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Location Decisions of Foreign Banks and Institutional Competitive Advantage - page 25 / 33

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estimating which of these differences is the more important determinant of foreign bank entry. Related, it will be important how institutional competitive advantage impacts banks’ operations and performance. Is it that foreign banks with greater institutional comparative advantage can make loans easier and better, with lower risks and less need for loan-loss provisioning? Or is it that banks with institutional comparative advantage are better able or more willing to take advantage of weak supervisory structures in host countries, in the process taking more risks, leading to more non-performing loans? One way to differentiate between these hypotheses is to investigate how measures of actual foreign bank performance vary with institutional competitive advantage. Do foreign banks with specific institutional competitive advantage make more loans, to more informationally intensive borrowers, at lower risks? Another, complementary way is to investigate the impact of foreign bank entry on the domestic banking system, especially of low-income countries. Do banks from different countries with more institutional competitive advantage have a greater impact on the domestic financial system? None of these areas has yet been studied, however.

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