KOREA CAPITAL MARKET INSTITUTE

This paper looks to analyse the characteristics of Korean securities companies that expand overseas, and to identify the factors that influence their overseas entry decision. Despite a history of over 30 years, there is a lack of systematic data on the overseas entry of Korean security firms, and as a result research on the issue is very limited. This paper uses a unique dataset, hand collected, that encompasses the entire entry and exit of all Korean securities firms, from 1984 to 2014, from which stylized facts are drawn and empirical analysis is performed.
 There has been two major waves of overseas entry of Korean securities firms, each motivated by different factors. The first wave took place between 1984 to 1997, when Korean securities firms began to deal in foreign securities business and started to establish offices and subsidiaries in the world’s financial centers. That came to a sudden halt with the onset of the Asian Financial Crisis in 1997. The second wave of overseas entry took place between 2007 to 2011, when Korean securities firms began to look particularly at underdeveloped but high growth potential financial markets in Asia, such as Vietnam, Indonesia and China. However, that trend reversed from 2011, as Korean securities firms’ profitability fell sharply and extensive restructuring took place.
 
Empirical analysis is done on the firm-specific and country-specific factors that determine the overseas entry decision of Korean securities firms. Among the firm-specific factors the size of capital is found to be the main determining factor of overseas entry. Other factors, that reflect competitive advantages of firms, such as business structure or cost efficiency are not found to be significant for the most part. For country-specific factors, the ease of entry, such as lower levels of entry restrictions seem to be the main determinants of which countries Korean firms expand into. However, this leads to over-concentration into underdeveloped financial markets, which require longer investment horizons, which Korean securities firms do no allow for.
The stylized facts, along with the empirical analysis point to several causes behind the lack of success of overseas entry by Korean securities firms, despite a history dating back over 30 years. First, there is a lack of a differentiating competitive advantage of firms that go overseas, except for capital size. Second, the size of overseas operations is too small and the incubation period is too short to allow the businesses to take hold and develop. Third, the overseas entry and exit of overseas operations is too correlated with the financial performance of the parent company, which in turn moves up and down with the Korean brokerage market conditions. Thus, in order to increase the success probabilities of overseas operations, Korean securities firms must develop competitive advantages, be more selective in resource allocation and invest with a longer term horizon.