Cost Leadership and Bank Internationalization

34 Pages Posted: 21 Jun 2016

See all articles by Rients Galema

Rients Galema

Utrecht University - School of Economics

Michael Koetter

Halle Institute for Economic Research

Caroline Liesegang

Deutsche Bundesbank

Date Written: 2013

Abstract

We adapt a theoretical model from the goods trade literature to test whether banks with a comparative cost advantage are more likely to enter foreign markets by means of foreign direct investment. We combine detailed proprietary bank-level data on the international activities of all German banks with publicly available bank micro data from possible destination markets to show that the decision to go abroad is driven by relative cost differences. Banks enter markets where they are cost leaders in terms of their marginal cost relative to those of banks in destination markets. They are attracted by markets that are larger and more competitive, as witnessed by lower interest rates charged by the most efficient competitors.

Keywords: Trade in financial services, International banking, Productivity, Markups, Marginal costs

JEL Classification: F3, G21

Suggested Citation

Galema, Rients and Koetter, Michael and Liesegang, Caroline, Cost Leadership and Bank Internationalization (2013). Bundesbank Discussion Paper No. 57/2013, Available at SSRN: https://ssrn.com/abstract=2796953 or http://dx.doi.org/10.2139/ssrn.2796953

Rients Galema (Contact Author)

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

Michael Koetter

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/en/about-the-iwh/people/detail/michael-koetter/

Caroline Liesegang

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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