Determinants and Impact of Financial Sector FDI to Emerging Economies: A Home Country's Perspective

Abstract

This paper reviews the theoretical literature explaining financial FDI, as well as the empirical results on the determinants of financial FDI and its potential effects for the home country. From this revision, we conclude that, at the present stage, the existing theoretical paradigms need to be adapted to explain the recent surge in international banks' local operations in emerging countries financial sectors. Macroeconomic and risk diversification theories would seem particularly well-suited to explain this reality. The empirical literature on financial FDI has concentrated on bank-specific factors and much less so on macroeconomic determinants, particularly push factors where generally only general FDI literature is available. The survey draws on this literature in those cases where no specific results for financial FDI exist. Finally, the effects of financial FDI on the home country are virtually unknown. The literature on general FDI has focused on employment, trade and investment effects, yet the consequences on the profitability and systemic risk of home's financial system remain a topic for debate.

Regulatory Arbitrage and Presence of Foreign Banks: Evidence from the Indian Banking Sector

“…Scholars have tried to theorize the factors driving foreign banks' choice of adopting either one or both channels. Theoretical underpinnings in this regard comprise application of general foreign direct investment (FDI) theories to explain foreign investments in host countries' banking sector (Battilossi, 2006;Goldberg, 2007;Herrero & Simón, 2003). 1 Among these, eclectic theory (formulated by Dunning, 1977), with its three dimensions, viz.…”