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Why Do Banks Go Abroad? Evidence Using a Three-Way Error Component Model

Author

Listed:
  • Tamrat W. Gashaw

    (Wartburg College)

  • Michael J. Ryan

    (Western Michigan University)

Abstract

This paper examines whether a host country's bank-capital-to-asset ratio and internet capability affect inward banking FDI. To do so we develop a two-asset portfolio selection model to analyze the risk-return factors in banking FDI. We then employ a three-way error component estimation model to account for time fixed effects as well as unobserved source- and host-country heterogeneity. The investment activities of 1156 banks from 20 source countries into 108 host countries over the period of 2000 - 2008 indicate that low bank-capital-to-asset ratio, better telecommunications infrastructure, strong bilateral trade, and the host's economic and financial sector development increase inward banking FDI. Finally, increased source-host geographic distance and the source country's government effectiveness affect banks' international investment activity.

Suggested Citation

  • Tamrat W. Gashaw & Michael J. Ryan, 2012. "Why Do Banks Go Abroad? Evidence Using a Three-Way Error Component Model," Journal of Economic Insight, Missouri Valley Economic Association, vol. 38(2), pages 79-107.
    • Handle: RePEc:mve:journl:v:38:y:2012:i:2:p:79-107
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    More about this item

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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