The internationalization of Australian banks

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Abstract

Since the 19th century, Australian banking has seen high inward and some outward flows of FDI. However, from the 1980s, Australian banks greatly expanded the scale of their FDI, their geographic scope and the range of products that they offered. This recent outward flow of FDI was the result of a complex and inter-related set of factors, including a push from a small and crowded Australian market and the pull of foreign wholesale and retail markets, that liberalization of trade and investment in financial services had made accessible. A combination of what Rugman (Inside the Multinationals: The Economics of Internal Markets, 1981, Croom Helm, London and Columbia University Press, New York) calls country-specific advantages (CFAs) and firm-specific advantages (FSAs), strongly influenced the ability of Australian banks to become successful MNBs. As the nature of international banking altered from the 1960s onwards, this overturned earlier forms of internationalization by Australian banks. Now banks had to acquire and absorb new knowledge to be able to operate effectively in new product and geographic markets.

Introduction

Australian banking has a long history of inward and, to a lesser extent, outward foreign direct investment (FDI). This discussion on the Australian experience adds to the growing number of country-based case studies of FDI in banking, not only for the UK, the US and Japan, but also for a number of smaller European nations (Engwall and Wallenstäl, 1988, Huertas, 1990, Jones, 1990, Jones, 1993, Ozawa and Hine, 1993, Hellman, 1994, Guillen and Tschoegl, 2000, Boldt-Christmas et al., 2001).

What makes the Australian story important is that the Australian banks’ experience is an outlier in many respects. The behavior of Australia's banks as they internationalized does not challenge an internalization explanation of FDI (Merrett, 1995, Williams, 1997). However, the banks faced a wider set of entry mode options into foreign markets than the literature has generally recognized. Exploiting these allowed Australian banks to adopt an incremental approach to learning and capability enhancement, particularly in wholesale bank products. This study also suggests that a wide set of factors drove strategies of internationalization (as distinct from issues of entry mode choice). These factors included the perceived relative attractiveness of markets at home and abroad, perceptions that the regulatory regimes of home and host governments influenced to a significant degree.

From the middle of the 19th century until the late 1960s, the internationalization of Australian banks consisted of branches in London, New Zealand and islands in the southwest Pacific. The banks’ reliance on unchanging markets and products, and unchanging organizational routines and capabilities, gave rise to a path dependency that increased the costs of formulating and implementing new internalization strategies in the radically different environment of the late 20th century. Two external stimuli were critical to the learning of new skills by Australian banks from the late 1950s. First, their existing operations in London allowed them to participate in emergent euro-currency markets. Second, the banks collaborated and competed with foreign banks that entered the Australian market in increasing numbers from the 1960s. The result was that the Australian banks developed enhanced capabilities in inter-bank and corporate markets, both abroad and at home. In the 1980s and 1990s, Australian banks transferred domestically developed capabilities in retail banking to a number of countries, most importantly, the Indian sub-continent, the US, New Zealand and the UK.

This paper first presents an account of the internationalization of Australian banking from the 1830s until the present to provide a temporal context for the subsequent analysis. This involves a review of the number of foreign banks operating in Australia and the nature of their activities within that market. The paper then examines the offshore activities of Australian banks. (Table 1 presents a synopsis of the inward and outward FDI.) Second, the paper explores, in the context of the strategic choices facing Australian banks, the complex set of motivations for the new wave of internationalization that occurred in the 1980s. Finally, the paper addresses the issue of how the banks learned new skills in terms of products, markets or organizational design from their alliance partners, from the operations of existing offices overseas and from acquired banks and how effectively they deployed this new knowledge.

Section snippets

Foreign banks in Australia

The underlying character of Australian commercial banking reflects the nature of the domestic economy, particularly its resource base and its relationship with the rest of the world. The British settled in Australia in the late 18th century. What began as a convict settlement became, some 40 years later, a colony actively engaged in exporting wool. The range of exports expanded rapidly in the second half of the century to include gold and other metals, wheat, frozen meat and dairy products. At

Motivation for internationalization

The internationalization of Australian banks over the past 100 years was a response to a complex set of domestic and foreign stimuli that shaped the set of strategic options open to them. Both environments altered significantly in the last half of the 20th century with a significant break occurring in the 1970s and 1980s with deregulation of domestic banking systems and the progressive integration of once segmented markets for currency, capital and financial intermediation (Dale, 1984, White,

Path dependency, learning and internationalization

In the 1960s, external constraints limited the Australian banks’ moves offshore. Access to markets was difficult. Many countries blocked entry or permitted it only under restricted circumstances (Tschoegl, 1981). These conditions persisted in many OECD countries into the 1980s (Pecchioli, 1983, Walter, 1985) and in emerging markets in the 1990s. Further, the cost of entry to buy an existing large bank in the US, Canada, UK or continental Europe was beyond the grasp of Australian banks. The

Conclusion

This paper has sought to establish a number of contentions. The first is that Australian banking has a long history of internationalization as foreign banks have operated there continuously since the 1830s and as Australian-domiciled banks have had branches abroad from the much the same date. The second is that the nature of internationalization altered significantly during the 1980s and 1990s. Many new foreign banks entered Australia once the government granted licenses in 1985 and Australian

Acknowledgements

The author would like to thank the editor and an anonymous referee for their comments on an earlier draft.

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