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Location Decisions of Foreign Banks and Institutional Competitive Advantage - page 7 / 33





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with in the latter part of the period banks included roughly accounting for 90 percent or more of banking system assets in each country.

The database includes almost all countries, thus covering both high-income as well as developing countries. Countries with less than five active banks in Bankscope were not included, leaving us with a total of 138 high income and developing countries, with the latter divided into low, lower-middle and upper-middle income countries (on the basis of 2005 US dollar GDP level and using the World Bank classification). Our database thus provides for a wide variety of income levels and institutional quality. For developing countries, we include all banks in our sample that are available in Bankscope. In the case of high-income countries, we aim to capture a large share in terms of assets (at any time, at least 75 percent) of the domestic banking sectors of these countries. This means that in terms of numbers, we only need to include a small subset of available banks, as in these countries concentration ratios tend to be high.

Our database includes all currently and past active commercial banks, saving banks, cooperative banks, bank holding companies and long term credit banks that are or have been reporting to Bankscope between 1995 and 2006. For each bank, we determine the year of its establishment and, if applicable, the year it became inactive. Furthermore, we carefully treat mergers and acquisitions to avoid double counting.

The determination of ownership is as follows. First, we determine if a bank, where we include both foreign branches and subsidiaries, can be considered foreign owned. We use the definition generally applied in the literature on foreign banking (e.g., Clarke, Cull, Martinez Peria and Sanchez, 2003; Claessens, Demirguc-Kunt and Huizinga, 2001) and consider a bank as foreign owned if 50 percent or more of its shares is owned by foreigners.2 Second, we sum the percentages of shares held by foreigners by the country of residence, with the country with the highest percentage of shares then considered the source country. Ownership is based on direct ownership, i.e., we do not consider indirect ownership. The rationale is that we are interested in the entry decision of a foreign bank as it relates to the institutional environment of the source country in

2 We do not consider the degree of ownership concentration. Investors may be a dispersed group, one large shareholder or multiple blockholders, which may matter for the impact of ownership on entry decisions. Because the available data make it difficult to further differentiate ownership structures, especially for the large sample of banks we have, we did not consider these factors.


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