Does the Entry Mode of Foreign Banks Matter for Bank ... - EconomiX

separate legal entity incorporated in the host country, but one in which the foreign parenthas majority ownership.Each of the above organizational forms has its own advantages and disadvantages.A branch is less costly to establish than a subsidiary, because there is no costs ofincorporation, no need to report annually to local registrar of companies, no need for aboard of directors, and so forth. It is more appropriate for conducting wholesale andcorporate banking activities in host countries, including foreign exchange and moneymarket trading. Nevertheless, as it is part of the parent bank, a branch requires carefulsupervision because unauthorized trading could make the parent bankrupt. A subsidiary,in contrast, may fail even though the parent is solvent and vice versa, because it is anindependent entity. However, a major constraint for a subsidiary is that it can only makeloans on the basis of its own capitalization. Thus, it is hardly appropriate for conductingcorporate lending and trading activities. In the case of an affiliate, the foreign bankdoesn't have full control over it, so its role is limited to that of a prospector rather than ofa long term commitment.Representative office is the least constrained and least costly form oforganization. It is like an embassy or a consulate of a company in a foreign market.However, it cannot conduct any type of business. Therefore, it is suitable with an aim ofexploring business opportunities in a foreign country.Modes of Entry. A greenfield investment involves the establishment of aninstitution from scratch, whereas a merger and acquisition implies the purchase of afirm's (here a bank's) shares or other form of capital. The M&A may result in the foreignfirm buying less or more than 50% of a bank’s capital. In this paper, we focus only oncontrol acquisitions, i.e. the purchase of at least 50% of a bank's capital.Entering via a Greenfield investment allows the foreign bank to take advantage ofits international reputation, particularly in less developed or less stable economies wheredepositors may feel more secure in their banking transactions with well establishedforeign banks. It also allows foreign banks to target market segments, which would not bepossible with the acquisition of a local entity. With acquisition, the foreign bank will beleft with the customer profiles of the old domestic bank which can be incompatible or atleast inconsistent with the overall market positioning of its parent bank, and adjustment-11-