DETERMINANTS AND IMPACT OF FINANCIAL SECTOR FDI TO EMERGING ECONOMIES: A HOME COUNTRY’S PERSPECTIVE - September 2003

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. 1 This paper was prepared as background material for the Working Group on Financial FDI of the BIS Committee of the Global Financial System (CGFS) 2 Both authors are affiliated with Banco de España ([email protected] and [email protected]). Opinions are theirs and not of the institution they represent. The authors wish to thank members of the CGFS working group on Financial FDI and participants to the seminar organized at Banco de España for their valuable comments. Remaining errors are the responsibility of the authors.