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Location Decisions of Foreign Banks and Institutional Competitive Advantage - page 16 / 33





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Empirical Results

Univariate evidence We start with some simple basic statistics that highlight the entry patterns and how institutional competitive advantage may matter. Table 2 provides two sets of statistics, those for all observations in the sample and those for the observations where there was bilateral foreign bank investment at the time.15 Statistics are reported for both 1995 and 2006, allowing a comparison over time. The Table shows that foreign presence, the average number of foreign banks of a specific country j in host country i, almost doubled from 0.05 to 0.09 for all observations.16 For those observations with bilateral investment, there is no change in average presence over time, but the number of host-source country observations with presence increases from 314 to almost 500. This confirms the increase and broadening of foreign banks’ investments.

Important evidence for our institutional competitive advantage hypothesis is that for the sample with investment, the average institutional competitive advantage score goes down, from 1.29 in 1995 to 1.19 in 2006, which means an increase in relative familiarity. For the all observations sample, there is no such trend. Together, this suggests that the increased entry is driven in part by changes in institutional competitive advantage. The institutional competitive advantage variable itself, however, is higher for the entry sample than for the all observations sample, implying that often source countries are relatively further away from host countries than countries in general are. This univariate comparison is, however, misleading since the reasons why many countries with low scores on institutional competitive advantage have no entry may lie with other constraints, including a low level of host institutional quality. Indeed, in 1995, the average quality of host institutions was higher for observations with bilateral investment than for all observations, indicating that investment was concentrated in countries with relative good functioning institutions. In 2006, this difference was lower,

15 Note that to avoid any biases due to capital account, other restrictions or factors limiting in- or out-ward investments, we excluded those host countries receiving no investment and those source countries not investing at all abroad. In addition, offshore banking centers were also excluded.


The low number reflects the fact that for many country-pairs no investment has taken place.


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