FDI and Internationalization: Evidence from U.S. Subsidiaries of Foreign Banks
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and
Evidence Internationalization:
from
U.S.
Subsidiaries
of
Foreign
Banks
Adrian E. Tschoegl*
THE WHARTON SCHOOL OF THE UNIVERSITY OF PENNSYLVANIA
Nine foreign banks own the ten largest U.S. affiliates or subsidiaries of foreign banks. These account for 86% of the assets in affiliates and subsidiaries. Theirhistories suggest that most now represent an attempt by the parents to grow outside the confines of home markets. Original motives for their establishment have included ethnic banking and operational stability stemmingfrom geographical dispersion. There is one major instance of acquiring caINTRODUCTION Foreign banks have operated in the U.S. since the mid-19th Century. But the growth of affiliates and subsidiaries has been a phenomenon of the last quarter of the 20th Century. Some have taken part in the consolidation of U.S. banking that commenced in the 1980s and are now large. Still, the size of the U.S. banking system means their share of the system's assets remains slight. Federal Reserve statistics show that since the early 1980s affiliates and subsidiaries of foreign banks have accounted for a relatively steady 4% of as-
pabilities, but it does not involve retail banking. The dispersal of national origins suggests that bankspecific capabilities are the primary source of the parents' competitive advantage. Being from English speaking countries also appears to help. Lastly, the growth of the affiliates and subsidiaries has not come from incremental growth but rather from a rearrangement of assets among banks. sets, 5% of loans and 4% of deposits at U.S. banks. Most studies of foreign direct investment (FDI) in banking in the U.S. rightly focus on branches and agencies, which account for the bulk of assets in foreign or foreign-owned banks. But the affiliates and subsidiaries are interesting because theory suggests that foreign banks should largely be absent from retail banking in countries with well-developed and competitive banking systems. For most developed countries they are absent; hence their constant modest presence in the U.S. is anomalous.
*The author is a Senior Fellow of the Department of Management. His primary research interest is foreign direct investment in banking. The authorthanks GeoffreyJones, MiraWilkins and the other conference participantsfor their
comments on the paper he presented in Rotterdam in August 2000. Stewart Miller, Barry Williams and Hubert Bonin provided helpful comments on this one. Lastly, the author thanks T. Brewer and the referees for their suggestions. JOURNAL OF INTERNATIONALBUSINESS STUDIES, 33, 4 (FOURTH QUARTER
2002): 805-815
805
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FDI AND INTERNATIONALIZATION
BACKGROUND THEORETICAL Currently, their parents majority or wholly own the largest banks, suggesting that the parents hope to improve cash flows in their acquisitions or to transfer capabilities from the acquisition back to themselves.
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