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Location Decisions of Foreign Banks and Institutional Competitive Advantage - page 1 / 33





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Location Decisions of Foreign Banks and Institutional Competitive Advantage

Stijn Claessens and Neeltje Van Horen*

This draft: March 2008


Familiarity with working in a specific institutional environment compared to its competitors can provide a firm with a competitive advantage, making it invest in specific host countries. We examine whether this notion of institutional competitive advantage drives banks to seek out specific markets. Using detailed, bilateral data of bank ownership for a large number of countries over 1995-2006 and using a first-difference model, we find that institutional competitive advantage importantly drives banks’ location decisions. Results are robust to different samples and model specifications, various econometric techniques and alternative measures of institutional quality. This finding has some policy implications, including on the increased cross-border banking among developing countries.

JEL Classification Codes: F21, F23, G21

Keywords: foreign direct investment, international banking, institutions

  • *

    Claessens is with the International Monetary Fund, University of Amsterdam and CEPR, and Van Horen

is with the Central Bank of the Netherlands and the University of Amsterdam. The paper was started while the authors were at the World Bank. We are grateful to Allaeddin Twebti, Matias Gutierrez and especially Tugba Gurcanlar and Joaquin Mercado for their help with collecting the data. We would like to thank our discussants, Gerald Dwyer, Johann Fedderke, and Jan Svenjar; Valentina Bruno, Erik Feijen, Robert Hauswald, Jeroen van Hinloopen, Franc Klaassen, Luc Laeven, Steven Ongena, and Costas Stephanou; and seminar participants at American University, Rabobank, University of Amsterdam, Utrecht University, the Central Bank of the Netherlands, the 2006 Latin American and Caribbean Economic Association Meetings (Mexico-City), the Journal of Financial Stability and Bank of Finland conference (Helsinki), the 13th Dubrovnik Economic Conference, the 11th CEPR/ESI Annual Conference (Pretoria), and the 2007 Hong Kong University for Science and Technology Finance Symposium for their comments. Financial support for this project from the World Bank’s Research Support Budget and the United Kingdom's Department for International Development (DECRG trade and services project) is gratefully acknowledged. The views expressed in this paper are those of the authors and do not necessarily represent those of the institutions with which they are or have been affiliated. E-mail addresses: sclaessens@imf.org, n.van.horen@dnb.nl.

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