. 10
( 15)


Table 2. India™s software exports (gross foreign exchange earnings)

Year Software Exports(US$m) Export Growth (%)
1980 4.0 -
1981 6.8 70%
1982 13.5 99%
1983 18.2 35%
1984 25.3 39%
1985 27.7 9%
1986 38.9 40%
1987 54.1 38%
1988/89(Apr-Mar) 69.7 (29%)
1989/90 105.4 51%
1990/91 131.2 24%
1991/92 173.9 33%
1992/93 219.8 26%
1993/94 314.0 43%
1994/95 480.9 53%
1995/96 668.0 39%
1996/97 997.0 49%
1997/98 1650 65%
1998/99 2180 32%
1999/2000 3600 65%
2000/01 5300 47%
2001/02 6200 17%
2002/03 7800 (est.) 24%

Source: Heeks, 1999.

primarily driven by the export market, the growth of this sector remains an enclave of the
general economy without many forward or backward linkages. In terms of the spatial
location of the industry, approximately 90 percent of software development and export
is confined to the four major metropolitan areas of Bangalore, Mumbai, Delhi and Chennai
(as shown in Table 3), leading Mansell (1999) to perceive that export-oriented IT growth
would seem to have generated marginal spillover benefits.
The IT sector export-based strategy has been successful in India primarily as a result of
the outsourcing of services by the firms based in the developed economies. India has
been the focus for many Western firms as its competitive advantage is based on
technological agility, flexibility, cost control, time-to-market and quality. These advan-
tages are rooted in the established education sector, and Indian technology institutes
are acknowledged as world-leading institutions that select and train IT professionals.
115,000 Indian IT professionals graduate annually in a country with an English speaking
population of around 1 billion people. There is expansion in the IT market with more than
3,000 Indian software exporting companies currently having export relationships with
over 100 countries. Some of the leading Indian companies are registered with the NYSE
or Nasdaq.

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ICT Growth and Diffusion 245

Table 3. Distribution of software sales and exports across major locations in India

Sales % Exports %____________

Location 1997 1998 1997 1998
Bangalore 33.9 27.9 30.3 29.7

Mumbai 24.3 24.7 27.5 24.0

Delhi/Noida 15.9 20.3 15.3 18.5

Chennai 14.8 16.8 15.5 17.3

Hyderabad 4.2 5.4 5.3 6.3

Calcutta 3.3 2.3 1.5 1.3

Others 3.6 2.6 4.6 2.9

Source: Joseph, 2002:16.

It should be noted here that the IT sector is highly labour intensive, and one that employs
mostly skilled labour, although the level of this varies with the nature of a firm™s activities.
Available empirical evidence suggests that the IT export boom of the last decade should
be considered in the context of India™s labour cost advantage (as shown in Table 4). The
IT sector upswing has lead to increases in the demand for labour and also wage rates.
Table 4 reflects India™s cost advantage in relation to skilled employable labour in the IT
sector. More than this, off-shore IT work is also cheaper for MNCs than employing Indian

Table 4: IT labour costs across different countries in 1995 (Note: Figures are averages
for 1995 and were likely to rise 5 to 10 percent approximately per annum, with rates
being slightly higher in lower-income countries.)

Switzer USA Canada UK Ireland Greece India
(US$ per annum)
Project leader 74,000 54,000 39,000 39,000 43,000 24,000 23,000
Business analyst 74,000 38,000 36,000 37,000 36,000 28,000 21,000
System analyst 74,000 48,000 32,000 34,000 36,000 15,000 14,000
System designer 67,000 55,000 36,000 34,000 31,000 15,000 11,000
Development programmer 56,000 41,000 29,000 29,000 21,000 13,000 8,000
Support programmer 56,000 37,000 26,000 25,000 21,000 15,000 8,000
Network analyst/designer 67,000 49,000 32,000 31,000 26,000 15,000 14,000
Quality assurance specialist 71,000 50,000 28,000 33,000 29,000 15,000 14,000
Database data analyst 67,000 50,000 32,000 22,000 29,000 24,000 17,000
Metrics/process analyst 74,000 48,000 29,000 31,000 - 15,000 17,000
Documentation/training staff 59,000 36,000 26,000 21,000 - 15,000 8,000
Test engineer 59,000 47,000 25,000 24,000 - 13,000 8,000

Source: Heeks (1999), adapted from Rubin (1996).

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246 Borbora

IT labour onsite. For example, using data invoice processing as an example, onsite work
at the client™s site would cost US $8,000 (plus local taxes) as opposed to US $4,600 offsite
in India (Heeks,1999).

Policy Measures Supportive of IT
Growth in the Indian Experience
The importance of promoting the software development industry has long been recog-
nized in India by the Department of Electronics (DoE), and suitable supportive policies
were in place as far back as in 1972 (Parthasarathi and Joseph, 2002). By 1982 the DoE
had begun concentrating on software export promotion policies, and the Computer
Policy of 1984 gave further thrust to the industry by underlining the need for institutional
and policy support in key areas. The accelerated growth of the computer industry after
1984 created calls for the rationalization of the import policies and for additional export
promotion. As a result of this, a new policy was announced in 1986 that identified
software specifically as one of the key areas for export promotion and underlined the
importance of an integrated approach to the development of software for both domestic
and export markets. This policy had the following major objectives:
• To promote software exports to take a quantum leap and capture a sizeable share
in international software markets;
• To promote the integrated development of the national software industry for both
domestic and export markets;
• To simplify existing procedures allowing the software industry to grow faster;
• To establish a strong base for the national software industry in India;
• To promote the use of the computer as a decision-making tool, to increase work
efficiency, and to promote appropriate applications in order to gain long-term
benefits of computerization for the economy.

To achieve these objectives various commercial incentives were provided to software
firms. These measures included tax holidays, income-tax exemption on software exports,
and the subsidized and duty-free import of hardware and software used for export
In 1991 the Indian government began to open the economy with a programme of market
liberalization and economic reform. At that time the Indian government™s assessment of
the IT industry was that India had a comparative advantage in the software export market
but not the hardware sector. Following this evaluation, the government consciously
prioritized software exports and new policy measures were initiated to support this
strategy, including the removal of entry barriers for foreign companies, the lifting of
restrictions on foreign technology transfers, the participation of the private sector in
policymaking, the provision of finance through equity and venture capital, reforms for

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ICT Growth and Diffusion 247

faster and cheaper data communication facilities, and the rationalization of taxes and
tariffs (Narayanmurthy, 2000).
In addition to these measures the Indian government also undertook a series of
institutional reforms including the establishment of an integrated Ministry of Commu-
nications and Information Technology. One key development stemming from these
reform was the establishment of Software Technology Parks (STP) to provide the
necessary infrastructure for software exports. At the time of this writing, there are 18 STPs
in India throughout the country and these play a significant role in exports. The total
number of units registered with the STPs increased from 164 in 1991 to 5,582 in 1999,
accounting for about 68 percent of all Indian IT Exports (Table 5). The facilities in these
STPs include, amongst others, modern computers and communication networks that are
beyond the reach of individual firms. In June 2000 a new STP consisting of a business
support center and an India Infotech Center was set up in Silicon Valley to facilitate
software exports by small and medium Indian firms to the US (Economic Times, 2000). The
center also fosters business relationships by providing access to US financial institu-
tions, venture capitalists and specialized trade bodies to promote partnership between
the US and Indian ICT software and service companies.
The success of the aforementioned policies and of the STPs led to an appreciable growth
of investment in ICT exports (Venkitesh, 1995). The growth of the sector outstripped that
of the workforce, leading to eventual labour constraints (Schware, 1987; Sen, 1995).
Traditionally the main source of ICT and software professionals was from Indian public-
sector educational institutes such as the Indian Institutes of Technology (IITs),
Industrial Training Institutes (ITIs) and engineering colleges, as well as additional
public-sector institutions such as C-DAC and CMC, Ltd. engaged in training computer
personnel. With the demand for skilled IT-sector labour increasing in the early 1980s, the
Government permitted private investment in IT training. Today, there are private
companies running training centers throughout the country through franchise networks
offering many courses. These institutes primarily cater to the middle and lower-skill-level
labour demand. In addition to this, seven Indian Institutes of Information Technologies
(IIITs) were established to provide excellence in IT with the input of academics. Available
estimates indicate that in 1999 there were over 1,832 educational institutions providing

Table 5: Trends in IT exports from units registered with software technology parks

Year No. of units registered Total exports from India Share of STP units
With STPs (US$million) in total exports
1991-92 164 164 na
1992-93 227 225 8
1993-94 269 330 12
1994-95 364 485 16
1995-96 521 734 29
1996-97 667 1085 46
1997-98 844 1750 54
1998-99 1196 2650 58
1999-2000 5582 3900 68

Source: Joseph, 2002.

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248 Borbora

training in IT to 67,785 professionals (Nasscom, 1999). The breakdown of the current
labour pool indicates that holders of the three main awards relevant to the sector,
B.Techs, diplomas and ITI certificates, account for some 70 percent of the total IT
workforce in India.
Besides development of the infrastructure and labour pool for the IT sector, the Indian
government has taken measures to address the problem of software piracy by including
the protection of the computer software copyright within the established Indian Copy-
right Act of 1957, reinforcing active role of the state in promoting the industry. Other
factors which have added to India™s comparative advantage in this sector have been the
availability of a highly skilled English speaking workforce and also the time difference
between India and major export markets such as the USA.
It is clear that over the last decade the Indian IT sector has benefited enormously from
a national system of innovation comprised of many actors working effectively together
in order to develop international competitive advantage and credibility. This successful
strategy has been the result of a focused state development strategy toward the
promotion of the ICT software and service sector for foreign exchange earnings. This
export-oriented strategy has so far overlooked the importance of ICT diffusion to the
economy in general, such as improved efficiency, productivity, and competitiveness to
domestic industries and services.

Concluding Remarks
Today there is an increasing realization that the benefits offered by IT for improvements
to human welfare, economic productivity, and growth are mainly limited to the developed
economies. Even though this International Digital Divide is a feature of the current global
environment, there is potential to reducing the gap between the leading and developing
countries with appropriate government policies. The development of such policies
requires an integrated approach with the involvement of actors in counties across the
public and private sectors. Sustained development requires both revenues from ICT-
growth strategies and from improvements to the economy obtained through ICT
diffusion. With reference to the Indian experience, we can observe that an export-
oriented IT-growth strategy has deflected attention away from ICT diffusion at a time
when a recent study by the IMF (2001) has reported that IT-using countries tend to
benefit more than IT-producing countries. The disappointing welfare gains for IT
producers have been attributed to the deterioration in the terms of trade between the
producers and users. Despite the growth of the software industry, India is also among
the losers. These finding underline the importance of the complementary roles of the
domestic market in promoting innovation and exports and export-orientated, IT-induced
productivity and growth. The policy implication for developing countries, and for India
in particular, would suggest that ICT diffusion should be prioritized for economic
development and growth.
The growth of the service sector has been one of the key drivers of economic develop-
ment in both the developed and developing world in the last decades, underlining the

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ICT Growth and Diffusion 249

fact that international competitive advantage will in the future be determined more by
trade in intangibles rather than goods. Developing countries such as India can obtain
the benefits resulting from the internationalization of services with the adoption of liberal
trade and investment policies designed to support IT growth. However, in order to
maximize the wider economic and social benefits, complimentary policies supporting
national ICT diffusion cannot be overlooked, and should be the focus of future policy

I would like to express our gratitude to Professor K. J. Joseph (Jawaharlal Nehru
University, India), Dr. Richard Heeks (University of Manchester, UK), and the informa-
tion officer of Bridges.org for allowing the use of the duly acknowledged sources in the
development of this chapter.

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252 Roberts & Mukonoweshuro

Chapter XIII

Digital Technologies
and the Cross-Border
Expansion of South
African Banks
Joanne Roberts
University of Durham, UK

Chipo Mukonoweshuro
University of Durham, UK

This chapter explores the role of Information and Communication Technologies (ICTs)
in the international development of South African banks. It is argued that South African
banks derive important advantages from the use of ICTs in their expansion into
neighbouring countries. Using Dunning™s (1989, 1988) eclectic approach as a
mechanism with which to assess the evidence supporting this argument, ICT is explored
both as an ownership specific capacity, as a locational specific factor influencing the
geographical pattern of international expansion, and as a facilitator of the
internalization of cross-border banking networks. Through an investigation of the
significance of digital technologies in the cross-border expansion of South African
banks, including case studies of Stanbic and ABSA, this chapter highlights the
opportunities and challenges confronting such organizations. In so doing, the chapter
will contribute to the understanding of intra-African foreign direct investment in the
banking sector and the emerging digital economy in developing countries.

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Digital Technologies and the Cross-Border Expansion of South African Banks 253

The financial sector is central to the economy. Economic activity must be financed, thus,
as economies grow so to do their financial sectors. Indeed, developments in the
economic, political and technological environment over the last 30 years have intensified
the impact of financial-sector activity on the economy as a whole. For example, in the
current era, financial market integration is a major aspect of the ongoing process of
globalization (Held, McGrew, Goldblatt & Perraton, 1999). The increasing intensity of
competition since the 1970s, together with deregulation of the financial markets and the
internationalisation of financial services, has driven the application of digital technolo-
gies in the sector. In particular, innovations in the field of Information and Communica-
tion Technologies (ICTs) have fundamentally influenced the sector, especially in terms
of the speed with which financial services may be produced and delivered (Strange, 1998).
However, the impact of digital technologies combined with the deregulation of financial
markets has led to a growing concentration of financial service activity in global cities,
such as New York, London, and Tokyo (Sassen, 2001; Castells, 2000). Consequently, the
enormous flows of capital circulating around the globe, including, for example, the daily
foreign exchange market turnover, which amounted to US $1,500 billion in 1998 (BIS,
2002), largely by-pass the developing countries of Africa, including South Africa.
Nevertheless, digital technologies do influence the financial services sectors in these
countries, both in terms of the availability and cost of capital, consumer access to
services and the organisational development of service providers. While digital tech-
nologies are having a significant impact on the global financial markets, this chapter
focuses on the impact and role of ICTs in the expansion of financial services organisations
in the developing countries of Africa and, in particular, on the international development
of South African banking organisations.
To exploit the opportunities arising from the adoption of liberal economic policies and
privatization of state-owned companies by many African countries, South African
banking organizations have sought to extend their international networks throughout
the continent. The aim of this chapter is to explore the role of digital technologies in
facilitating this cross-border expansion of South African banking organizations. The rise
of ICTs since the 1970s and, in particular, the growth of the Internet since the mid-1990s,
has influenced the organization of economic activity (Castells, 2000). The banking sector
has experienced significant organizational change resulting from the adoption of ICTs
(Bryan, 1993; Jones, 1993). However, specific challenges do exist for financial-sector
organizations operating in Africa. For example, compared to most other parts of the world,
Africa has a poorly developed ICT infrastructure (Mansell & Wehn, 1998). Even so, it
is argued here that South African banking organisations derive important advantages
from the use of ICTs in their expansion into neighbouring countries.
Through an investigation of the significance of digital technologies in the cross-border
expansion of South African banking organizations this chapter highlights the opportu-
nities and challenges that confront such organizations. In so doing, the chapter will make
a contribution to the understanding of intra-African foreign direct investment in the
banking sector. Furthermore, by examining the use of ICTs by developing countries™
multinational organizations this chapter will contribute to an understanding of the

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254 Roberts & Mukonoweshuro

emerging digital economy in developing countries. The chapter will be of interest to
policy-makers, academic researchers and business managers in developing countries
seeking to appreciate the role of ICTs in the promotion of economic activity.
The use of digital technologies in the cross-border expansion of South African banking
organizations is examined through a review of relevant literature and evidence. A number
of case studies, elaborating on the cross-border expansion of South African banks, will
be used to investigate the role of ICT in the internationalization of African banking
organizations. Dunning™s (1989, 1988) eclectic approach, which is one of the most widely
used frameworks to analyse the international development of the firm, is applied as a
mechanism with which to assess the evidence supporting the argument that the use of
ICTs give South African banks an advantage over their regional competitors in the cross-
border delivery of banking services. Within this analysis ICT is explored both as an
ownership specific internal capacity, as a locational specific factor influencing the
geographical pattern of international expansion, and as a facilitator of the internalization
of cross-border banking networks. The chapter begins with a review of banking in Africa
with particular attention focused on South Africa. This is followed by an analysis of the
internationalization of South African banking organization. The use of digital technolo-
gies in the delivery of services and the organization of banking networks is then explored
before their role in the South African banking organization networks is investigated.
Finally, conclusions are drawn regarding the role of digital technologies in the interna-
tional development of South African banks as well as the challenges facing these banks
in their efforts to maintain a leadership position in the supply of banking services in

Banking in Africa
The colonization of Africa allowed countries like the United Kingdom, France, Germany,
and Belgium to build up significant financial networks across the continent between 1880
and 1914 (Darroch, 1992; Jones, 1990). These financial networks were generally linked to
domestic banking institutions in their home economies and focused on trade and the
relatively undeveloped capital markets. The earliest indigenous African banks were
established in the 1920s. Although initially plagued by failure, indigenous banks became
more prolific in the 1940s and 1950s (Jones, 1993). From 1950, the indigenous banking
sector experienced greater stability and continued to rise in prominence, particularly
during the 1960s. The Second World War marked the end of the era of European
dominance in Africa. Moves toward independence resulted in the growth of nationalist
feelings, which brought about sweeping regulatory changes, the accelerated rise of
indigenous banks and pressures for localization of ownership. Despite this, British banks
retained their prominent positions in the domestic banking systems particularly in the
Southern hemisphere. For example, in Southern and Central Africa British banks held
more than 50% of the market share in 1971 while in South Africa, 73% of local deposits
were still held by two British banks “ Standard and Barclays (Jones, 1993).

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Digital Technologies and the Cross-Border Expansion of South African Banks 255

Notwithstanding the radical changes seen in banking structures throughout the conti-
nent, colonial banks retain their influence today and a significant number of subsidiaries
of large institutions such as Standard Chartered bank and Barclays still dominate.
Nevertheless, indigenous African banks continue to increase in sophistication and
expand their roles, even though in terms of Tier 11 capital and assets they remain small.
According to The Banker, in 2001 the top 100 Sub-Saharan banks (excluding South
Africa) had combined total assets of US$29.6 billion and total pre-tax profits of US$888
million, which amounts to a middle-size bank on the world stage (“Minnows still,” 2001).
Despite the negative image of the African continent today, growth is starting to occur.
While only a small number of African countries continue to be involved in civil conflicts,
many others have undergone significant economic reform (“Minnows still,” 2001). A
number of countries are casting off their reputations for economic mismanagement,
liberalizing their markets and promoting the private sector (Cockerill, 2000). Significant
efforts are being made to improve national financial infrastructures because a sound and
well-structured banking sector plays a key part in maintaining growth and stability.
African countries adopting “structural adjustment” policies at the instigation of the
International Monetary Fund (IMF) and World Bank have generated a great need for
more rigorous financial standards (“Minnows still,” 2001; Moore, 2000). In addition, the
privatization of businesses and liberalization of markets arising from the adoption of such
policies has resulted in the takeover of many local banks by foreign investors. Overall,
the continent has seen vast improvements in services and accountability to a previously
un-competitive, state subsidized, and heavily bureaucratic financial sector (Manson,
A key factor in the development of the banking sector is profitability. International banks
and investors claim that their African operations are extremely profitable. WPA Consult-
ing (2002) confirms that the average return on equity in Sub-Saharan Africa is 15%
compared the rest of the world at 7%. Not surprisingly then, more investors are crossing
national borders to establish a presence in African countries. Today, domestic South
African banks have emerged as the leading investors on the continent followed by a
number of European groups. It is, then, to the international development of South African
banks that our attention now turns.

The Rise of International South African
Banking Organizations
In this section, Dunning™s (1988, 1989) eclectic approach is used as a lens through which
to view the international development of South African banks. The eclectic approach,
which draws together three groups of advantages arising from Ownership, Location and
Internalization (OLI approach), provides a useful framework with which to explore the
existence and development of multinational firms. Ownership specific advantages
include the firm™s unique assets such as brands, technology, knowledge base, reputa-
tion, economies of scale and domestic market conditions that give the firm an advantage

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256 Roberts & Mukonoweshuro

over foreign firms. Locational advantages relate to the characteristics of overseas
locations including those that are specific to the market, the availability of resources and
the general economic and political environment. Finally, internalization advantages arise
from securing ownership advantages within the boundaries of the firm, for example,
rather than licensing unique knowledge through contractual mechanisms the firm gains
greater advantage by internalizing such assets within the firm. Originally developed to
analyse the activities of manufacturing firms, Dunning (1989) later applied the approach
to service firms. Although Dunning™s eclectic approach has weaknesses,2 it does provide
a useful framework with which to analyse the international development of service
organizations, including banks.3
Despite enormous investment into South Africa in the period from the late 1800s to the
1960s, most foreign banks withdrew their investments in the South African economy
during the apartheid era, resulting in the development of a strong domestic banking
sector. Today the South African banking system is well developed, with a prudent
regulatory and legal infrastructure and good accounting standards and disclosure
practices. Due to South Africa™s colonial history, many of the institutions have First
World structures that would not normally be prevalent in an emerging market. The legal
system is mature, contractual rights are enforceable and creditor rights are well recog-
The South African banking sector is dominated by a few large groups, which are also the
largest banks in Africa. They overshadow most segments of the banking market, except
for resale and repurchase agreements, where some foreign banks or their branches have
a significant share of the market. In 2000 South Africa dominated The Banker™s list of the
top 100 African banks with 76.5% of the total Tier 1 Capital of US$11.3 million and with
seven South African banks among the top ten banks (“Minnows still,” 2001), (Table 1).

Table 1. Largest banks in Africa

Tier 1 Capital
Rank Bank
US$ million
1. Stanbic (SA) 2,333
2. Nedcor (SA) 2,111
3. ABSA Group (SA) 1,273
4. First Rand Banking Group (SA) 1,222
5. Investec Group (SA) 876
6. BoE bank (SA) 582
7. Mauritius Commercial Bank 234
8. State Bank of Mauritius 171
9. First Bank of Nigeria 150
10. Saambou Bank (SA) 149

Source: Compiled from “Minnows Still” (2001, p.17)

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Digital Technologies and the Cross-Border Expansion of South African Banks 257

Although South African financial institutions could not operate directly in neighbouring
states during the apartheid years, today they have become the most important investors
in Sub-Saharan Africa™s financial sector (Odenthal, 2001). One motivation for the
internationalization of South African banks is the rise of competition in the home market.
Since 1994, at least 50 foreign banks have entered the country (KPMG, 2000). The demise
of the siege economy fostered during isolation, rising competition in local markets, and
the dismantling of protective tariffs at home have forced the biggest local companies to
look abroad. Hence, South African banks are attracted by the locational advantages
offered by other Sub-Saharan African countries. In particular, they can benefit from using
their ownership advantages in terms of experience, size and strength as the banking
markets develop in these other African countries.
There are several other motivations underlying internationalization. Firstly, most of the
banks are fully diversified within the local economy. During the second half of the 1990s,
average return on assets was not as high as that in other emerging markets, reflecting
the maturity of the South African banking system. Interest margins are much smaller than
those of some Eastern European countries and have been following a downward trend
for a number of years. Operating costs remain high because of extensive branch networks
and electronic banking infrastructures. Therefore, geographical expansion in terms of
internationalization is necessary to sustain growth and profitability. Secondly, many
banks have large reserves, which they were unable to invest when the economy was
closed. These reserves provide an ownership advantage that the banks can exploit in
other markets. Thirdly, Theobald (2002) declares that the huge profits to be made on the
continent are a major attraction to financial investors. Hence, there are locational
advantages that attract South African banks to invest in other African nations. Fourthly,
evidence suggests that the banks are merely following their clients (“Standard Bearer,”
1996). South African firms in sectors such as brewing, mining, hospitality and retailing
are becoming international in scope, either in search of hitherto inaccessible resources
or markets in Africa. Relationships with existing clients in the home market can be seen
as an ownership advantage that the bank is able to take into another market when the
client firm moves overseas. Certain countries will then have locational advantages
because of the presence of existing clients. Fifthly, the banks may be seeking efficiency
and economies of scale and scope. Here efficiency gains may arise from cheaper
resources in other countries or through the more intensive use of existing resources such
as ICT networks. Finally, African governments are more inclined to work with other
Africans (“Standard Bearer,” 1996), particularly with the more sophisticated South
African banks. African identity is then another ownership advantage for South African
banks. It is also a locational advantage in terms of the attractiveness of African markets
for South African banks.
The key sources of ownership advantage for knowledge intensive service firms such as
banks are intangible assets. These assets take time to develop, they are difficult to
measure and value and importantly they are fragile and difficult to protect. They include
reputation, brand name, technical/specialized expertise, knowledge of clients and rela-
tionships with them, global scope of the service firm™s affiliate network, methodologies
for producing services, knowledge of the market for the services and management skills
(Aharoni, 2000; Grosse, 2000; Roberts, 1998). For banks, ownership advantages also arise
from the use of ICT networks as well as the level of their reserves. Economies of scale

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258 Roberts & Mukonoweshuro

arising from the size of the bank provide a source of ownership advantage as also does
access to international capital and financial markets. Furthermore, financial institutions
may acquire advantages from innovative activity. This type of advantage has become
increasingly important with the application of technology to the delivery of financial
services since the 1970s and the deregulation of the sector in many countries since the
1980s. Such innovative activity has given rise to many new financial products, including
derivatives - the most important product innovation since the mid-1980s.4
Ownership advantages also arise from the home environment of multinational firms. For
South African banks, this environment includes a well-developed banking system,
including effective regulatory and legal structures, a superior telecommunication infra-
structure and a technologically progressive environment. This environment gives South
African banks advantages that are not available to the banks of other African nations.
The strength, size and maturity of the South African banking sector would appear to be
an ownership advantage for them arising from the historical development of the sector
in their domestic market. South African banks are able to develop superior financial
services in their home market, which they can then deliver to other African markets. Such
services include the development and use of advanced technologies that improve
service quality and efficiency of provision. Additionally, South African banks have
knowledge and experience of operating in Africa giving them an important advantage
compared to non-African banks. In a sense, South African banks have the opportunity
to become first-movers in the delivery of banking services in other African markets.
The forces driving the internationalization of South African banks outlined above
suggest that the nature of internationalization is largely market-oriented. Furthermore,
psychic distance (Johanson & Wiedersheim-Paul, 1975) is a factor influencing the
locational choice of South African banks. By investing in other African countries, South
African banks are entering markets that are psychically close in the sense that their social,
cultural, political and economic development has similarities with that of the banks™ home
market. Although the poor technological infrastructures available in African countries
present many challenges, it also provides a locational advantage for South African banks
giving them the opportunity to exploit their technological expertise.
Multinational banks generally demonstrate a preference for overseas expansion through
wholly or majority-owned subsidiaries (Jones, 1993). This form of expansion allows
banks to control their ownership advantages by internalizing them within the boundaries
of the firm. South African banks have adopted two strategies to drive international
expansion (Theobald, 2002). The first is to buy controlling stakes in African banks. The
second is to take a minority stake, which increases profitability and directs business back
to the head office. African banks choose whenever possible to internalize their owner-
ship specific advantages in order to maintain control, which is particularly important in
unstable environments. The establishment of wholly or majority-owned subsidiaries
facilitates control over intangible assets that cannot be fully protected through formal
contracts and intellectual property rights. This is especially important in locations where
regulatory and legal systems are poorly developed, as in many African countries.
Furthermore, the knowledge-intensive nature of the ownership advantages of banking
firms discourages the exchange of such assets in the market. The transfer of knowledge
through market exchange presents a number of difficulties including those explored by
researchers studying the economics of information (Arrow, 1969, 1974; Stigler, 1961).5

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Digital Technologies and the Cross-Border Expansion of South African Banks 259

Increasingly, control over intangible assets can be facilitated through the intensive
monitoring of independent partners enabled by the use of joint information systems. In
many sectors, such developments are leading to the evolution of networked enterprises
(Castells, 2000). Clearly, internationally active banks are benefiting from the monitoring
capacities of their international information systems. Nevertheless, control through
ownership remains important in this sector.

Digital Technologies and the Delivery of
Banking Services in Africa
The application of digital technologies to the production and delivery of financial
services has fundamentally influenced the banking sector. As Dicken (2003, p.442) notes,
“information is both the process and the product of financial services” (original
emphasis). The primary essence of all financial transactions is the collection, analysis
and dissemination of information. For this reason, the banking sector has experienced
significant organizational change resulting from the adoption of ICTs (Bryan, 1993;
Jones, 1993). Given the information intensiveness of banking services the effective use
of information systems by multinational banking organizations can be an important
source of competitive advantage (Kuljis, Macredie & Paul, 1998).
National and international interbanking transactions largely involve the flow of informa-
tion. Consequently, advances in ICT have transformed the speed and efficiency with
which such transactions are effected. For example, prior to 1977 the international
settlement of accounts between banks was largely carried out by mail or telex with each
bank having its own procedures. To increase the speed of these transactions groups of
banks joined together to create standardized telecommunications networks such as
SWIFT (Society for Worldwide Interbank Financial Telecommunications) (Wright &
Pauli, 1987). SWIFT was one of a number of proprietary data networks developed in the
1970s by financial service firms. The rise of the Internet in the 1990s presented new
opportunities for data networks and electronic payment systems. As an open network
infrastructure, the Internet disconnects the network from the proprietary infrastructure.
Moreover, with encryption technology highly secure environments can be created on
public networks. Hence, banks can take advantage of the Internet to supplement their
internal proprietary data networks and existing interbank networks to develop global
reach in the provision of a range of new electronic financial services.
Internet banking, for example, includes a range of retail and wholesale banking services.
Involving both individual and corporate clients, it includes bank transfers, payments and
settlements, documentary collections and credits, corporate and household lending,
card business and other activities (UNCTAD, 2002). According to UNCTAD (2002), Sub-
Saharan Africa, apart from South Africa, is the region that is most seriously lagging
behind in Internet banking. This is not surprising given that the continent of Africa,
compared to most other parts of the world, has a poorly developed ICT infrastructure
(United Nations Development Programme [UNDP], 2003; Mansell & Wehn, 1998). A
major problem for the adoption of Internet banking and e-commerce in developing

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Table 2. Access to communication technologies: A comparison between South African and various developed and developing regions

Telephone mainlines Internet users
(per 1,000 people) (per 1,000 people) (per 1,000 people)

1990 2001 1990 2001 1990 2001
South Africa 93 111 .. 242 0.1* 64.9
Developing countries 21 87 .. 75 .. 26.5
Least developed countries 3 6 0 6 .. 1.8
Roberts & Mukonoweshuro

Arab States 35 76 .. 58 .. 15.6

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East Asia and the Pacific 17 122 .. 113 .. 41.4
Latin America and the Caribbean 62 162 .. 160 .. 49.0
South Asia 7 38 .. 7 .. 6.3
Sub-Saharan Africa 11 15 .. 28 .. 7.8
Central and Eastern Europe and the CIS 124 224 .. 120 .. 42.8
OECD 392 523 10 539 2.8 332.0
High-income OECD 465 597 13 605 3.2 400.1

World 98 169 2 153 .. 79.6

* data refer to 1991
.. not available
Source: Constructed from data presented in UNDP, (2003), Human Development Report 2003,
United Nations: Geneva and New York.

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Digital Technologies and the Cross-Border Expansion of South African Banks 261

countries is the lack of universal access. Table 2 compares the access to communications
across groups of developed and developing countries. This disparity of access is
referred to as the global digital divide (Castells, 2001), a divide that is often replicated
within countries both developed and developing. There are, as Polikanov and Abramova
(2003) note in their review of Africa and ICT, a number of initiatives to widen access to
telecommunications and the Internet including RASCOM and Africa One. In the field of
telecommunications, the RASCOM project aims to provide Africa with a regional system
of satellite communications. Although initiated in 1992 this project has yet to make
significant progress. Africa One aims to build an undersea fibre-optic cable circling the
continent, which will connect African states to each other and to the global Internet
backbone. In 2002, the first stage of Africa One linking West Africa to Asia via South
Africa was inaugurated (Polikanov & Abramova, 2003). Despite such initiatives, Africa
seriously lags behind other regions of the world, apart from the Middle East, in the
numbers of Internet users. According to NUA online surveys (Nua Internet Surveys,
2003), in September 2002 there were some 605.60 million Internet users worldwide,
distributed as follows: North America 30.16 %; Europe 31.52 %; Asia/Pacific 30.92 %;
Latin America 5.51%; Middle East 0.85%; and, Africa 1.04 %, with most users being in
South Africa.
Nevertheless, a study of the impact of information technology on the banking and
insurance sector in Nigeria, (Ugwu, Oyebisi, Ilori & Adagunodo, 2000) identifies the
following electronic application services employed in the banking industry: electronic
fund transfer, electronic fund transfer at the point of sale, pass card, smart card and home
banking. Just over 10% of Nigerian banks offer their customers electronic banking
services (Manson, 2002b). Automatic Teller Machines (ATMs) and credit card payments
are widely established in some African countries, particularly South Africa, Kenya and
Zimbabwe. However, other African countries such as Tanzania and Uganda have limited
use of these instruments. By utilizing new electronic banking systems, banks are tapping
in to the continent™s great potential for growth bypassing the underdeveloped infra-
structure. For instance, Ghana was introduced to electronic banking in 2000 and, in June
2001, the co-operative bank of Kenya became one of four banks to launch a centralized
banking system. Furthermore, as UNCTAD (2002) notes, where the telecommunications
infrastructure is inadequate, technologies that allow the storage and transaction of value
in proximity and offline are being adopted. For example, smart cards based on Visa
Horizon proximity technologies are being introduced in Ghana and a number of other
African countries.
At the local level, these developments are also greatly increasing the capacity of both
banks and non-banks to access local and national markets without the high cost
investments in traditional delivery systems. Consequently, the leap from low tech to
latest tech is more marked in Africa than in almost any other part of the world (Melly &
Marks, 2000).
Significant challenges, however, do exist for financial-sector organizations operating in
Africa. For instance, merging banking operations into a single cross-border information
system is a major feat in places without electricity supplies or telephone lines. A key
challenge in Africa is to bringing the benefits of the formal first-world economy to the
largely low-income population that depends heavily on local micro-credit and savings

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262 Roberts & Mukonoweshuro

schemes which play an important role in the development process (Moore, 2000).
Electronic banking has the potential to bridge the divide between the formal tax-paying
economy and the dynamic informal economy of the rural areas and to replace expensive
bricks and mortar with more cost-effective systems in a continent where 70% of the
population is still unbanked (Paulson, 2000).
South Africa has a major advantage over other African countries in the area of Internet
access. It has a developed telecommunications infrastructure, which was restructured
in 1996, and although the commercialized Public Telecommunications Operator, Telkom,
initially retained a monopoly in the provision of basic fixed telephony services, in an
agreement with the World Trade Organization under the Agreement on Basic Telecom-
munications South Africa is bound to liberalize and privatize its telecommunications
sector (Cogburn, 2003). The level of competition in the telecommunications sector is a
key factor determining the price of access to the Internet. Effective competition brings
price down and since most Internet access is through fixed telecommunication lines,
allows for the successful development of Internet-based activity. This has been clearly
demonstrated in relation to the uneven development of Internet activity in Europe
(Waesche, 2003).
The South African government has sought to promote a digital economy and provide
universal access to the Internet and basic telephony in order to redress the socio-
economic ills created by apartheid. To widen access to the Internet in South Africa the
Department of Communication has promoted a range of public access initiatives includ-
ing the development of Multi-Purpose Community Information Centres, the Universal
Service Agency and Public Information Terminals (Cogburn, 2003). Table 2 also includes
data for South Africa from which it is evident that the country is advanced in its access
to the Internet and telecommunications (including cellular access) compared to devel-
oping countries as a whole.
South Africa has a well-developed financial system, in which the South African Reserve
Bank (SARB) has taken the lead on issues concerning e-payments. In 1998, for example,
it developed the South African Multiple Option Settlement (SAMOS) system that allows
real-time settlement between banks (Cogburn, 2003). Indeed, South Africa™s top four
banks are the largest consumers of telecommunication services (Cogburn & Nyaki
Adeya, 2002). All major financial institutions have electronic networks that span the
country, and the networks of the largest banks reach out into other nations. These
institutions already engage in a significant level of e-commerce from web-based elec-
tronic banking, online bill presentation and payment, asset financing, mortgage appli-
cations and online share dealings to unit trusts, insurance product sales and insurance
claims processing. The number of such transactions grew substantially between 1999
and 2000, and they are expected to continue to develop rapidly (Cogburn & Nyaki Adeya,
One innovative new application in Internet banking is Paycom express, a prepaid Internet
account developed by a South African consortium. It combines a pre-paid credit with a
user-identification and can be used to make electronic purchases over the Internet. More
importantly, it is being used to dial into the Internet at a national network of Caltex petrol
stations in order to buy fuel. This is extremely beneficial in remote areas where petrol
stations often provide the only telecommunications link for miles.

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Digital Technologies and the Cross-Border Expansion of South African Banks 263

Financial institutions in the developed world are already adopting wireless communica-
tion for the delivery of services (Yen & Chou, 2001). Given the poor development of the
land-based telecommunications infrastructure in Africa, wireless communication would
appear to offer great potential for the future development of the Internet and Internet-
based services on the Continent. South African banks are already involved in wireless
pilots of varying complexity ranging from basic banking services and SMS (Short
Messaging Service) alerts, to full-blown payment, bill-payment, pre-paid cellular re-
charging and other services (Manson, 2002b). The future of mobile delivery has
significant potential in African markets. Large sectors of the population still do not have
access to the wired world and wireless technology has the ability to provide a range of
innovative financial inquiry and payment services at relatively low cost to potential
users. However, a major challenge for banks adopting wireless technologies relates to
the proliferation of mobile telecommunication operators across Africa. These operators
are using a variety of largely incompatible standards thereby increasing the costs for
businesses wishing to supply services to users of mobile communications.
With a few exceptions, non-African investors in the banking sector tend to cater to large
businesses and up-market personal customers who can make good use of technology
and the foreign banks™ capacity to provide investment advice, structure trade financings
or deal in foreign exchange. Internet and other online services are well suited to this
clientele. However, the lower end of the personal banking market together with the small,
medium and micro enterprise market are not as attractive to non-African banks, conse-
quently, they offer many opportunities for South African banks to exploit throughout the
continent of Africa.

Digital Technologies in South African
Banking Organization Networks
In this section, the role of digital technologies in South African banking organization
networks is examined through case studies of Standard Bank of South Africa Limited
(Stanbic) and the Amalgamated Banks of South Africa (ABSA). Both Stanbic and ABSA
are among the top banks in South Africa and Africa (Table 1), as such they are leading
investors in, and users of, ICT. An examination of the use of ICT by these two banking
organizations will provide insights of relevance to the wider African banking community.
However, before progressing further it is useful to review briefly the historical develop-
ment of these two banks.
The Standard Bank of South Africa Limited (Stanbic) was formed in 1962 and registered
as a South African company operating as a subsidiary of Standard Bank in London
(subsequently to become Standard Chartered Bank plc.). However, in 1987 Standard
Chartered sold its 39% stake in Stanbic, transferring complete ownership to the holding
company in South Africa (“Global Sweep,” 2002). In 1988, the group became international
by opening a branch in Swaziland. In 1992, it established a bank in Botswana and acquired
the long established Grindlays network in Botswana, Kenya, Uganda, Zaire, Zambia and

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264 Roberts & Mukonoweshuro

Zimbabwe, with minority holdings in Ghana and Nigeria. In 2002, the group acquired an
interest in a bank in Malawi and established a representative office of an offshore banking
unit in Mauritius. Although involved in retail banking, Stanbic™s main emphasis has been
on corporate banking. It taps into the competency of its London operation to provide
project finance as well as commodity finance for trade. Today the group has the largest
single network of banking services in Africa (Table 1) and made US$5.6 million before tax
in Africa in 2001 (Theobald, 2002).
ABSA was formed more recently in 1991 by the merger of Allied Bank (Allied Building
Society established in 1888), Volkskas Group (Volkskas Co-operative Limited estab-
lished in 1934) and United Bank (United Building Society established in 1889). TrustBank
(Federale Trust Limited established in 1954) joined the ABSA Group when Bankorp
merged with ABSA in 1992. ABSA Group is the controlling company of the third largest
banking and financial services group in Africa (Table 1). ABSA prefers to use its
Johannesburg base to do deals in trade and structure finance as well as project finance.
Consequently, it has limited African exposure to corporate banking. ABSA™s African
expansion is predominantly in the retail sector. The group purchased two major retail
banks in privatization deals - Banco Austral in Mozambique and the Tanzanian National
Bank of Commerce. It focuses on under-performing banks, which it then develops giving
the group quick returns on capital. The bank plans to acquire at least one bank a year in
selected African countries to improve efficiencies and to use them as channels for tried-
and-tested retail products (Theobald, 2002).
South African banks are increasingly looking to technology to support their growth
(Belford, 2003). Digital technologies have played a key role in facilitating the international
organizational structures of international banks. For instance, organizational wide
information systems facilitate the control over ownership advantages through the
intensive monitoring of activities within the boundaries of the firm. Indeed, ABSA insists
that control is mandatory and non-negotiable and abandoned a deal with the Diamond
Bank of Nigeria, when the owner refused to surrender control. ABSA has connected the
back offices of its two foreign banks via satellite to Johannesburg where full monitoring
takes place. All 35 of its Tanzanian subsidiaries have direct online links to the head office
in South Africa. Satellite dishes ensure that customers nationwide have real-time instant
service (Melly & Marks, 2000).
More importantly, in Africa, digital technology is allowing banks to bypass the tradi-
tional bricks and mortar communications infrastructure with more cost-effective elec-
tronic systems. This is critical on a mostly undeveloped continent, which at the size of
12 million square miles, is almost as large as North America and Europe combined. For
instance, Stanbic™s network spans 17 other Sub-Saharan countries, extends to 20
countries on other continents and is connected by banking systems that link into the
SWIFT international message system. Furthermore, satellite communications are being
harnessed to reduce reliance on inadequate telecommunications systems throughout the
Sub-Saharan region.
Clearly, access to global financial networks is an important ownership advantage for
banks like Stanbic and ABSA. These banks are also generating further ownership
advantage by investing heavily in pioneering new methods of electronic banking and the
development of real-time communication networks (Ashurst, 1998). Johannesburg has

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Digital Technologies and the Cross-Border Expansion of South African Banks 265

emerged as a strategic locality for the development of a new standard for electronic cash
transactions, giving South African banks further ownership advantages deriving from
their home base.
One limiting factor in the issuing of credit cards is the costly and unreliable telecommu-
nications infrastructure. To overcome this problem banks have distributed multifunction
“chip” cards that track spending and support a pre-paid “electronic purse,” thus
severing the bond linking points of sale to mainframes. By 1997, both Stanbic and ABSA
had issued conventional magnetic stripe debit cards developed by Mastercard, to be
upgraded to “chip” cards for about 9 million clients6, many of whom have never used
chequebooks or ATMs. The new equipment includes GSM (Global Systems for Mobile)
terminals, which rely on digital cellular telephony in areas where cable networks
supporting landline telephony are unavailable. Indeed, ABSA was the first bank in South
Africa to launch a mass-market mobile banking application in August 2000. The bank
offers customers access to balance enquiries, mini-statements, transfers and third-party
payments via cellular devices.
Stanbic aims to grow income and reduce costs through the use of mobile technologies
(Manson, 2002a). The group offers its customers access to traditional banking products
via cellular banking. It also offers subscribers to certain networks the ability to purchase
pre-paid airtime via electronic channels, namely Interactive Voice Response (accessible
directly from cell phones and landlines), and ATMs. In addition, Stanbic is using
technology to help target low-income customers by developing low-cost distribution
networks to service them. In 2001, Stanbic™s AutoBank E in South Africa had 2.6m low-
income customers, and almost all are people who “previously kept their money in biscuit
tins or informal neighbourhood savings clubs” (“South African banking,” 2000). Many
were unable to meet minimum-balance requirements to open traditional bank accounts
or to understand complex bank charges. AutoBank E allows almost anyone to open an
account with a deposit of only 50 Rand ($8). Paperwork is kept to a minimum. Customers
are given a cash-point card, and shown how to use it by employees who speak a variety
of African languages. Simplicity is paramount, so all transactions occur through ATMs
with a flat fee charged each time. Customers do not need a separate savings account
because a “savings purse,” into which money can be transferred, is attached to every
account. Customers do not even have to be literate to use the service: many simply
remember the sequence of buttons they need to press. Computerization makes it possible
to lend money to people with no collateral and no formal address. The computer analyses
a customer™s savings history to decide whether he or she is creditworthy. Since there are
no back-office staff and little paperwork, AutoBank E™s costs are 30-40% lower than at
traditional branches. Interest rates on deposits are low, but even those whose only
income is a state pension can afford to bank with AutoBank E (Moore, 2000).
Most African banks have lost competitiveness because high costs and the lack of
appropriately skilled labour have hindered their ability to maintain sophisticated sys-
tems. A major challenge for South African banks and other businesses highly dependent
on ICT is the ability to recruit, train and retain a skilled workforce. Information technology
skills are in demand across the globe, hence South African businesses must compete for
these skills in the global market. Furthermore, the development of such skills in South
Africa is inhibited by the vast inequality that exists within the country. A legacy of the

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Table 3. The ownership, locational and internalization advantages of South African multinational banks investing in Africa

Ownership advantages Locational Advantages Internalization Advantages

Existing client relations, access to Person-to-person contact Maintenance of quality through
• • •
transnational clients, foreigners abroad required therefore need to be control
close to clients
Reputation, brand name and Control over intangible assets,
• •
professional expertise such as reputation and brand
Presence of existing clients

Access to, and knowledge of, Government regulations
• •
international capital and financial Economies of scale and scope in

Growing markets for financial

Roberts & Mukonoweshuro

markets the use of assets such as data

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Economies of scale and scope
• Low levels of effective

Economies of coordinating

competition in African markets
Intrinsic value of reserve currencies

capital flows
Substantial capital base Lower costs of foreign
• •
Importance of international

Financial innovations

Availability of skilled labour

Control over trans-border

Protection against

data/communication networks Low psychic distance, including

exchange/political risks
African identity
Access to global financial networks

Need to pursue pan-

African countries prefer

Ability to invest in the latest
• African/global investment
investment from other African
information and communications strategy
rather than non-African
South African nationality/ African

Low technological

competencies of indigenous
Advantages arising from the home base

including the regulatory and legal
Availability of indigenous banks

environment and the strong promotion
for acquisitions
of ICTs by government policies

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Digital Technologies and the Cross-Border Expansion of South African Banks 267

apartheid era is the continuing disparity in economic power between Blacks and Whites.
The poorest 40% of the population earn less that 4% of the income, while the wealthiest
10% earn more than 51% (Marais, 2000; Cogburn and Nyaki Adeya, 2002). Such disparity
limits the scope for growth and the development of a skilled workforce.
Banks need to upgrade software systems continually to keep them competitive. For
banks using older versions of software, which software vendors no longer support,
upgrading often involves the complete re-integration and re-customization of software,
increasing costs dramatically (Vecchiatto, 2002). For a number of reasons African banks
pay a premium for the customization of their software. Firstly, some deal in environments
where people regularly exchange one currency for another local currency. Secondly, in
some countries power failures are an everyday occurrence, so software and hardware
must be robust, and banks must have adequate back-up facilities. Finally, African banks
do not generally benefit from efficiencies of scale as they are operating from much smaller
bases than Western incumbents are. However, the large size and economic strength of
Stanbic and ABSA give them ownership advantages arising from economies of scale that
are not available to smaller African banks. Internal competencies in the use and
development of banking technology together with the external technological environ-
ment of their home country, in which digital technologies are highly developed relative
to other African countries, provide these banks with significant ownership advantages
in the use of ICTs. Table 3 provides a summary of the ownership, locational and
internalization advantages from which South African banking organizations, including
Stanbic and ABSA, benefit in their competition with non-African and indigenous banks
in African markets. It is the desire to exploit these advantages that motivates South
African banks to expand into other African markets.
Clearly, both Stanbic and ABSA are well endowed with ICTs and the necessary skills to
apply them successfully to the banking sector in Africa. Their expertise in the use and
development of technology is an important source of ownership advantage for these
organizations when expanding into foreign markets. Combined with their emerging
market specialization and experience with African conditions, their use of digital tech-
nologies provides them with the opportunity to dominate the banking sector in Africa.

The banking sector worldwide has experienced significant organizational change result-
ing from the adoption of ICTs. This chapter has examined the role of digital technologies
in facilitating the cross-border development of African banking organizations by
investigating the activities of a number of South African banks. In addition, the analysis
explored ICT both as an ownership specific internal capacity, as a locational specific
factor influencing the geographical pattern of international expansion, and as a facilitator
of the internalization of cross-border banking networks.
Specific challenges exist for financial sector organizations operating in Africa. These
arise from the low level of development and the weak ICT infrastructure. South African

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permission of Idea Group Inc. is prohibited.
268 Roberts & Mukonoweshuro

banks have several advantages beyond those available to other African banks and to
non-African banks. Firstly, South African banks have the knowledge and experience of
operating in Africa and have strong brands and reputations across the continent.
Secondly, the size and maturity of the South African banking sector has promoted the
strength and stability of these banks, which are amongst the largest in Africa. Thirdly,
their origins in South Africa give them an advantage over non-African banks because
African governments prefer to use African rather than non-African banks. Finally, South
African banks have well-developed information systems and invest heavily in telecom-
munications and information technology in order to maintain their advantage arising from
the use of digital technologies.
The locational advantages available to South African banks operating in Africa include
the ability to exploit the increasingly stable and liberalized economic environments in
these countries. National financial infrastructures are improving as countries adopt
standards that are more rigorous. Foreign investment in Africa has increased signifi-
cantly following these improvements. Furthermore, the technological weaknesses of
many African countries allow South African banks to develop a leading position in the
use of information systems.
South African banks also gain from the maintenance of control over ownership advan-
tages which leads to internalization within the boundaries of the firm. In particular, ICT
has played a key role in facilitating the control of assets through the organizational
structures of international banks. For example, both ABSA and Stanbic use real-time
communication networks to monitor activities in their subsidiaries.
This chapter has highlighted a number of issues regarding intra-African investment in
the banking sector. In particular, the evidence presented above supports the argument
that South African banks have an advantage over their regional competitors arising from
their ability to apply ICTs successfully to the production and delivery of their services
as well as to the operation of their organisational networks. Clearly, the technological
leadership of South African banks derives from historical factors and the policies
pursued by a government that is keen to promote the digital economy as a means to
improve opportunities across the country. Important also has been the regulatory
environment as it relates to both the banking and telecommunications sector and wider
social issues in South Africa. The government has sought to maintain a stable economic
environment, although the persistence of corruption and the AIDs epidemic present
great challenges which must be faced if the country is to continue to progress.
South African banks currently have an advantage in the use and development of digital
technologies. However, there is no guarantee that this technological leadership will
persist. As noted, a major challenge for South African banks is the ability to recruit, train
and retain a skilled workforce. There is then the danger that South African banks will not
be able to sustain their advantages as they expand across Africa. This would allow non-
African banks to takeover and build upon the foundations laid by South African banks.

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permission of Idea Group Inc. is prohibited.
Digital Technologies and the Cross-Border Expansion of South African Banks 269

Tier 1 capital is a measure of the strength of the bank and is defined as common
equity, qualifying non-cumulative perpetual preferred stock, and minority inter-
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For a critical discussion of Dunning™s eclectic approach see, for example, Ietto-
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internationalisation of service firms see Roberts (1998).
See Dicken (2003, p. 446), for examples of product innovations in financial markets.
Briefly, difficulties arise because of the asymmetric distribution of information
concerning the transaction between buyer and seller. The exchange of knowledge
gives rise to problems of adverse selection and moral hazard that may prevent such
transactions occurring in the open market. Adverse selection is an ex ante
information problem referring to a situation in which one party in a potential
transaction is better informed about a relevant variable in the transaction than the
other party. Moral hazard is an ex post information problem referring to action which
parties in a transaction may take after they have agreed to execute the transaction.
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