Does foreign bank entry really stimulate gross domestic investment?

Robert Lensink and Victor Murinde

Applied Financial Economics, 2006, vol. 16, issue 8, 569-582

Abstract: This paper investigates the linear as well as non-linear properties of the relationship between the entry of foreign-owned private banks and changes in gross domestic investment. A standard model of aggregate investment behaviour, in which an indicator for foreign banks is one of the determinants, is estimated and tested on a cross-section of data from 54 countries. The regression results suggest that the relationship between foreign bank entry and aggregate investment mimics a U-curve: low (high) values of foreign bank entry have negative (positive) effects on domestic investment. The threshold value for the U-curve is also identified and represents the critical point at which foreign bank entry starts to stimulate aggregate investment. Overall, therefore, the evidence suggests that there is a robust non-linear (U-curve) relationship, so that the presence of foreign banks leads to investment expansion only after foreign bank presence becomes large enough as a share of local banking activity.

Date: 2006
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DOI: 10.1080/09603100600649701

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