Entry of Foreign Banks Into North Cyprus: A Research Proposal

Entry of Foreign Banks into

us. North Cypr Research Proposal A 2010 Lawrence O. Emeagwali MANAGEMENT 602

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Lawrence O. Emeagwali [email protected] http://strategy‐lawrence.blogspot.com

Entry of foreign Banks into North Cyprus

A Research proposal

by

Lawrence Okechukwu Emeagwali

Research Proposal in partial fulfillment of the Course Requirements for MNGNT 602

The American University, Cyprus

JANUARY, 2010.

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1. Introduction

Banks have been engaging in foreign direct investment (FDI) for over 15 decades. In the

process, they have had to cope with and deal with the disadvantages of being foreign, generally

without being able to depend on proprietary administrative or physical technology. It is clearly

obvious then, that foreign direct investment in banking is a suitable phenomenon which

provides many experimental basis for the study of how banks enter and survive in a comparable

industry across nations and other institutional environments. Limited research exists however

in the investigation of this occurrence in unrecognized countries.

In studying global banking activities, the Turkish Cypriot case has a considerable number of

important and useful characteristics. First, the peculiar situation of the northern part of the

island which is not officially recognized by the rest of the world except Turkey, presents a

myriad of interesting and unique problems both in it’s ability to attract foreign multinational

banks and also it’s ability to carry out reciprocity which is a common feature in the

internationalization of banks. Second, there is a clear and recent starting point for the entry of

foreign banks into North Cyprus. Third, there is an interesting mix of entrants, abstainers, and

entry strategies. Fourth, it’s long enough since foreign banks started penetrating the Turkish

Cypriot banking sector, thus enough time has elapsed that one can start to observe entry

strategies as well as failures and survivors.

This proposed research therefore aims to explore, observe and analyze the process, strategies

and modes of entry of foreign banks into North Cyprus as well as their survival in this

unrecognized nation. Hence the posing of the following research questions:

1.1 Research Questions:

RQ1: What motives are responsible for the entry of foreign banks into the TRNC?

RQ2: What entry modes and strategies do foreign banks employ when entering the Turkish

Cypriot banking sector?

RQ3: What factors influence the survival of foreign banks in the TRNC?

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In order for the proposed research work to effectively analyze this phenomenon, it is wise to

take a look on the background of the Turkish Republic of Northern Cyprus as well as historic

trends and occurrences in its banking sector. It is important to reiterate here again that the

TRNC is an unrecognized country since it has no diplomatic recognition from most recognized

nations of the world especially UN member states, with the exception of Turkey. In the

following subsection I take a closer look at the broad definition of an unrecognized country.

1.2 What are unrecognized countries?

According to answers.com, unrecognized countries are contemporary geopolitical entities that

wish to be recognized as sovereign entities, but do not have complete worldwide diplomatic

recognition. It implied that unrecognized countries are classified into two groups viz: Countries

with partial or complete control over their territories and have stated a desire for full

independence. On the other hand the second group is made up of those countries which have

been duly recognized by the United Nations, but have refused to be recognized by at least one

other recognized nation, because such countries, can not lay claims to all of its territory.

Countries which belong to both groups of unrecognized countries include the Republic of China

(Taiwan), Nagorno Karabakh, Somaliland, Transnistria. Abkhazia, Kosovo, Northern Cyprus, the

state of Palestine, the Sahrawi Arab Democratic Republic and South Ossetia among others.

The Turkish Republic of Northern Cyprus however, belongs to the first group of unrecognized

countries, seeing that it is only recognized by Turkey.

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2. Literature Review

Previous research on the entry of foreign banks into different nations of the world, has been in

existence for over many decades, and has as expected, initially focused on the occurrence of

this phenomenon among the developed countries of the world (Tschoegl, 2001). However, in

the late 19 century research began to shift to studying the occurrence of this phenomenon in

the developing countries of the world. Prominent among these research works, were the works

carried out by such renown researchers of international banking activities as Adrian Tschoegl of

the Wharton Financial Institutions center of the University of Pennsylvania whose work

spanned the observation and analysis of the entry and survival of foreign banks into Norway

and a separate research into the entry of foreign banks into Japan and California.

Most of these previous research work had focused on understanding why banks entered

foreign markets, how they enter these markets, the factors which affect the choice of foreign

markets, as well as the advantages and abilities these foreign banks have which makes it

possible for them to compete against local firms which are not faced with the difficulties and

disadvantages of operating at a distance and in an unfamiliar market. The qualities of host

countries which makes them attractive to foreign banks (Graham, 1990). The effect of strategic

interaction between firms as a motive for foreign direct investments (Knickerbocker, 1973 &

Graham, 1978). An examination of the type of banks which entered these foreign markets, and

the banks which left (Veugelers, 1995 & Graham 1990) as well as banks which survived

(Tschoegl, 1994). Other previous research into the entry of foreign banks into various

developed and developing nations of the world, include the works of Yu and Ito, (1988);

Terpstra and Yu, (1989); Ito and Rose, (1994); Hennart and Park, (1994) as well as Engwal and

Wallenstal, (1988).

2.1 Importance of my Proposed Research Topic

It can be observed from the above, that previous research literature has paid little attention to

the internationalization of banks related to the unrecognized countries of the world. More

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especially, it reveals that although foreign banks maintain a presence in the various

unrecognized countries of the world, for various reasons, empirical investigation into such

activities has, to say the least, been non existent. Therefore the aim of this proposed research is

to bridge the gap existing in the body of literature pertaining to the study of the entry of foreign

banks into various countries of the world; by thoroughly examining the occurrence of the same

phenomenon in unrecognized countries, using the Turkish Republic of North Cyprus as a case

study.

2.2 An Overview of the Turkish Cypriot Banking sector

Post separation of Cyprus in 1974, the TRNC Government became persistently, economically

and financially dependent on Turkey as it is the only country which recognizes it. Since the

official currency of the Northern part of the island is the Turkish Lira, the monetary policy of the

Turkish Cypriots also became dependent on the economy of Turkey, with very minimal or no

influence from the economic or political situation of the divided island. Thus, with any

instability in the Turkish economy, there was a resultant instability in the economy of the TRNC.

This phenomenon for year has led to the continuous deterioration of macroeconomic

fundamentals. The North Cyprus economy has experienced two banking sector crisis. The first

took place in 1994 and the second took place between the years 2000 and 2002.

In 1999 there were 37 surviving banks in North Cyprus. However, towards the end of 2002 ten

of these banks suspended operations, two banks were taken over by another bank, and only 25

banks remained. However, after new governmental regulations and policies, normalcy was

restored in the banking sector, with more provisions made for the entrance of foreign banks.

HSBC and ING are two of the prominent multinational foreign banks to enter the Turkish

Cypriot banking sector. HSBC was the first to establish, after encountering problems with the

Greek Cypriot and Uk government on the legality of it’s branch in the TRNC. ING bank entered

next having acquired the popular Oyak bank in 2008. These two foreign banks will form the

basis of my proposed case study research.

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3. Research Methodology

The methodology stated here is subject to alterations or complete change, during the actual

research process. A Periodical Synopsis will document and reveal any changes or alterations

made in the process.

First of all I’ll consider more extensively and comprehensively, all prior and existing statistical,

theoretical and empirical findings from available literature, related to my chosen project topic.

Next the proposed research will be conducted, using the qualitative research methodology, in

particular the case study approach.

The case study approach will be used here because according to Yin,(1993) Case study research

approaches are necessary

1. To explain complex causal links in real‐life interventions

2. To describe the real‐life context in which the intervention has occurred

3. To describe the intervention itself

4. To explore those situations in which the intervention being evaluated has no clear set of

outcomes.

Also the case study approach has been identified to be the ideal research methodology, when a

holistic, in‐depth investigation is needed (Feagin, Orum & Sjoberg, 1991). Also, according to

Stake, (1995) case studies are best suited to this type of research because they are usually

designed to reveal the details, by using multiple sources of data. Case studies also allow for

triangulation of findings. Triangulation is the protocol used to ensure accuracy and alternative

explanations.

3.1 Data Needs and Data Collection

In gathering data to be analyzed, first of all I will design my case study research protocol, then I

will prepare for data collection by using the six primary sources of evidence for case study

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research as postulated by Yin, (1994) and they include documentation, use of archival records,

interviews, direct observation, participant observation and collection of direct artifacts.

Documents I would need for the case study research will include bank letters, bank

memoranda, bank agendas, bank study reports, or any relevant items which would aid the

successful conduct of the research. I would also carefully review the validity of the documents

so as to prevent the inclusion of incorrect data into the research data base. Since one of the

most important advantage of having access to these bank documents is to find matching

evidence among the information gathered from other sources for the two foreign banks in

question.

Archival records from such institutions as the Turkish Cypriot Chamber of Commerce would

also be useful in the research process since they include historical list of banks which have

entered or exited the Turkish Cypriot banking sector as well as other useful information such as

records of bank activities, charts, lists of names, important dates as well as reports and survey

data, . I will try as much as possible to be meticulous in determining the origin of the records

and their accuracy.

Since interviews have been found to be one of the most important sources of case study

information. I will conduct a diverse array of interviews. These interviews could take one of

several forms: open‐ended, focused, or structured. In the open‐ended interview, I would ask for

the specific opinion of relevant bank officials on specific events or facts related to my research

questions stated earlier on. This will be a very important phase of my research on the entry of

foreign banks into North Cyprus, because the information I retrieve from the interview process

could help me to corroborate previously gathered data. As the need arises, I will also use the

focused interview, in which the bank respondent is interviewed for only a short time, and the

questions asked would come from the case study protocol. The structured interview would be

used particularly in study of the bank’s perspective of the Turkish Cypriot neighborhoods since

in such a situation; a formal survey would be required. I will also make use of tape recorders

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during the interviews although this will be subject to the permission of the bank official to be

interviewed.

3.2 Analytical Techniques

In analyzing the data I collected for both HSBC and ING banks, I will employ a data analysis

technique which consists of examining, categorizing, tabulating, or recombining the evidence to

address the initial propositions of my research work, as suggested by (Yin, 1994). I will rely on

my experience and the previous literature studied, to present the evidence in various ways,

using various suitable interpretations. This is necessary because statistics are not necessarily

used in most case study research methods. This case studies will however, employs a series of

statistical tests to aid in the effective presentation of the data to the final audience.

I will also make us e of the alternative analytical technique suggested by Miles and Huberman

(1984), such as using arrays to display the interview and archived data, creating displays,

tabulating the frequency of events and information documented from interviews with the bank

officials, events, ordering the information, and other methods. I will be meticulous so as to

conduct the analysis in a way that will not bias the results.

Further, I will use additional techniques suggested by Yin (1994) such as pattern‐matching,

explanation‐building, and historical time‐series analysis of the entry of these and other foreign

banks into North Cyprus. In general, the analysis will rely on the theoretical propositions and

conceptual frame works that led to the research questions posed in my proposed research

work.

3.3 Plan for Interpreting results

I will use a combination of clear tabulation and the explanation‐building method in interpreting

my findings the later is a method in which the findings from the analysis of the case study is

interpreted by building an explanation of the case where necessary. Trends will be discovered

from the various analytical processes and time series will be duly interpreted taking cognizance

http://www.nova.edu/ssss/QR/QR3-3/tellis2.html#yin94

http://www.nova.edu/ssss/QR/QR3-3/tellis2.html#miles

http://www.nova.edu/ssss/QR/QR3-3/tellis2.html#yin94

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of the importance of the various periods both in the history of the Turkish Republic of North

Cyprus, as well as the history of both banks and Turkey.

3.4 Expected Results

After completing my proposed research, I expect to find historic records of foreign banks which

entered and which exited the Turkish Cypriot banking sector. I also intend to find foreign banks

which survived the periods of financial crisis in the country. I also intend to discover any

relationships between the foreign banks which entered and the host government at the time

they did. I also expect a pattern which shows that banks which entered tended to utilize their

presence and incorporation in mainland Turkey, as a basis and justification for entry into the

TRNC. I intend to unveil the historic entry modes and strategies of banks which entered, as well

as how they survived and why those which had exited the TRNC did and the reasons.

.

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REFERENCES

Engwall, L. (1994). The Invisible Hand Shaking the Visible Hand. Uppsala University Working

Paper Series 94‐5.

Feagin, J., Orum, A., & Sjoberg, G. (Eds.). (1991). A case for case study. Chapel Hill, NC:

University of North Carolina Press.

Graham, E. M. (1978). Transnational Investment by Multinational Firms: a rivalistic

Phenomenon. Journal of Post‐Keynesian Economics 1 (1), 82‐99.

Hennart, Jean‐François, and Park, Y. (1994). Location, Governance and Strategic Determinants

of Japanese Manufacturing Investments in the United States. Strategic Management Journal 15

(6), 419‐436.

Ito, K., & Elizabeth L.R. (1994). Industry Consolidation and Global Competition: Multiple Market

Competition in the Tire Industry. Leonard N. Stern School of Business, New York University,

unpublished paper.

Knickerbocker, Frederick T. (1973). Oligopolistic Reaction and Multinational Enterprise Division

of Research, Graduate School of Business Administration, Harvard University, Boston.

Miles, M., & Huberman, M. (1984). Qualitative data analysis: A source book for new methods.

Beverly Hills, CA: Sage Publications

Safakli, O. (2003), “Basic problems of the banking sector in the TRNC with partial emphasis on

the proactive and reactive strategies applied” Journal of Dogus University, Vol. 4 No. 2,pp. 217‐

32

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Sjoberg, G., Williams, N.,Vaughan, T., & Sjoberg, A. (1991). The case study approach in social

research. In Feagin, J., Orum, A., & Sjoberg, G. (Eds.), (1991). A case for case study (pp. 27‐79).

Chapel Hill, NC: University of North Carolina Press.

Stake, R. (1995). The art of case research. Newbury Park, CA: Sage Publications.

Terpstra, Vern, and Yu Chwo‐Ming. 1989. Determinants of Foreign Investment of U.S.

Advertising Agencies. Journal of International Business Studies 19 (1), 33‐ 46.

Tschoegl, Adrian E. 1982. Foreign Bank Entry into Japan and California. In Alan M. Rugman, ed.,

New Theories of the Multinational Enterprise (London: Croom)

Yin, R. (1993). Applications of case study research. Newbury Park, CA: Sage Publishing.

Yin, R. (1994). Case study research: Design and methods (2nd ed.). Thousand Oaks, CA: Sage

Publishing.

Web References

Answers.com

www.answers.com/unrecognizedcountries

http://www.answers.com/unrecognizedcountries