Linking Italy’s Banking and Industry in Eastern Europe: Industrial District Outsourcing and Bank FDI

Abstract:     
Following deep banking crises in their early transition, Eastern European countries have opened up to foreign banks, which (mostly from Western Europe) have massively entered those markets during the last decade. Though Italian banks ventured into their Eastern Passage only in recent years, they made relatively large investment to gain a retail presence in Eastern Europe. Concurrently, over the last decade, many Italian industrial districts specializing in traditional goods responded to growing competition from emerging economies walking their own Eastern Passage. Specifically, these industrial districts found a new way to safeguard their competitive hedge by largely moving (heavy unskilled labour phases of) production to low-labour-cost Eastern Europe. We try to shed some light on whether the two Eastern Passages were related or independent.

Using detailed data for Italy, we find that banks venturing into retail business in Eastern Europe are significantly increasing their market share in Italy’s industrial districts that heavily shifted their production process to Eastern Europe in search of lower labour costs. We interpret this as indirect evidence that, with their move to Eastern Europe, Italian banks are effectively strengthening links with their national manufacturing customers. We conclude that, even though possibly motivated by other factors as well, the move by Western banks to Eastern Europe may also be interpreted as a strategy catering for the home market. Hence, the two Eastern Passages seem to be related to some extent.

Number of Pages in PDF File: 30

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