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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
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.

Suggested Citation

  • Wezel, Torsten, 2004. "Foreign Bank Entry into Emerging Economies: An Empirical Assessment of the Determinants and Risks Predicated on German FDI Data," Discussion Paper Series 1: Economic Studies 2004,01, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp1:1542
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    References listed on IDEAS

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    Cited by:

    1. Dorrucci, Ettore & Meyer-Cirkel, Alexis & Santabárbara, Daniel, 2009. "Domestic financial development in emerging economies: evidence and implications," Occasional Paper Series 102, European Central Bank.
    2. Cerutti, Eugenio & Dell'Ariccia, Giovanni & Martinez Peria, Maria Soledad, 2007. "How banks go abroad: Branches or subsidiaries?," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1669-1692, June.
    3. Herrero, Alicia Garcia & Martinez Peria, Maria Soledad, 2007. "The mix of international banks' foreign claims: Determinants and implications," Journal of Banking & Finance, Elsevier, vol. 31(6), pages 1613-1631, June.
    4. Kalyvas, Antonios Nikolaos & Mamatzakis, Emmanuel, 2017. "Do creditor rights and information sharing affect the performance of foreign banks?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 13-35.
    5. Havrylchyk, Olena & Jurzyk, Emilia, 2011. "Inherited or earned? Performance of foreign banks in Central and Eastern Europe," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1291-1302, May.
    6. 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.
    7. 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.
    8. Bank for International Settlements, 2004. "Foreign direct investment in the financial sector of emerging market economies," CGFS Papers, Bank for International Settlements, number 22, december.
    9. J. François Outreville, 2008. "Foreign Affiliates of the Largest Insurance Groups: Location‐Specific Advantages," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 75(2), pages 463-491, June.
    10. 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.
    11. Javier Rodríguez & Javier Santiso, 2007. "Banking on Democracy: The Political Economy of International Private Bank Lending in Emerging Markets," OECD Development Centre Working Papers 259, OECD Publishing.
    12. Korzeb, Zbigniew & Niedziółka, Paweł & Nistor, Simona, 2023. "Sovereign creditworthiness and bank foreign ownership. An empirical investigation of the European banking sector," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    13. Byung Wook Jun & Sung Man Yoon, 2020. "Foreign Banks Acquisition Strategy and the Business Approach of Domestic Bank: A Case of Standard Chartered Bank," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 10(7), pages 861-874, July.
    14. Ajay B. Massand & Gopalakrishna B.V., 2017. "Determinants of Bank Foreign Direct Investment Inflow in India: A Dynamic Panel Data Approach," IIM Kozhikode Society & Management Review, , vol. 6(1), pages 13-22, January.
    15. PIRLOGEANU Dan, 2017. "The Determinants Of Foreign Direct Investments Inflows In G7 Countries," Revista Economica, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 69(3), pages 85-93, August.
    16. repec:onb:oenbwp:y::i:114:b:1 is not listed on IDEAS
    17. Wildmann, Christian, 2010. "What drives portfolio investments of German banks in emerging capital markets?," Discussion Paper Series 2: Banking and Financial Studies 2010,04, Deutsche Bundesbank.
    18. Ralph Sonenshine & Evan Kraft, 2015. "What Motivates Banks and Other Financial Services Firms to Merge? An Empirical Analysis of Economic and Institutional Factors," Review of Economics & Finance, Better Advances Press, Canada, vol. 5, pages 66-82, August.
    19. Yakubu, Ibrahim Nandom & Bunyaminu, Alhassan & Abdallah, Iliasu, 2022. "Motivations for Foreign Bank Entry in Ghana: A Country-level Analysis," MPRA Paper 115234, University Library of Munich, Germany.

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    More about this item

    Keywords

    foreign direct investment; banks; emerging markets; macroeconomic risk;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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