Location Decisions of Foreign Banks and Competitor Remoteness
The paper was started while the authors were at the World Bank. We would like to thank the Editor, the two referees, our discussants, Gerald Dwyer, Johann Fedderke, and Jan Svenjar; Valentina Bruno, Julian di Giovanni, Erik Feijen, Robert Hauswald, Jeroen van Hinloopen, Franc Klaassen, Luc Laeven, Steven Ongena, Costas Stephanou, Chen Zhou, and seminar participants at American University, Rabobank, University of Amsterdam, Utrecht University, De Nederlandsche Bank, the 2006 Latin American and Caribbean Economic Association Meetings (Mexico City), the Journal of Financial Stability and Bank of Finland Conference (Helsinki), the 13th Dubrovnik Economic Conference, the 11th CEPR/ESI Annual Conference (Pretoria), and the 2007 Hong Kong University for Science and Technology Finance Symposium for their comments. Financial support for this project from the World Bank's Research Support Budget and the United Kingdom's Department for International Development (DECRG trade and services project) is gratefully acknowledged. An earlier version of this paper was circulated under the title: “Location Decisions of Foreign Banks and (Institutional) Competitive Advantage.” The views expressed in this paper are those of the authors and do not necessarily represent those of the institutions with which they are or have been affiliated.
This paper examines the role of “competitor remoteness”—the weighted average distance of all competing banks to a host country—on the location decision of a foreign bank. It uses unique, bilateral data on 1,199 foreign banks from 75 home countries present in 110 host countries. It finds that, besides bilateral distance, competitor remoteness importantly drives foreign banks’ location decisions. The impact of distance and competitor remoteness is stronger for non-OECD home and host countries, when the scale of foreign bank inward and outward investment is limited, and for host countries where foreign banks dominate.