Abstract
This chapter empirically examines the relationship between foreign bank presence and financial development in a panel framework covering 57 emerging market and developing economies (EMDEs) over 1995–2009. Specifically, the chapter undertakes an empirical investigation of three inter-related questions: One, how does greater foreign bank presence affect domestic credit creation in EMDEs? Two, are there threshold levels of foreign bank presence associated with financial sector development? Three, is the relationship between foreign banks and financial development conditional on the presence of a threshold level of institutional environment? While we find a positive relationship between foreign banks and financial development in general, the empirical results suggest that a strong information environment tends to strengthen the beneficial impact that foreign banks can have on financial development.
This chapter is based on and builds upon ongoing joint work with Ramkishen S. Rajan. Selected relevant references include Rajan and Gopalan (2014), Gopalan (2015a, b).
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Notes
- 1.
At the outset, it is worth emphasizing that we would like to make a distinction between foreign bank entry and foreign bank presence. While technically much of the phenomenon we are describing relates to the effects of foreign bank entry and how it affects host countries through their presence, the metric we use in this chapter (foreign bank assets as a share of domestic banking assets) is a stock variable. Hence it does not capture entry (flow) in the strict sense of the term. Hence we use the term foreign bank presence instead of entry.
- 2.
- 3.
This issue is closely related to the literature on the implications of foreign bank presence on firms’ access to finance which has primarily focused on the dynamics of foreign bank lending to small and opaque firms (mostly the small-and medium-sized enterprises).
- 4.
They also find that the thresholds are lower for foreign direct investment and portfolio equity liabilities compared to those for debt liabilities.
- 5.
For a detailed investigation on various possible determinants of private credit, see Djankov et al. (2007).
- 6.
Further, a key point to note here is that the estimates of the fixed-effects estimation remain robust only if the potential source of endogeneity arises from the correlation between the time-invariant component of the error term and the regressor of interest. This is because a fixed-effects model resolves this problem by excluding the unobservable time-invariant effects through a time-demeaning of the data.
- 7.
An examination of the correlations among the right-hand side variables rules out issues of multi-collinearity. The results are available on request.
- 8.
The average income in our sample of 34 countries is US$4765 for emerging economies and US$1930 for our sample of 23 developing countries.
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Gopalan, S. (2016). Foreign Bank Presence and Financial Development in Emerging Market and Developing Economies: An Empirical Investigation. In: Roy, M., Sinha Roy, S. (eds) International Trade and International Finance. Springer, New Delhi. https://doi.org/10.1007/978-81-322-2797-7_28
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DOI: https://doi.org/10.1007/978-81-322-2797-7_28
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