Advantages And Disadvantages Of International Expansion

Topic: Discuss the advantages and disadvantages of international expansion the banking industry may encounter.

Introduction

International development has become one main trend of commercial bank under globalization background, and more and more banks establish branches in foreign areas. International expansion both brings advantages and disadvantages, and banks should make a proper balance for promoting global expansion. To seek stable growth of revenues, more banks take great effort for promoting international expansion, so this paper makes a discussion on advantages and disadvantages.

Analysis and Discussion

For international development, the economies of scale and risk diversification are viewed as the primary motivation, and banks pursue

Under global background, capital flows are frequent and capital cost always is relatively low in developed countries, so lots of banks in undeveloped countries seek capital support from developed countries. For example, in 2016, China’s Postal Savings Bank raised $7bn from global market and the majority capitals come from developed market, because the bank has taken large capital for promoting international expansion and has been accepted by foreign investors. With international expansion, China’s Postal Savings Bank can make a great success of foreign financing, so the bank can obtain cheap capital for supporting business development. One main motivation for international expansion is regulatory avoidance and banks hope to avoid the strict domestic regulation for developing in foreign countries. Houston et al (2012) argue that the regulatory difference, especially the requirement of capital reserve, largely promotes the international development of commercial banks, to avoid the high capital adequacy

Through international expansion, the banks can achieve economies of scale, risk diversification, product innovation, cheap capital and regulatory avoidance, so as to pursue new profit from foreign market. However, international expansion also has disadvantages and the bank has to effectively balance the cost, risk and return, because the operational and management cost of foreign business is high and there is also high difficulty for the risk