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The Determinants of Multinational Banking during the First Globalization, 1870-1914

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  • Stefano Battilossi

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Abstract

What determined the multinational expansion of European banks in the pre1914 era of globalization? And how were banks’ foreign investments related to other facets of the globalizing world economy such as trade and capital flows? The paper reviews both the contemporary and historical literature, and empirically investigates these issues by using an original panel data based on a sample of more than 50 countries. The dependent variable, aiming at measuring the intensity of crossborder activities operated by banks from foreign locations, is the number of foreign branches and subsidiaries of British, French and German banks. Explanatory variables are mainly selected on the base of the eclectic theory of multinational banking, but also include geographical factors (as suggested by gravity models) and institutional indicators advanced by recent studies inspired by new institutional economics, such as legal families and adherence to the Gold Standard. These regressors captures the impact of economic integration (trade and capital flows), informational development, institutional and economic characteristics of the hostmarket, as well as exchange rate and country risk factors, on banks’ foreign investment decisions. The results suggest that, due to its prevailing ‘colonial’ features, pre1914 multinational banking does not fit easily into augmented gravity models. The role of trade as a key determinant of banks expansion overseas is qualified, and both institutional factors as well as competitive interaction emerge as critical determinants of banks’ decisions to invest in foreign countries. Moreover, the systematic comparison of determinants of foreign investiments of banks from major core countries reveals that multinational banking was not a homogenous phenomenon, as banks of different nationality responded differently to economic, geographical and institutional factors.

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Paper provided by Universidad Carlos III, Departamento de Historia Económica e Instituciones in its series Working Papers in Economic History with number wh056807.

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Date of creation: Dec 2005
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Handle: RePEc:cte:whrepe:wh056807

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  1. Portes, Richard & Rey, Helene & Oh, Yonghyup, 2001. "Information and capital flows: The determinants of transactions in financial assets," European Economic Review, Elsevier, vol. 45(4-6), pages 783-796, May.
  2. Joël Métais, 1979. "Le processus de multinationalisation des grandes banques commerciales," Revue Économique, Programme National Persée, vol. 30(3), pages 487-517.
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Cited by:
  1. Rui Esteves, 2011. "The Political Economy of Global Financial Liberalisation in Historical Perspective," Economics Series Working Papers Number 89, University of Oxford, Department of Economics.
  2. Nikolay Nenovsky & Martin Ivanov & Gergana Mihaylova, 2008. "The Evolution of Bulgarian Banks' Efficiency During the Twenties: A Dea Approach," Working Papers 82, Bank of Greece.
  3. Barry Eichengreen & Marc Flandreau, 2012. "The Federal Reserve, the Bank of England, and the Rise of the Dollar as an International Currency, 1914–1939," Open Economies Review, Springer, vol. 23(1), pages 57-87, February.
  4. Barry Eichengreen & Marc Flandreau, 2010. "The Federal Reserve, the Bank of England and the rise of the dollar as an international currency, 1914-39," BIS Working Papers 328, Bank for International Settlements.

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