"Foreign direct investment is an essential aspect of 'globalization' yet its empirical determinants are not well understood. What we do know is based either on poor data for a wide range of nations, or good data for the US and Swedish cases. In this paper, we provide evidence on the determinants of the activities of German multinational firms by using a newly available firm-level data set from the Deutsche Bundesbank. The specific goal of this paper is to demonstrate the relative role of country-level and firm-level determinants of foreign direct investment. We focus on three main questions: First, what are the main driving forces of German firms' multinational activities? Second, is there evidence that sector-level and firm-level factors shape internationalization patterns? Third, is there evidence of agglomeration effects in the foreign activities of German firms?" Copyright � CEPR, CES, MSH, 2005..

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Abstract:The choice between foreign direct investment (FDI) and exports has been a recurrent theme in the literature on international trade, yet few studies have analysed this choice at the level of the individual firm. This paper uses a new dataset to study the FDIversus-exports decision for banks. We use data on the foreign direct investment stocks and the cross-border provision of financial services of German banks for the period 1997-2000 to describe the regional pattern of banks' international activities. We find that country-and bank-specific variables capturing size have a major impact on banks' foreign activities. The results are consistent with the hypothesis that the realisation of economies of scale and the provision of trade-related finance shape globalisation patterns. Greater cultural and geographical distance, by contrast, potentially limit the international expansion of banks. Our results also suggest that FDI and cross-border services are complements rather than substitutes. Keywords:international banking, gravity equations, foreign direct investment, cross-border financial services JEL-Classification: F0, F21 Non Technical SummaryThis paper provides a first comprehensive assessment of the globalisation of the German banking industry based on bank-level data. By combining data from different sources, we draw a fairly complete picture of the foreign direct investments and the cross-border provision of financial services of German banks. The data we use covers the second half of the 1990s, ie a period in which the globalisation of the German banking industry was fully under way. In addition, we disentangle the effects of bank-and country-level explanatory variables, of regulatory and cultural factors, and of factors capturing market size on the internationalisation of German banks. Moreover, having access to data on all German banks, we can separate factors that influence the decision of banks to go abroad from those affecting the actual volume of international business. With regard to the latter, we find that the determinants of entry and of the volume of activity are qualitatively the same.In terms of robustness, we obtain the most stable results for variables that account for size at the bank level and at the country level. More internationally oriented and larger banks also have the largest foreign investments abroad. Larger markets (in terms of GDP) and a large volume of bilateral trade between Germany and a host country promote FDI. Hence, the intention to realise economies of scale is an important motive behind the international expansion of German banks. Moreover, the impact of the variables capturing bank and market size is the same across the different forms of foreign activities that we consider, ie FDI and cross-border financial services. In particular, the impact of trade is positive throughout. The provision of trade-related financial services thus remains a major driving force behind the globalisation of German banks. Besides, more profitable banks are more active internationally, w...

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Abstract:The presence of other firms in a foreign market can have a double-edged effect on the profitability of new entrants. Firstly, a larger presence of other firms implies more competition and thus lowers the earnings prospects of new entrants. Secondly, there might be positive spill-over effects between the activities of new and old entrants, which can lead to clustering effects. Such clustering of firms in foreign markets has been documented in the empirical literature on foreign direct investment (FDI) of nonfinancial firms, but little evidence is available for banks. This paper analyses whether banks have a tendency to cluster abroad and whether smaller banks in particular invest in markets where other banks are already present. We use firm-level evidence on the foreign direct investments of German banks for the period 1997-2000 to test this hypothesis. Our results suggest that German banks are indeed more active in markets in which other German banks are already present. However, once we control for countryfixed effects, the negative competition effect dominates. Keywords:international banking, clustering, foreign direct investment Nichttechnische Zusammenfassung

We examine how the correlations of bank loan defaults depend on the correlations of asset returns and how correlations and diversification are affected by macroeconomic risks. We highlight the main properties of the relationship between asset returns and default correlations, illustrating how adverse macroeconomic shocks raise not only the likelihood of defaults, but also the correlation of defaults. The latter effect, called correlation effect, may account for more than 50% of the increase in the credit risk. Copyright Blackwell Publishing Ltd 2003.

Does more FDI make the world a riskier place for workers? We analyze whether an increase in multinational firms' activities is associated with an increase in firm-level employment volatility. We use a firm-level dataset for Germany which allows us to distinguish between purely domestic firms, domestic multinationals, their foreign affiliates, and foreign firms that are active in Germany. We decompose the volatility of firms into their reaction and their exposure to aggregate developments. Generally, we find no above-average wage and output elasticities for multinational firms. Keywords:Employment volatility, labor demand, multinational firms Non technical summaryThis paper analyzes the question whether firms' multinational activities make the world a riskier place for workers. Our short answer to this question is: No. More specifically, we address this question using a firm-level dataset on German firms. In contrast to earlier work, we distinguish between different types of multinational firms and study their exposure to foreign and domestic economic activity.Our main results, based on estimates of firm-level labor demand functions, can be summarized as follows. First, employment in German firms is relatively persistent, it increases in response to firm-level sales, and it falls if wages increase. Second, multinational firms do not respond systemically more to wages and output than firms that are active only on the domestic market. Also, the persistence of employment is very similar across the different types of firms. These results are relatively robust across different industries.Overall, our results do not lend support to the hypothesis that an increasing integration into international markets generally increases the elasticity of labor demand and thus labor market uncertainty. In view of the large degree of heterogeneity across different types of multinationals, across different industries, and across firms of different sizes, it will be difficult to devise policy measures directly geared towards the reduction in employment risk in specific types of firms or industries. Instead, policies should aim at increasing the flexibility of firms and workers to adjust to changes in the external environment. Nichttechnische Zusammenfassung