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Location Decisions of Foreign Banks and Institutional Competitive Advantage - page 21 / 33

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both periods we retain the negative sign for institutional competitive advantage with equal statistically significance, although in the second period the parameter is smaller.

Since the entry decision of a bank may depend on the size of the bank’s investment, we also investigate which variables best help to explain the change in foreign bank presence in terms of market share. We therefore next use the change in asset shares between 1996 and 2005, rather than the change in the number of banks, as dependent variable using again Poisson estimation techniques (row 6). This robustness test gives us very similar regression results as the base regression, with again a large semi-elasticity.

We also use regional dummies in the regression to test whether aspects like the establishment of regional free-trade agreements (FTAs) and currency unions affect the entry patterns in such a way to alter the importance of the institutional competitive advantage variable. We continue to find the same results (row 7), although with a less strong impact of our institutional competitive advantage variable, possibly because some of the entry is motivated by regional factors.

We next investigate the robustness of our results to the specific lag structure used for the explanatory variables. Instead of using the first lag, we use the second lags of all explanatory variables and look at entry for the period 1997-2006. By using a longer lag structure we reduce the risks of reverse causality, e.g., entry affecting the host institutional environment. Again we find that our institutional competitive advantage variable has a negative and statistically significant impact on entry decisions (row 8), with a magnitude very similar to the base regressions.

In the next robustness test we examine whether our results are affected by an endogeneity bias. The variable capturing the impact of changes in institutional quality in the host country might be endogenous as entry of foreign banks could have an impact on the institutional quality in the host country in the following years. Although it is unlikely that endogeneity is affecting the results due to a number of factors (our dependent variable captures bilateral FDI of banks, not all foreign banks come from better institutional environments, our main institutional quality variable is quite general and we lag all our independent variable by one year), we test whether this is the case. As our bilateral trade variable could also be affected by foreign bank entry, we exclude this variable. The result (row 9) shows that the sign and significance of our institutional

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