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Unformatted text preview: DO WE KNOW WHY BANKS GO TO EMERGING COUNTRIES AND WHAT IS THE IMPACT FOR THE HOME COUNTRY?: A SURVEY Alicia García Herrero and Daniel Navia Simón 1 September 2006 Abstract This paper reviews the theoretical and empirical literature explaining financial FDI from the perspective of the investing country (home). We conclude that the existing theoretical paradigms need to be adapted to explain the recent surge in international banks’ local operations in the financial sectors of emerging countries. Macroeconomic and risk diversification theories would seem particularly well-suited to explain this reality. The empirical literature on the reasons why banks from decide to go broad has concentrated on bank-specific factors and much less so on macroeconomic determinants of the home country. Finally, the effects of financial FDI on the home country’s economy and/or financial system are virtually unknown. Key words: financial FDI, home country JEL Classification: 1 Alicia Garcia Herrero is affiliated with the Bank of International Settlements ( [email protected] ) and Daniel Navia is affiliated with Banco de España ( [email protected] ). Opinions are theirs and not necessarily those of the institutions they represent. A first version of this paper was prepared as background material for the Working Group on Financial FDI of the BIS Committee of the Global Financial System (CGFS). The authors wish to thank members of the CGFS working group on Financial FDI and participants to the seminar organized at Banco de España for their valuable comments. Remaining errors are the responsibility of the authors’. 2 1. INTRODUCTION During the 1990s, foreign involvement in the financial sector of emerging economies rose substantially. By the end of the decade, foreign-owned banks in Central and Eastern Europe accounted for an average of 70% of bank assets and 40% in Latin America (Mathieson and Roldós (2001)). The growth of foreign banking activities in emerging economies is not an isolated phenomenon. It is part of the well documented increase in foreign direct investment (FDI) flows towards emerging economies during the last decade. This has largely been led by mergers and acquisitions, reflecting the extensive privatization of state-owned assets in Latin America and Central and Eastern Europe and the sale of distressed banking and corporate assets in several Asian economies following the 1997 crisis 2 . The expansion of international banks into emerging economies has resulted into a renewed interest in the causes and consequences of financial FDI. A good part of the existing literature was developed in the 1970s and early 1980s, with the objective of explaining the so-called “second-wave” of financial institutions’ international expansion, which started in the 1960s 3 . This concentrated in developed countries, although there was also a surge in bank loans to emerging countries. As will be explained in more detail in the next section, during the second half of the 1990s, banks have started local...
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