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Does foreign bank entry really stimulate gross domestic investment?

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  • Robert Lensink
  • Victor Murinde

Abstract

This paper investigates the linear as well as non-linear properties of the relationship between the entry of foreign-owned private banks and changes in gross domestic 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 54 countries. The regression results suggest that the relationship between foreign bank entry and aggregate investment mimics 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 and represents the critical point at which foreign bank entry starts to stimulate aggregate investment. Overall, therefore, the evidence suggests that there is a robust non-linear (U-curve) relationship, so that the presence of foreign banks leads to investment expansion only after foreign bank presence becomes large enough as a share of local banking activity.

Suggested Citation

  • Robert Lensink & Victor Murinde, 2006. "Does foreign bank entry really stimulate gross domestic investment?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(8), pages 569-582.
    • Handle: RePEc:taf:apfiec:v:16:y:2006:i:8:p:569-582
    DOI: 10.1080/09603100600649701
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    References listed on IDEAS

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    1. William C. Gruben & Jahyeong Koo & Robert R. Moore, 1999. "When does financial liberalization make banks risky? : an empirical examination of Argentina, Canada and Mexico," Center for Latin America Working Papers 0399, Federal Reserve Bank of Dallas.
    2. Robert Lensink & Hong Bo & Elmer Sterken, 2001. "Investment, Capital Market Imperfections, and Uncertainty," Books, Edward Elgar Publishing, number 1770.
    3. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
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    Cited by:

    1. Shusen Qi & Steven Ongena, 2019. "Will Money Talk? Firm Bribery and Credit Access," Financial Management, Financial Management Association International, vol. 48(1), pages 117-157, March.

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