Signals of foreign bank entry on real sector FDI and foreign trade and their impact on economic development in the New EU Member States

Petra Roessl and Peter Haiss

No 36, Proceedings of the German Development Economics Conference, Zurich 2008 from Verein für Socialpolitik, Research Committee Development Economics

Abstract: Does financial sector foreign direct investment (FSFDI) trigger general capital inflows and foreign trade? Do these inflows to New EU Member States (NMS) provide positive signals (Spence, 1973) towards economic development or 'crowd out' investment and trade? While the direct impact of financial deepening has received much attention (Hasan, Wachtel, Zhou, 2006; Detragiache, Tressel, Gupta, 2006), indirect effects have received less consideration. To fill this gap, we review the literature on possible links and provide descriptive data for NMS. We apply regression analysis and find coherence between FSFDI and non-financial FDI and trade in Bulgaria and Croatia, but there are various directions in which developmental repercussions can go and the impact on trade is not as significant as the effect on nonfinancial FDI. We argue that the relative impact of FSFDI, real sector FDI and trade needs to be taken into consideration in shaping economic policies conducive to economic development.

Keywords: foreign banks; economic development; foreign trade; FDI; signal theory (search for similar items in EconPapers)
JEL-codes: E44 F15 F36 G21 O11 P34 (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:gdec08:36

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