specialist in trade finance, and it gained profits from financial charges and commissions amounting to 42.5% of its operating income in 2011. Service profits account for 9.9 million USD for KEB in Hong Kong which is a much better performance than its Korean rivals. The employment rate of local staff amounted almost to 80%, implying a high level of KEB’s learning and commitment. Table 5 Commitment and subsidiary operation by Korean banks in Hong Kong. Employment (people)

KEB HNB WRB SHB

Korean

Local

Total

8 4 4 6

31 11 17 8

39 15 21 14

Source: Authors’ interviews. Note: Service profits are measured in million USD.

Service Profits

% of Total Subsidiary Profits

9.9 1.1 2.9 1.5

42.5 8.0 22.5 19.0

1047

5. Concluding remarks While there is a large volume of research on the internationalization of manufacturing firms, financial service firms are less represented in the internationalization literature. Research on this topic is urgent because of the growing presence of international financial service firms and their vulnerability towards international financial crises. As financial liberalization globally connects the banks, their internationalization is heavily affected by crisis. Yet, theoretically, it is not well understood how a crisis affects bank internationalization. A crisis naturally increases uncertainty and regulation, deterring bank internationalization. Alternatively, it may encourage banks to seek other markets for risk diversification. To understand the internationalization of banks during changes in the global business environment, we used the internationalization process (IP) model. The IP model illustrates that the internationalization of a firm is determined by uncertainties, which depend on the levels of learning and commitment. In this effort, we examined the internationalization behaviour of Korean banks with a particular focus on the Asian financial crisis in 1998 and the global financial crisis in 2008. We proposed that the network context, which is based on an understanding of the home government and the host government policies, has a bearing on the learning and commitment of entrants in terms of local regulations, local consumers, and geographic locations. This leads to differences in terms of sequential entry, the form of establishment, and the functional balance of banks. To recap our findings, the first crisis in 1998 discouraged Korean banks from overseas expansion. However, from that experience, Korean banks learned to manage crisis situations to the extent that internationalization was even promoted when the second crisis occurred in 2008. During and after the second crisis, internationalization among banks varied depending on their learning and commitment in terms of local regulations, local consumers, and geographic locations; learning and commitment, meanwhile, were affected by their relationships with home-market policies, hostmarket policies, and manufacturers. The IP model suggests that foreign market entry is a positionbuilding process in a foreign market network (Johanson & Vahlne, 2009). As the IP model predicts, foreign expansion was affected by the learning and commitment to build a foreign market network. The earliest crisis may discourage internationalization, as firms react to the shock, but we have found that firms also learn from the crisis. As a result, they increased development of foreign establishment in the subsequent crises. The Korean experience suggests that the impact of crises on bank internationalization should be examined in a specific network context, apart from financial risks. The general relationship between the network context and the internationalization process is not hurt by the crisis and, further, the crisis provides a momentum to strengthen the current network or to explore new networks. A crisis justifies re-shaping in the business network and, if the crisis repeats, local learning and commitment strengthen as they help banks spread the risks. Our paper argues that, by pushing to strengthen business networks, a crisis may provide an opportunity for a foreign company to transform from an outsider to an insider. References Akbar, Y. H., & McBride, J. B. (2004). Multinational enterprise strategy, foreign direct investment and economic development: The case of the Hungarian banking industry. Journal of World Business, 39(1), 89–105. Axelsson, B., & Johanson, J. (1992). Foreign market entry: The textbook vs. the network view. In B. Axelsson & G. Easton (Eds.), Industrial networks: A new view of reality (pp. 218–231). London: Routledge. Bergstro¨m, R., Engwall, L., & Wallerstedt, E. (1994). Organizational foundations and closures in a regulated environment: Swedish commercial banks 1831–1990. Scandinavian Journal of Management, 10(1), 29–48.

1048

J.-W. Lee et al. / International Business Review 23 (2014) 1040–1048

Blomstermo, A., Eriksson, K., & Sharma, D. (2002). Knowledge and time: A forgotten factor in the internationalisation process of firms. In V. Havila, M. Forsgren, & H. Ha˚kansson (Eds.), Critical perspectives on internationalization (pp. 263–284). Oxford: Pergamon. Bouquet, C., Hebert, L., & Delios, A. (2004). Foreign expansion in service industries: Separability and human capital intensity,. Journal of Business Research, 57(1), 35–46. Delios, A., & Henisz, W. (2000). Japanese firms’ investment strategies in emerging markets. Academy of Management Journal, 43(3), 305–323. Drogendijk, R., & Hadjikhani, A. (2009). Internationalization of service companies. In S. Andersson & G. Svensson (Eds.), Global marketing: Think globally and act locally (pp. 189–216). Lund: Studentlitteratur. Engwall, L., & Johanson, J. (1990). Banks in industrial networks. Scandinavian Journal of Management, 6(3), 231–244. Engwall, L. (1992). Barriers in international banking networks. In M. Forsgren & J. Johanson (Eds.), Managing networks in international business (pp. 167–177). New York: Gordon & Breach. Engwall, L. (1994). Bridge, poker and banking. In D. E. Fair & R. J. Raymond (Eds.), The competitiveness of financial institutions and centres in Europe (pp. 227–239). Amsterdam: Kluwer. Eriksson, K., Johanson, J., Majkga˚rd, A., & Sharma, D. D. (1997). Experiential knowledge and cost in the internationalization process,. Journal of International Business Studies, 28(2), 337–360. Ford, D. (Ed.). (1990). Understanding business markets: Interaction, relationships and networks. London: Academic Press. Forsgren, M. (2002). The concept of learning in the Uppsala internationalization process model: A critical review. International Business Review, 11(3), 257–277. Ghauri, P. N., & Grønhaug, K. (2010). Research methods in business. New York: Prentice Hall. Grant, R. M., & Venzin, M. (2009). Strategic and organisational challenges of internationalization in financial services. Long Range Planning, 42(5–6), 561–587. Hadjikhani, A., Lee, J.-W., & Ghauri, P. N. (2008). Network view of MNCs’ socio-political behavior. Journal of Business Research, 61(9), 912–924. Hadjikhani, A., Hadjikhani, A. I., & Thilenius, P. (2013). Internationalisation process in turbulent and stable markets: Do firms know that they do not know? Journal for Global Business Advancement, 6(3), 182–201. Hadjikhani, A., Hadjikhani, A. I., & Thilenius, P. (2014). The internationalization process model: A proposed view of firms’ regular incremental and irregular non-incremental behavior. International Business Review, 23(1), 155–168. Hadjikhani, A., & Thilenius, P. (2005). The impact of horizontal and vertical connections on relationships’ commitment and trust. Journal of Business and Industry Marketing, 29(3), 136–147.

Hatani, F. (2009). Pre-clusterization in emerging markets: The Toyota Group’s entry process in China. Asia Pacific Business Review, 15(3), 369–387. Johanson, J., & Vahlne, J. E. (1977). Internationalization process of firm: Model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1), 23–32. Johanson, J., & Vahlne, J. E. (2006). Commitment and opportunity development in the internationalization process: A note on the Uppsala internationalization process model. Management International Review, 46(2), 165–178. Johanson, J., & Vahlne, J. E. (2009). The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies, 40(9), 1411–1431. Johanson, J., & Mattsson, L.-G. (1988). Internationalization in industrial systems: A network approach. In N. Hood J.-E. Vahlne (Eds.), Strategies in global competition (pp. 287–314). New York: Croom Helm. Keilor, B. D., Wilkinson, T. J., & Owens, D. (2005). Threats to international operations: Dealing with potential risk at the firm level. Journal of Business Research, 58(5), 629–635. Lee, J.-W., Abosag, I., & Kwak, J. (2012). The role of networking and commitment in foreign market entry process: Multinational corporations in the Chinese automobile industry. International Business Review, 21(1), 27–39. Lee, K., & He, X. (2009). The capability of the Samsung group in project execution and vertical integration: Created in Korea, replicated in China. Asian Business and Management, 8(3), 277–299. Lee, S.-H., & Makhija, M. (2009). Flexibility in internationalization: is it valuable during an economic crisis. Strategic Management Journal, 30(5), 537–555. Nohria, N., & Ghoshal, S. (1997). The differentiated network: Organizing the multinational corporation for value creation.. San Francisco: Jossey-Bass. Prahalad, C. K., & Lieberthal, K. (2003). The end of corporate imperialism. Harvard Business Review, 81(8), 109–117. Streeck, W. (1992). Social institutions and economic performance: Studies of industrial relations in advanced capital economies. London: Sage. Thurbon, E. (2001). Two paths to financial liberalization: South Korea and Taiwan. Pacific Review, 14(2), 241–267. Van Heerde, H., Helsen, K., & Dekimpe, M. (2007). The impact of a product-harm crisis on marketing effectiveness. Marketing Science, 26(2), 230–245. Yeyati, E. L., & Micco, A. (2007). Concentration and foreign penetration in Latin American banking sectors: Impact on competition and risk. Journal of Banking and Finance, 31(6), 1633–1647. Yin, R. K. (2003). Case study research: Design and methods. (Third Edition.). Thousand Oaks, CA: Sage. Zaheer, S. (1995). Overcoming the liability of foreignness. Academy of Management Journal, 38(2), 341–363.