Location decisions of foreign banks and competitive advantage

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Location decisions of foreign banks and competitive advantage

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Claessens, Stijn
Van Horen, Neeltje

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Abstract

While institutional differences have been found to affect country growth patterns, much has remained unexplained, including how economic actors " overcome " institutional weaknesses and how internationalization helps or hinders development. Banking is an institutionally-intensive activity and the location decision of foreign banks provides a good test of how institutional differences are dealt with and how they may affect economic choices. Specifically, the authors examine whether banks seek out those markets where institutional familiarity provides them with a competitive advantage over other foreign competitor banks. Using bilateral data on banking sector foreign direct investment in all developing countries and controlling for other factors, they find that competitive advantage is an important factor in driving foreign banks ' location decisions. The findings suggest that high institutional quality is not necessarily a prerequisite to attract foreign direct investment in banking and that there are specific benefits, as well as risks, to international financial integration between developing countries.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4113.

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Date of creation: 01 Jan 2007
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Handle: RePEc:wbk:wbrwps:4113

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This paper has been announced in the following NEP Reports:

NEP-ALL-2007-01-28 (All new papers)
NEP-BAN-2007-01-28 (Banking)
NEP-CSE-2007-01-28 (Economics of Strategic Management)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Ricardo Correa, 2008. "Cross-border bank acquisitions: Is there a performance effect?," International Finance Discussion Papers 922, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Cull, Robert & Martinez Peria, Maria Soledad, 2007. "Foreign bank participation and crises in developing countries," Policy Research Working Paper Series 4128, The World Bank. [Downloadable!]
Claudia M. Buch & Gayle L. DeLong, 2008. "Banking Globalization: International Consolidation and Mergers in Banking," IAW Discussion Papers 38, Institut für Angewandte Wirtschaftsforschung (IAW). [Downloadable!]

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