Abstract
This chapter reviews the theoretical and empirical literature which links economic growth to the role and characteristics of the financial system. Among these characteristics, relevant to CESEE countries, stand the presence of foreign-owned banks and their activities in the host market. The chapter starts with a review of the main findings of the finance and growth theory and empirics; it then concentrates on specific findings for our group of countries. It finally reports the results of a series of studies targeting the role of foreign-owned banks in influencing the economic path of host countries.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
The dataset contains annual data starting from 1980 for 176 advanced, emerging and low-income economies from the World Bank Global Financial Development database and World Bank FinStat, IMF’s Financial Access Survey, Dealogic corporate debt database, and Bank for International Settlements debt securities database.
- 2.
Only two studies investigate longer sample periods, though they are limited in the number of transition countries analysed.
- 3.
The Barro and Lee dataset provides educational attainment data for 146 countries in five-year intervals from 1950 to 2010. The educational attainment of the adult population over age 15 and over age 25 is provided at seven levels of schooling, from no formal education up to complete tertiary. The Penn World Tables provide an index of human capital per person, which is related to the average years of schooling and the rate of return to education; the average years of schooling are taken from the Barro and Lee dataset, while the assumed rate of return to education is based on Mincer equation estimates around the world.
- 4.
The rule of law index captures perceptions of the extent to which agents have confidence in and abide by the rules of society, in particular, the quality of contract enforcement, property rights and the courts, as well as the likelihood of crime and violence. The regulatory quality captures perceptions of the ability of the government to formulate and implement sound policies and regulations which permit and promote private sector development.
- 5.
Still, most studies on the stock market-growth nexus rarely include data from after the GFC and usually use data for only several CEE countries.
Bibliography
Acemoglu D, Aghion P, Zilibotti F (2003) Distance to frontier, selection and economic growth. NBER Working Paper, No. 9066
Acemoglu D, Zilibotti F (1997) Was Prometheus unbound by chance? Risk, diversification and growth. J Polit Econ 105:709–775
Acemoglu D, Johnson S, Robinson JA (2001) The Colonial Origins of Comparative Development: An Empirical Investigation. Am Econ Rev 91(5):1369–1401
Acemoglu D, Johnson S, Robinson JA (2002). Reversal of Fortune: Geography and Institutions in the Making of the Modem World Income Distribution. Q J Econ 118: 1231–1294
Agénor PR, Canuto O, Jelenic M (2012) Avoiding Middle-Income Growth Traps. Economic Premise, No. 98, World Bank. https://openknowledge.worldbank.org/handle/10986/16954
Aghion P, Dewatripont M, Rey P (1999) Competition, financial discipline and growth. Rev Econ Stud 66:825–852
Aghion P, Howitt P (1992) A Model of Growth Through Creative Destruction”. Econometrica 60 (2):323–351
Aghion P, Howitt P (1998) Endogenous Growth Theory. MIT Press, Cambridge, MA
Akimov A, Wijeweera A, Dollery B (2009) Financial development and economic growth: evidence from transition economies. App Financ Econ 19(12):999–1008. https://doi.org/10.1080/09603100701857880
Alfaro L, Chandab A, Kalemli-Ozcanc S, Sayekd S (2004) FDI and economic growth: the role of local financial markets. J Int Econ 64:89–112. https://doi.org/10.1016/S0022-1996(03)00081-3
Allen F, Gale D (1997) Financial markets, intermediaries and intertemporal smoothing. J Polit Econ 105: 523–546
Arcand JL, Panizza U, Berkes E (2015) Too much finance?. J Econ Growth 20(2):105–148. https://doi.org/10.1007/s10887-015-9115-2
Arellano M, Bond S (1991) Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. Rev Econ Stud 58 (2):277
Arestis P, Chortareas G, Magkonis G (2015) The financial development and growth nexus: a meta-analysis. J Econ Surv 29(3):549–565. https://doi.org/10.1111/joes.12086
Atje R, Jovanovic, B (1993) Stock Markets and Development. Eur Econ Rev 37(2–3):632–40
Barajas A, Chami R, Yousefi SR (2013) The Finance and Growth Nexus Re-Examined: Do All Countries Benefit Equally? IMF Working Paper, No. 13/130
Barro RJ, Sala-i-Martin XI (2003) Economic growth. MIT press, Boston
Beck T (2008) The Econometrics of Finance and Growth. World Bank Policy Res Working Paper Series 2(April):1–51
Beck T (2013) Finance for Development: A Research Agenda. DEGRP research report
Beck T, Berrak B, Rioja F, Valev NT (2012) Who gets the credit? And does it matter? Households vs firms across countries. B.E. J Macroecon 12(1):1–46. https://doi.org/10.1515/1935-1690.2262
Beck T (2011) The Role of Finance in Economic Development: Benefits, Risks, and Politics. Center Discussion Papers, No. 141
Bencivenga VR, Smith BD (1993) Some Consequences of Credit Rationing in an Endogenous Growth Model. J Econ Dyn Control 17:97–22
Berglof E, Bolton P (2002) The Great Divide and Beyond: Financial Architecture in Transition. J Econ Persp 16(1):77–100. https://doi.org/10.1057/9780230374270_4
Bevan AA, Estrin S (2004) The determinants of foreign direct investment into European transition economies. J Comp Econ 32:775–787. https://doi.org/10.1016/j.jce.2004.08.006
Blackburn K, Hung VTY (1998) A theory of growth, financial development and trade. Economica 65:107–124
Blundell, RW, Bond, SR (1998) Initial Conditions and Moment Restrictions in Dynamic Panel Data Models. J Economet 87:115–143. https://doi.org/10.1016/S0304-4076(98)00009-8
Bolton P, Santos T, Scheinkman J (2011). “Cream Skimming in Financial Markets.” National Bureau of Economic Research Working Paper 16804
Borensztein E, De Gregorio J, Lee JW (1998) How does foreign direct investment affect economic growth?. J Int Econ 45:115–135. https://doi.org/10.1016/S0022-1996(97)00033-0
Boyd JH, Smith BD (1992) Intermediation and the equilibrium allocation of investment capital: implications for economic development. J Monetary Econ 30:409–432
Boyd JH, Smith BD (1994) How good are standard debt contracts? Stochastic versus nonstochastic monitoring in a costly state verification environment. J Bus 67:539–562
Bruno V, Hauswald R (2014) The real effects of foreign banks. Rev Financ 18:1683–1716. https://doi.org/10.1093/rof/rft041
Buch CM, Kokta RM, Piazolo DM (2003) Foreign direct investment in Europe: Is there redirection from the South to the East? Comp Econ 31:94–109. https://doi.org/10.1016/S0147-5967(02)00013-6
Buch CM, Toubal, F (2003) Economic Integration and FDI in Transition Economies: What Can We Learn from German Data? Vierteljahrshefte zur Wirtschaftsforschung 72(4):594–610. https://doi.org/10.3790/vjh.72.4.594
Caporale GM, Rault C, Sova AD, Sova R (2015) Financial Development and Economic Growth: Evidence from 10 New European Union Members. Int J Financ Econ 20(1):48–60. https://doi.org/10.1002/ijfe.1498
Carkovic M, Levine R (2002) Does Foreign Direct Investment Accelerate Economic Growth? Mimeo University of Minnesota
Carp L (2012) Can Stock Market Development Boost Economic Growth? Empirical Evidence from Emerging Markets in Central and Eastern Europe. Procedia Econ Financ 3:438–444
Carstensen K, Toubal F (2004) Foreign direct investment in Central and Eastern European countries: a dynamic panel analysis. J Comp Econ 32: 3–22. https://doi.org/10.1016/j.jce.2003.11.001
Chee YL, Nair M (2010) The Impact of FDI and Financial Sector Development on Economic Growth: Empirical Evidence from Asia and Oceania. Int J Econ Financ 2 (2):107–119
Cheng S, Ho CC, Hou H (2014) The Finance-growth Relationship and the Level of Country Development. J Financ Serv Res 45:117–140. DOI https://doi.org/10.1007/s10693-012-0153-z
Čihák M, Demirgüç-Kunt A, Feyen E, Levine, R (2012) Benchmarking Financial Systems around the World. World Bank Res Policy Working Paper, No. 6175
Claessens S, Laeven L (2003) Financial Development, Property Rights, and Growth. J Financ 58(6):2401–2436
Claessens S, Demirgüç-Kunt A, Huizinga H (2001) How does Foreign Entry Affect Domestic Banking Markets?. J Bank Financ 25 (5):891–911. https://doi.org/10.1016/S0378-4266(00)00102-3
Claessens S, Van Horen N (2014) Foreign banks: trends and impact. J Money Credit Bank 41(1): 295–326. https://doi.org/10.1111/jmcb.12092
Compton RA, Giedeman DC (2011) Panel evidence on finance, institutions and economic growth. Appl Econ 43(25):3523–3547. DOI: https://doi.org/10.1080/00036841003670713
Dawson PJ (2003) Financial development and growth in economies in transition. App Econ Lett 10(13):925–929. https://doi.org/10.1080/1350485032000154243
de Haas RTA, van Lelyveld IPP (2006) Foreign banks and credit stability in Central and Eastern Europe. A panel data analysis. J Bank Financ 30:1927–1952. https://doi.org/10.1016/j.jbankfin.2005.07.007
De La Fuente A, Marin JM (1996) Innovation, bank monitoring and endogenous financial development. J Monetary Econ 38:269–301. https://doi.org/10.1016/S0304-3932(96)01277-9
de Mello LR (1999) Foreign Direct Investment-Led Growth: Evidence from Time Series and Panel Data. Oxford Econ Papers, No. 51(1), Symposium on Trade, Technology, and Growth
Demetriades, P, Rousseau P (2016) The changing face of financial development. Econ Lett 141(C): 87–90. https://doi.org/10.1016/j.econlet.2016.02.009
Diamond DW (1984) Financial intermediation and delegated monitoring. Rev Econ Stud 51: 393–414
Diamond DW (1991) Monitoring and reputation: the choice between bank loans and directly placed debt. J Polit Econ 99:689–721
Diamond DW, Verrecchia RE (1982) Optimal managerial contracts and equilibrium security prices. J Financ 37:275–287
Eichengreen B, Park, D, Shin, K (2011) When Fast Growing Economies Slow Down: International Evidence and Implications for China, NBER Working Paper, No. 16919
Eichengreen B, Park, D, Shin, K (2013) Growth Slow Downs Redux: New Evidence on the Middle-Income Trap. NBER Working Paper, No. 18863
Eicher TS, Leukert A (2009) Institutions and Economic Performance: Endogeneity and Parameter Heterogeneity. J Money Credit Bank 41(1):197–219
Eller M, Haiss PR, Steiner K (2005) Foreign Direct Investment in the Financial Sector: The Engine of Growth for Central and Eastern Europe? Vienna University of Economics and B.A., Europainstitut Working Papers, No. 69. https://doi.org/10.2139/ssrn.875614
Fink G, Haiss P, Vuksic G (2009) Contribution of Financial Market Segments at Different Stages of Development: Transition, Cohesion and Mature Economies Compared. J Financ Stabil 5(4):431–455. https://doi.org/10.1016/j.jfs.2008.05.002
Gaffeo E, Garalova P (2014) On the finance-growth nexus: additional evidence from Central and Eastern Europe countries. Econ Change Restruct 47(2):89–115. https://doi.org/10.1007/s10644-013-9143-x
Gale D, Hellwig M (1985) Incentive-compatible debt contracts: the one-period problem. Rev Econ Stud 52:647–663
Galetovic A (1996) Specialization, intermediation and growth. J Monetary Econ 38:549–559. https://doi.org/10.1016/S0304-3932(97)84693-4
Giannetti M, Ongena S (2005) Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets. ECB Working Paper, No. 498.
Goldsmith RW (1969) Financial structure and development. Yale University Press, New Haven CT
Greenwood J, Jovanovic B (1990) Financial development, growth and the distribution of income. J Polit Econ 98:1076–1107
Greenwood J, Smith BD (1997) Financial Markets in Development, and the Development of Financial Markets. J Econ Dyn Control 21(1):145–181
Grossman SJ, Stiglitz J (1980) On the impossibility of informationally efficient markets. Am Econ Rev 70:393–408
Handa J, Khan SR (2008) Financial development and economic growth: a symbiotic relationship. Appl Financ Econ 18(13):1033–1049. DOI: https://doi.org/10.1080/09603100701477275
Harrison P, Sussman O, Zeira J (1999) Finance and growth: theory and evidence. Mimeo. Federal Reserve Board, Washington DC
Hassan MK, Sanchez B, Yu JS (2011) Financial development and economic growth: new evidence from panel data. Q Rev Econ Financ 51(1):88–104. https://doi.org/10.1016/j.qref.2010.09.001
Herzer D (2012) How Does Foreign Direct Investment Really Affect Developing Countries’ Growth?. Rev Int Econ 20(2):396–414. DOI:https://doi.org/10.1111/j.1467-9396.2012.01029.x
Holmstrom B, Tirole J (1993) Market liquidity and performance monitoring. J Polit Econ 101:678–709
Jensen M, Meckling WR (1976) Theory of the firm, managerial behavior, agency costs and ownership structure. J Financ Econ 3:305–360
Jensen M, Murphy K (1990) Performance pay and top management incentives. J Polit Econ 98:225–263
King RG, Levine R (1993a) Finance, Entrepreneurship and Growth. J Monetary Econ 32(3):513–42.
King RG, Levine R (1993b) Finance and Growth. Schumpeter Might Be Right. Q J Econ 108:717–738
Koivu T (2002) Do Efficient Banking Sectors Accelerate Economic Growth in Transition Countries. BOFIT Discussion Paper, No. 14/2002, Bank of Finland
Kyle AS (1984) Market structure, information, future markets, and price formation. In: Storey GG, Schmitz A, Sarris AS (ed) International Agricultural Trade: Advanced readings in price formation, market structure and price instability. Westview, Boulder CO
Laeven L, Levine R, Michalopoulos, S (2015) Financial innovation and endogenous growth. J Financ Intermed 24:1–24. https://doi.org/10.1016/j.jfi.2014.04.001
Lensink R, Murinde V (2006) Does foreign bank really stimulate gross domestic investment?. Appl Financ Econ 16(8):569–582. https://doi.org/10.1080/09603100600649701
Lensink R, Hermes N (2004) The short-term effects of foreign bank entry on domestic bank behaviour: Does economic development matter?. J Bank Financ 28(3):553–568. https://doi.org/10.1016/S0378-4266(02)00393-X
Léon F (2018) Convergence of credit structure around the world. Econ Model 68:306–317. https://doi.org/10.1016/j.econmod.2017.07.021
Levine R (1991) Stock markets, growth, and tax policy. J Financ 46:1445–1465
Levine R (2005) Finance and Growth: Theory and Evidence. In: Aghion P, Durlauf SN (ed) Handbook of Economic Growth. Volume 1A, chapter 12, Elsevier, North Holland
Levine R, Loayza N Beck, T (2000) Financial Intermediation and Growth: Causality and Causes without Outliers. J Monetary Econ 46(1):31–77. https://doi.org/10.1016/S0304-3932(00)00017-9
Levine R, Zervos, S (1998) Stock Markets, Banks, and Economic Growth. Am Econ Rev 88:537–558
Mankiw G, Romer D, Weil DN (1992) A Contribution to The Empirics Of Economic Growth. Quat J Econ 408–437
Mehl A, Winkler, A (2003) The finance-growth nexus and financial sector environment: new evidence from southeast Europe. Paper Presented at The Ninth Dubrovnik Economic Conference on Banking and the Financial Sector in Transition and Emerging Market Economies. Croatian National Bank
Morales MF (2003) Financial intermediation in a model of growth through creative destruction. Macroecon Dyn 7:363–393. https://doi.org/10.1017/S1365100502020138
Petkovski M, Kjosevski J (2014) Does Banking Sector Development Promote Economic Growth? An Empirical Analysis for Selected Countries in Central and South Eastern Europe. Econ Res-Ekonomska Istraživanja 27(1):55–66
Philippon T (2010) Financiers versus Engineers: should the financial sector be taxed or subsidized?. Am Econ J- Macroecon 2(3):158–82
Popov A, Udell G (2010) Cross-Border Banking and the International Transmission of Financial Distress during the Crisis of 2007–2008, ECB Working Paper, No. 1203
Popov A (2017) Evidence on Finance and Economic Growth. ECB Working Paper Series No.2115
Rioja F, Valev N (2014) Stock markets, banks and the sources of economic growth in low and high income countries. J Econ Financ 38(2):302–320. https://doi.org/10.1007/s12197-011-9218-3
Rodrik D (2000) How far will international economic integration go?. J Econ Perspect 14(1):177–186. DOI: https://doi.org/10.1257/jep.14.1.177
Rodrik D (2011) The Future Of Economic Convergence. NBER Working Paper, No. 17400
Rousseau P, Wachtel P (2011) What is Happening to the Impact of Financial Deepening on Economic Growth?. Econ Inq 49(1):276–88. https://doi.org/10.1111/j.1465-7295.2009.00197.x
Rousseau PL, Wachtel P (1998) Financial Intermediation and Economic Performance: Historical Evidence from Five Industrialized Countries. Journal Money Credit Bank 30(4):657–78.
Sahay R, Čihák M, N’Diaye P, Barajas A, Bi R, Ayala D, Gao Y, Kyobe A, Nguyen L, Saborowski C, Svirydzenka K Yousefi SR (2015) Rethinking financial deepening: stability and growth in emerging markets, SDN 15/08, International Monetary Fund, Washington
Sassi S, Gasmi A (2014) The effect of enterprise and household credit on economic growth: new evidence from European Union countries. J Macroecon 30:226–231. https://doi.org/10.1016/j.jmacro.2013.12.001
Scharfstein D (1998) The disciplinary role of takeovers. Rev Econ Stud 55:185–199
Shan J (2005) Does financial development ‘lead’ economic growth? A vector auto-regression Appraisal. Appl Econ 37(12):1353–1367. DOI: https://doi.org/10.1080/00036840500118762
Sirri ER, Tufano P (1995) The economics of pooling. In: Crane DB et al (ed) The global financial system: a functional approach. Harvard Business School Press, Boston MA
Solow RM (1956) A Contribution to the Theory of Economic Growth. Q J Econ LXX, p 65–94
Soussa F (2004) A Note on Banking FDI in Emerging Markets: Literature Review and Evidence from M&A Data, Working Paper, https://www.bis.org/publ/cgfs22gb.pdf
Stein JC (1988) Takeover threats and managerial myopia. J Polit Econ 96:61–80
Sussman O (1993) A theory of financial development. In: Giovannini A (ed) Finance and Development: issues and experience. Cambridge University Press, Cambridge
Tennant D, Abdulkadri A (2010) Empirical exercises in estimating the effects of different types of financial institutions’ functioning on economic growth. Appl Econ 42(30):3913–3924. DOI:https://doi.org/10.1080/00036840802360252
Valickova P, Havranek T, Horvath R (2015) Financial Development and economic growth: a meta-analysis. Econ Surv 29(3):506–526. https://doi.org/10.1111/joes.12068
Wu JL, Hou H, Cheng SY (2010) The dynamic impacts of financial institutions on economic growth: Evidence from the European Union. J Macroecon 32(3):879–891. https://doi.org/10.1016/j.jmacro.2009.09.003
Yu JS, Hassan MK, Sanchez B (2012) A re-examination of financial development, stock markets development and economic growth. Appl Econ 44(27):3479–3489. https://doi.org/10.1080/00036846.2011.577019
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2018 The Author(s)
About this chapter
Cite this chapter
Iwanicz-Drozdowska, M., Bongini, P., Smaga, P., Witkowski, B. (2018). Impact of Foreign-Owned Banks on Economic Development. In: Foreign-Owned Banks. Studies in Economic Transition. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-01111-6_6
Download citation
DOI: https://doi.org/10.1007/978-3-030-01111-6_6
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-01110-9
Online ISBN: 978-3-030-01111-6
eBook Packages: Economics and FinanceEconomics and Finance (R0)