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Foreign Bank Entry into Emerging Economies: An Empirical Assessment of the Determinants and Risks Predicated on German FDI Data

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  • Wezel, Torsten
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    Abstract

    The paper investigates the factors crucial in the locational decisions of multinational German banks in selected emerging markets of central and eastern Europe, Latin America and Asia between 1994 and 2001. Emphasis is placed on testing variables of macroeconomic and financial sector risk along with measures of bank-client integration and host country market characteristics. Results indicate that FDI by non-banks exerted a strong pull effect on banking FDI flows, as did highly developed financial markets and a low country risk. No particularly meaningful effects are found in the sample for per capita GDP or trade linkages. A strong case can be made for a variable taken from the "early warning indicators" literature which measures the backing of short-term banking deposits by international currency reserves. In almost all regressions, this financial crisis variable turns out be highly negatively correlated with FDI flows. Disaggregation of the sample by region illustrates that the factors which are at work differ between the continents. Comparing pre- and post-Asian-crisis time periods, it is found that both variables of country riskiness gain significance in the later sub-sample, with the result being especially pronounced for the measure of financial vulnerability. --

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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2004,01.

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    Date of creation: 2004
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    Handle: RePEc:zbw:bubdp1:1542

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    Keywords: foreign direct investment; banks; emerging markets; macroeconomic risk;

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    1. Calvo, Guillermo A, 1996. "Capital Flows and Macroeconomic Management: Tequila Lessons," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 1(3), pages 207-23, July.
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    Cited by:
    1. Olena Havrylchyk & Emilia Jurzyk, 2008. "Inherited or Earned? Performance of Foreign Banks in Central and Eastern Europe," Working Papers 2008-16, CEPII research center.
    2. Molyneux, Philip & Nguyen, Linh H. & Xie, Ru, 2013. "Foreign bank entry in South East Asia," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 26-35.
    3. Cerutti, Eugenio & Dell'Ariccia, Giovanni & Martinez Peria, Maria Soledad, 2005. "How banks go abroad : branches or subsidiaries ?," Policy Research Working Paper Series 3753, The World Bank.
    4. Cazzavillan, Guido & Olszewski, Krzysztof, 2012. "Interaction between foreign financial services and foreign direct investment in Transition Economies: An empirical analysis with focus on the manufacturing sector," Research in Economics, Elsevier, vol. 66(4), pages 305-319.
    5. Alicia García-Herrero & María Soledad Martínez-Pería, 2005. "The mix of international banks'foreign claims: determinants and implications," Banco de Espa�a Working Papers 0525, Banco de Espa�a.
    6. Clarke, George R.G. & Cull, Robert & Martinez Peria, Maria Soledad, 2006. "Foreign bank participation and access to credit across firms in developing countries," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 774-795, December.

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