Foreign Direct Investment in the Financial Sector: The Engine of Growth for Central and Eastern Europe?
Europe Institute Working Paper No. 69
Posted: 11 Feb 2011
Date Written: December 2005
This paper examines the impact of financial sector foreign direct investment (FSFDI) on economic growth by estimating a panel data model for 11 Central and Eastern European countries (CEECs) between 1996 and 2003 in a cross-country growth accounting framework. The analysis concentrates on the efficiency channel linking FSFDI to economic growth. The results clearly indicate that there can be a elationship between FSFDI and economic growth. Approaching a medium degree of financial M&A is rewarded by higher economic growth after two periods. Beyond it, FSFDI seems to supr economic growth depending on a higher human capital stock. FSFDI-induced knowledge-spillovers to domestic banks can be an explanation for this phenomenon. Above a certain threshold, the crowding-out of local physical capital caused by the entry of a foreign bank seems to hamper economic growth. The value of the paper lies in (1) providing novel data on FSFDI in CEECs, (2) analyzing the impact of FDI on a sectoral level and (3) in modeling the hitherto only quantitatively discussed relationship between foreign banks and economic development into a structural, econometric model that combines two streams of economic research: the FDI-growth-literature and the finance-growth-literature.
Keywords: financial sector foreign direct investment, economic growth, financial economics, transitional economies, panel data analysis
JEL Classification: C23, F36, G10, O16, P2, P34
Suggested Citation: Suggested Citation