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Foreign lending, local lending, and economic growth

Author

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  • Owen, Ann L.
  • Temesvary, Judit

Abstract

Recent research has shown that there is significant cross-country heterogeneity in the previously well-established relationship of finance and long-run growth. We explore this heterogeneity by estimating finite mixture models and by considering the effects of foreign and domestic lending separately. We find that bank lending does not have the same effect on growth or savings in all countries. Country characteristics such as the extent of stock market development, the degree of rule of law, and even the development of the banking sector itself vary considerably across countries and affect the productivity of bank lending in encouraging growth and savings. Furthermore, the effect of bank finance on growth and the effect of foreign bank involvement depend on 1) how well developed the banking sector is, and 2) if foreign banks are involved via loans made by affiliates located within the country or via cross-border loans. The experience of lenders with a presence in the country is important, but only once a threshold level of financial sector development is reached. In countries with underdeveloped banking sectors, the influence of foreign-owned lenders relative to locally-owned banks can be detrimental to growth.

Suggested Citation

  • Owen, Ann L. & Temesvary, Judit, 2012. "Foreign lending, local lending, and economic growth," MPRA Paper 39978, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:39978
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    File URL: https://mpra.ub.uni-muenchen.de/39978/1/MPRA_paper_39978.pdf
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    References listed on IDEAS

    as
    1. Hakan Yilmazkuday, 2011. "Thresholds in the Finance-Growth Nexus: A Cross-Country Analysis," World Bank Economic Review, World Bank Group, vol. 25(2), pages 278-295, May.
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    5. Alfaro, Laura & Chanda, Areendam & Kalemli-Ozcan, Sebnem & Sayek, Selin, 2004. "FDI and economic growth: the role of local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112, October.
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    More about this item

    Keywords

    finance and growth; finite mixture models; cross-border lending;

    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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