O.R. Applications
Modeling international investment decisions for financial holding companies

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Abstract

This research analyzes the internationalization process model developed by Johanson and Vahlne and derives two integer programming investment decision models that consider the risk attitudes of investment firms. Johanson and Vahlne’s model provides a starting point for building a model that suits the investment approach and decision making process of financial holding companies. In practice, when firms make an international investment decision, there is a need for a model that can generate outputs based on financial measures such as profit, investment returns, and tolerable levels of risk. Thus, in this paper, Johanson and Vahlne’s concepts are studied and financial managers are interviewed to derive models that match the investment decision procedures of the firms. The model helps firms manage the risks of their investments and derive accurate investment strategies based on investment objectives and constraints.

Introduction

Firms continuously search for opportunities and formulate strategies for profit development. Operational strategies such as product diversification, vertical or horizontal integration, and internationalization are commonly used by enterprises. Numerous researchers have provided conceptual frameworks and models of the internationalization process that have been adopted by multinational investment firms. Johanson and Vahlne [24] are among the first to discuss the internationalization process and state that understanding the marketplace or having market knowledge is essential for making new market commitments or redirecting business activities to exploit international opportunities. Strategic choices that continuously become available provide companies’ with specific competitive advantages and directly affect their international performance. Further, risk and uncertainty are key factors impacting internationalization strategies. The accurate evaluation of multiple factors is required to enter and succeed in difficult markets. Mulvey and Shetty [34] indicated that the globalization of financial markets and the complexity of financial products have increased investment uncertainty and risks. Financial optimization models are frequently employed to weigh factors and are integrated with financial planning systems that use computer based mathematical models. This research provides two revised international investment models that expand the practical application of Johanson and Vahlne’s early model to financial holding companies. The revised models consider the investment decision methods of financial managers and apply integer programming to incorporate the financial perspectives of experts. In order to demonstrate the practical applications of the model, interviews of investment advisors are conducted to provide case data and to create two investment decision models.

This study is organized as follows. Section 2 outlines the internationalization process model of Johanson and Vahlne. In Section 3, a literature review of international investment decision models is provided. Section 4 demonstrates the application of Johanson and Vahlne’s original model and derives the integer programming model. Section 5 discusses the case study which includes data from two financial holding companies and the two investment decision models are defined. Finally, Section 6 presents the discussion and conclusion regarding the application of the model by financial holding companies.

Section snippets

The internationalization process model

Following the introduction of the internationalization process model offered by Johanson and Vahlne in 1977, numerous papers were published to discuss, revise, or challenge the model. This section discusses the early contributions of the authors and the research that has stimulated others to study internationalization process models.

International investment decision model

Market uncertainty and risk require that firms utilize decision models to help analyze and evaluate international investment strategies. The risk attitudes of the decision-makers influence the international investment decision model differently. Accuracy, efficiency and flexibility of the decision model are common requirements for firms.

Johanson and Vahlne’s model

Johanson and Vahlne’s model emphasizes the gradual acquisition, integration and use of knowledge about foreign markets and operations, and then recommends incrementally increasing commitments to foreign markets as confidence in the market increases. There are four key items underlying Johanson and Vahlne’s model [24] – market knowledge, market commitment, commitment decision, and current activities. The factors for market commitment include two state factors, the amount of resources committed

Case study

The history of Taiwan’s banking market can be divided into three stages. Before 1992, most banks were public banks and controlled by the government. As the Legislature Yuan revised the banking laws, many new banks were established after 1992. After Taiwan became a member of WTO in 2002, the number of foreign banks in the Taiwan market began to increase. Taiwan banks cannot avoid the transformation from being local to acting global. In 2003, 14 financial holding companies were established after

Discussion and conclusion

Internationalization involves many challenges and most companies have difficulties deciding how to execute their internationalization strategies. Numerous models have been designed for managers to efficiently and accurately assess their investments or projects. However, owing to shortcomings such as operating complexity or the demand for instant response, most managers simply select the method they are accustomed to for quicker decision-making. Some managers expressed dissatisfaction with

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