Does Foreign Bank Entry Really Stimulate Gross Domestic Investment?
The main question that motivates this paper is: does foreign bank entry really stimulate gross domestic investment in the host economies? Specifically, the paper investigates the linear as well as non-linear properties of the relationship between the entry of foreign banks and changes in aggregate investment. A standard model of aggregate investment behaviour, in which an indicator for foreign banks is one of the determinants, is estimated and tested on a cross-section of data from 55 countries. The regression results strongly suggest that the relationship between foreign bank entry and aggregate investment mimic a U-curve: low (high) values of foreign bank entry have negative (positive) effects on domestic investment. The threshold value for the U- curve is also identified; this value represents the critical point at which foreign bank entry starts to stimulate aggregate investment. Hence, it is not until it has gained substantial proportions that foreign bank entry stimulates gross domestic investment in the host economies. (original abstract)
- Beck, T., A. Demirgug-Kunt and R. Levine (1999), A New Database on Financial Development and Structure, Policy Research Working Paper 2146, World Bank.
- Bo, H., R. Lensink and E. Sterken (2001), Investment, Capital Market Imperfections and Uncertainty: Theory and Empirical Results, Cheltenham: Edward Elgar.
- Claessens, Stijn, A. Dermirguc-Kunt and Harry Huizinga (2001), How does foreign entry affect domestic banking markets? Journal of Banking & Finance, Vol. 25, No. 5 (May), pp. 891-911.
- Dermiguc-Kunt, A., R. Levine and H. Min (1998), Opening to foreign banks: issues of stability, efficiency and growth. In: Seongtae Lee, ed., The Implications of Globalisation of World Financial Markets, Seoul: Bank of Korea.
- Dixit, A.K. and R.S. Pindyck (1994), Investment Under Uncertainty, Princeton, New Jersey: Princeton University Press.
- Dumpere (1999), The Theory of Aggregate Investment and Output Dynamics in Open Economic Systems, Westport and London: Greenwood Press.
- Easterly, W. and H. Yu (1999), Global Development Network Growth Database, on internet: http://www.worldbank.org/html/prdmg/grthweb/gdndata/htlm.
- Ferderer, J.P. (1993), The impact of uncertainty on aggregate investment spending: an empirical analysis, Journal of Money, Credit and Banking, Vol. 25 (February), pp. 30-48.
- Goldberg, L., B. G. Dages and D. Kinney (2000), Foreign and domestic bank participation in emerging markets: Lessons from Mexico and Argentina, FRBNY Economic Policy Review, September, pp. 17-35.
- Gruben, W., J. Koo and R. Moore (1999), When does financial liberalisation make banks risky? An empirical examination of Argentina, Canada and Mexico, Federal Reserve Bank of Dallas Centre for Latin American Economics Working Paper, No. 0399, July.
- Hansen, B. E. (1999), Threshold effects in non-dynamic panels: Estimation, testing and inference, Journal of Econometrics, Vol. 93, pp. 345-368.
- Hansen, B. E. (2000), Sample splitting and threshold estimation, Econometrica, Vol. 68, pp. 575-603.
- Jorgenson, D.W. (1963), Capital theory and investment behaviour, American Economic Review, Vol. 53, No. 2, pp. 247-59.
- Kaplan, S.N. and L. Zingales (1997), "Do investment-cash flow sensitivities provide useful measures of financing constraints? Quarterly Journal of Economics, Vol. 112, pp. 169- 215.
- Kaufmann, D., A. Kraav and P. Zoido-Lobaton (1999), Governance matters, Policy Research Working Paper No. 2196, Washington, D.C.: World Bank.
- Levine, R. (1996), Foreign banks, financial development and economic growth. In: C. E. Barfield, ed., International Financial Markets: Harmonisation versus Competition, Washington, D C.: AEI Press.
- Levine, R. and S. Zervos (1998), Capital account liberalisation and stock market development, World Development, Vol. 26, No. 7, pp. 1169-1183.
- Mullineux, A.W., V. Murinde and A. Punjkit (2001), Reforming the traditional structure of a central bank to cope with the Asian financial crisis: lessons from the Bank of Thailand, in A.W. Mullineux and V. Murinde (eds.), Handbook of International Banking, Cheltenham: Edward Elgar (forthcoming).
- Murinde, V. and C. Ryan (1999), The Implications of the General Agreement on Trade in Services for the Banking Sector in the United Arab Emirates, Geneva: UNCTAD.
- Murinde, V. and C. Ryan (2001a), The Implications of World Trade Organisation and the General Agreement on Trade in Services for the Banking Sector in the Gulf Co-operation Council (GCC) Countries, in G. Reed (ed.), Trade Liberalisation under WTO, London: Macmillan (forthcoming).
- Murinde, V. and C. Ryan (2001b), The Implications of World Trade Organisation and the General Agreement on Trade in Services for the Banking Sector in Sub-Saharan Africa, in V. Murinde (ed.) The Free Trade Area for the Common Market for Eastern and Central Africa, Aldershot: Ashgate Publishing.
- World Bank (1999), World Development Indicators 1999, available on CD-Rom.