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The Determinants of Foreign Banking Activity in South East Europe: Do FDI, Bilateral Trade and EU Policies Matter?

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  • Flaviu Mihaescu
  • Liviu Voinea

Abstract

This research paper attempts to find explanatory variables for foreign banks activity in SEE and CEE, mainly among three categories of factors FDI, bilateral trade, and EU policies. We proxy bilateral banking activity by the consolidated foreign claims of reporting banks between source and recipient countries. Our sample includes 12 source countries (of which 10 are EU members) and 16 recipient countries (from SEE, CEE and former Soviet Union), and it covers the 1995-2004 period. We found that bilateral trade and the interest rate differential are significant and bear the expected sign, which means that foreign banks follow the customer and exploit profit opportunities. Foreign direct investment (FDI) was found to be weakly significant and only with a two-year lag, which means that banking activity is generated by non-financial FDI only after that FDI matures. Banking sector reform, a proxy for EU policies imposed to Eastern European countries, also appears significant. Lack of corruption is important, while distance does not matter. This paper also finds that an increase in foreign banks’ activity in a recipient country is correlated with an increase in the Human Development Index.

Suggested Citation

  • Flaviu Mihaescu & Liviu Voinea, 2006. "The Determinants of Foreign Banking Activity in South East Europe: Do FDI, Bilateral Trade and EU Policies Matter?," wiiw Balkan Observatory Working Papers 67, The Vienna Institute for International Economic Studies, wiiw.
  • Handle: RePEc:wii:bpaper:067
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    References listed on IDEAS

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    1. Edward Christie, 2003. "Foreign Direct Investment in Southeast Europe," wiiw Working Papers 24, The Vienna Institute for International Economic Studies, wiiw.
    2. Brealey, R. A. & Kaplanis, E. C., 1996. "The determination of foreign banking location," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 577-597, August.
    3. Aristidis Bitzenis, 2004. "Why foreign banks are entering transition economies: the case of Bulgaria," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 6(1), pages 107-133.
    4. Luiz Fernando Rodrigues de Paula, 2001. "Expansion Strategies of European Banks to Brazil and Their Impacts on the Brazilian Banking Sector," Anais do XXIX Encontro Nacional de Economia [Proceedings of the 29th Brazilian Economics Meeting] 044, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    5. Robert Lensink & Jakob Haan, 2002. "Do Reforms in Transition Economies Affect Foreign Bank Entry?," International Review of Finance, International Review of Finance Ltd., vol. 3(3-4), pages 213-232.
    6. Yamori, Nobuyoshi, 1998. "A note on the location choice of multinational banks: The case of Japanese financial institutions," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 109-120, January.
    7. Bol, Hanneke & Lensink, Robert & Haan, Jakob de, 2002. "Do reforms in transition economies affect foreign bank entry?," CCSO Working Papers 200205, University of Groningen, CCSO Centre for Economic Research.
    8. repec:dgr:rugccs:200205 is not listed on IDEAS
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