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Journal of Economic Integration 2010 March;25(1) :167-193.
Foreign Bank Penetration, Resource Allocation and Economic Growth: Evidence from Emerging Economies

Ji Wu Bang Nam Jeon Alina C. Luca 

Penn State University, Harrisburg, PA
Drexel University, Philadelphia, PA
International Monetary Fund, Washington, D.C.
Copyright ©2010 Journal of Economic Integration

This paper examines the implications of foreign bank penetration on economic growth from the perspective of resource allocation in host countries. We use aggregate banking data, constructed from bank-level balance sheets and income statement information covering more than 1200 banks in the 35 emerging economies of Asia, Latin America and Eastern and Central Europe for the period from 1996 to 2003. By applying the pooled OLS and fixed-effects models, we present consistent evidence that the effect of gross fixed capital formation on output growth is higher in an economy with a more pronounced level of foreign bank penetration relative to an economy with a lower level of foreign bank penetration. This finding suggests that foreign banks play an important role in allocating capital in a more productive way, thus leading to a higher economic growth rate. One of the main policy implications of our findings in this paper is that foreign banks may serve as a channel in enhancing economic integration of emerging economies with advanced economies that are the home countries of foreign banks.

JEL Classification: E44, F43, G21

Keywords: foreign bank penetration | economic growth | resource allocation
1. Arena, M., C. Reinhart, and F. Vázquez(2006), "The Lending Channel in Emerging Economies: are Foreign Banks Different?", Working paper.
2. Bayraktar, Nihal. and Yan Wang(2006), "Banking Sector Openness and Economic Growth", Working paper.
3. Beck, Thorsten. Asli Demirgüç-Kunt and Ross Levine(2000), "A New Database on Financial Development and Structure", World Bank Economic Review 14, 597-605.
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