The role of foreign banks in trade

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 10 April 2017

Working Paper No. 656
By Stijn Claessens, Omar Hassib and Neeltje van Horen

This paper provides new insights into how financial globalization relates to international trade. Exploiting unique, time-varying, bilateral data on foreign bank ownership for many countries, we show that, for emerging markets, greater local foreign bank presence, especially from the importing country, is associated with higher exports in sectors more dependent on external finance. The association does not arise for advanced countries and is stronger when institutions are weaker. The presence of a bank from the importing country is also associated with higher exports in sectors with more opaque products. Results are robust to controlling for domestic financial development and a full set of fixed effects. An event study confirms findings and shows impacts to be more pronounced when a foreign bank enters through an M&A. Imports also increase after entry, but less so. Overall, results suggest that foreign banks facilitate trade in emerging markets by increasing the availability of external finance and helping overcome information asymmetries.

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