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Location Decisions of Foreign Banks and Institutional Competitive Advantage - page 18 / 33

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the change in institutional competitive advantage is negative and highly significant, indicating that an improvement increases foreign bank entry. The impact of institutional competitive advantage on foreign bank entry is economically very relevant. An increase in institutional competitive advantage between source j and host i of 0.12 (the mean of the absolute change) would lead to an average increase of 15 percent in the number of banks from j in i. The first regression also shows that an improvement in institutional quality in the host country increases foreign bank entry, with the parameter also significant, but with a much smaller semi-elasticity. The fact that both the institutional competitive advantage and the institutional quality of host country are significant means one has to consider their combination when evaluating the effect of changes in the host country institutional environment. It indicates, for example, that, although a low quality institutional environment deters foreign bank entry in general, it does not need to do so for foreign banks coming from source countries with low quality institutions themselves since these could have an institutional competitive advantage in those host countries.

The regression result also shows that reductions in entry restrictions make an increase in foreign bank presence more likely as the coefficient on the entry restrictiveness variable (a positive value implies a move to a more closed regime) is statistically significant negative. As expected, increases in bilateral trade are associated with more foreign bank entry. The change in GDP in the source country is statistically significant, with a negative sign, suggesting some supply effects as source countries whose GDP grows faster see less outward FDI, maybe as domestic opportunities for investments are greater. The change in GDP per capita in the source country does not seem to have an impact on foreign entry.

The result in column 1 shows that banks that have an institutional competitive advantage in a specific host country tend to invest more in that country. It shows that our institutional competitive advantage variable—the absolute difference in institutional quality between source and host country relative to the average absolute difference in institutional quality between other competitor source countries and the same host country—matters for entry. The absolute difference in institutional quality between source and host country could, however, be a driver of foreign bank presence as well, as others have identified. To further test which is the more important driver of foreign bank

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