FDI versus exports: Evidence from German banks

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Abstract

We use a new bank-level dataset to study the FDI-versus-exports decision for German banks. We extend the literature on multinational firms in two directions. First, we simultaneously study FDI and the export of cross-border financial services. Second, we test recent theories on multinational firms which show the importance of firm heterogeneity [Helpman, E., Melitz, M.J., Yeaple, S.R., 2004. Export versus FDI. American Economic Review 94 (1), 300–316]. Our results show that FDI and cross-border services are complements rather than substitutes. Heterogeneity of banks has a significant impact on the internationalization decision. More profitable and larger banks are more likely to expand internationally than smaller banks. They have more extensive foreign activities, and they are more likely to engage in FDI in addition to cross-border financial services.

Section snippets

Motivation

Activities of non-financial multinational firms have been the subject of a large and growing literature over the past decade. Studies have particularly addressed the motivation to form horizontally or vertically integrated multinational firms. Whereas vertically integrated multinationals aim at lowering production costs, horizontally integrated multinationals move abroad in order to access large markets. These firms face a trade-off between exporting, which involves variable transportation

Theoretical background

Which banks expand abroad and what form of entry into foreign markets do they choose? There is no model of the international banking firm that we can use directly to answer these questions. In contrast to literature dealing with the choice between FDI and exports for manufacturing firms (see, for example, Markusen, 2002), the international banking literature has so far studied different internationalization strategies more or less in isolation. Hence, we draw on the literature on multinational

The data

The empirical analysis in this paper is based on a new bank-level dataset.2 The data are taken from three sources: balance sheet statistics for German banks, balance of payments statistics, and FDI stock statistics. The combined dataset contains data for five years (1997–2001). The balance sheet statistics for German banks contain all German banks in existence throughout the period under review. For

Empirical results

We use different empirical specifications to analyze the determinants of German banks’ foreign activities. We begin by estimating the determinants of FDI and cross-border financial services separately, using bank-level and country-level explanatory variables. Subsequently, we test whether maintaining a presence in a foreign country encourages the supply of financial services to that market (or vice versa), i.e., whether FDI and cross-border services are better described as complements or as

Summary of results

The banking industry accounts for an increasing share of multinational activities and FDI. Yet, little empirical and theoretical evidence has been available so far to analyze the patterns of globalization of banks, and few attempts have been made to link literature on international banking to literature on multinational, non-financial firms. The purpose of this paper has been two-fold. First, we have tested recent theories of the multinational firm and, second, we have analyzed the choice of

Acknowledgements

This paper represents the authors’ personal opinions and does not necessarily reflect the views of the Deutsche Bundesbank. The authors would like to thank two anonymous referees, Jörg Breitung, Jörg Döpke, Joachim Grammig, Heinz Herrmann, Jörn Kleinert, Robert Lipsey, Fred Ramb, Dietmar Scholz, Harald Stahl, and participants of seminars held at the Deutsche Bundesbank and at the Western Economic Association’s Annual Meeting in Denver (2003) for their support and most helpful discussions. Leena

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