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Location Decisions of Foreign Banks and Institutional Competitive Advantage - page 17 / 33

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suggesting that host institutions have become less of a constraining factor, as investment was more in countries with relative lower quality of institutions.

As expected, entry restrictions fall over time for both groups. Control variables often used to explain cross-border activities, such as common border, colonial links and distance, of course, do not vary over time for the all observations sample, but for the investment sample, for which coverage of countries varies over time, there is some evidence of a reduction in “distance” measured in the various ways. This decline in distance among investment country pairs suggests that (developing) countries have become more active investors in their own region. As expected, for the investment sample host and source countries are closer in “distance” than for the sample of all countries.

Over time, trade between countries with investment increases but much less so for the investment sample than for the all observations sample, suggesting that the importance of trade has declined as a factor in entry decisions. GDP and GDP per capita show that source countries tend to be much larger and richer, whereas host countries are not larger or poorer than all countries. The variation in source country GDP does increase over time, consistent with the fact that more lower-income countries have become source country.

Regression results The univariate comparisons do suggest that a number of factors, including importantly institutional competitive advantage, drive entry. Of course, these are just univariate comparisons and not all these factors vary over time (time-invariant factors are not relevant given our first-difference model). We now turn to the multivariate regression results to more rigorously investigate these issues. Table 3 presents the results. As noted, in terms of economic interpretation, the coefficients are (semi-)elasticities and capture the relative effect of the impact of the explanatory variable on the probability of entry from the source country to the host country as well as on the amount of FDI (i.e., the number of gross entries of foreign banks over the period 1996-2006).

The first column of the table shows the basic result which provides strong evidence in favor of our institutional competitive advantage hypothesis. The parameter on

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