why banks go to emerging countries and what is the impact for the home country -- a survey

This might be related to life time employment habits

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to those of US firms, employment is not reduced. This might be related to life-time employment habits at home. As for financial FDI, there is no available evidence of its impact on the level of employment in the banking sector of the home country. In any event, one would expect a very marginal – if not positive impact – particularly for those banks operating retail abroad. The reason is the lack of large economies of scale or substitution of service provision in the home country. Finally, investing abroad may also affect the structure of the economy. The literature has focused mainly on two aspects. First, the composition of exports. While FDI may not substitute exports in aggregate terms, data on Swedish firms present clear evidence of a change in the composition of exports following the internationalisation of domestic firms (Swedenborg (1982)). This shift results in a higher proportion of intermediate goods as home plants tend to provide inputs for foreign plants. As Blomström and Koko (1994) point out, the pattern and the consequences of specialization on intermediate inputs are likely to depend on the comparative advantages of the investor country. Second, FDI activity may also change the composition of labour demand in the home country. The most common hypothesis is that, as firms move low-skill and low-cost activities to developing countries, labour demand of white-collar workers will increase relative to that of blue-collar. Available studies show that this needs not be the case. Using hourly wages as a proxy for skill, Kravis and Lipsey (1988) did not find a clear relationship between skill intensity and foreign production. In the Swedish case, FDI in developing countries resulted in increased demand for both skilled and unskilled workers at home (Blomström, Fors and Lipsey (1997)). Furthermore, investment in developed economies reduced the demand for white collar workers but increased non- skilled labour intensity. As before, for the financial FDI, evidence is unavailable, but one could think that the same line of argument should apply since banks operating abroad will need to increase the
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18 share of skilled labour because only these are expatriated to the branches or subsidiaries abroad. As for the empirical evidence on general FDI, the impact could be marginal particularly in cases where international banks acquire existing banks and keep local management. Based on this evidence, there are good to reasons to expect the effects of financial FDI on the home country to be weak. Of course, the idiosyncratic characteristics of financial FDI, especially if directed to developing countries, raise other important questions that have not received enough attention in the literature. In particular, its effects on the profitability and systemic risk of home’s financial system still need to be addressed beyond the results obtained by Amihud, DeLong and Saunders (2001), among others.
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  • Fall '10
  • financial fdi

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