An Application of the Theory of Foreign Direct Investment to Multinational Banking in LDCs
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Abstract.For assessingthe determinantsof MNBs'expansioninto LDCs, a model that incorporates both supply and demand factors
is constructed.A reduced form of the model is tested by using pooled data over the period 1975-1982 for a sample of twentythree LDCs. The results of the study indicate that market size,
the presenceof multinationalcorporationsfromthe homecountry, the extentof economicdevelopment,and the balanceof payments are all significant determinants of the growth of MNBs in LDCs.
onthedeterminants andimpactof Multinational Despitetheburgeoning literature Banks Corporations (MNCs)in LDCs, the studiesconcerningMultinational (MNBs)in LDCsas a subsetof the literatureon ForeignDirectInvestment (FDI),havebeenscanty.Thereareonly a few studiesdealingwithMNBsin LDCsperse: Theworksof Odle[1981],UNCTC[1981], andGermidisand Michalet[1984]aremostlydescriptive.To a limitedextent,thesestudieshave documentedfactorscontributingto the growthof MNBs in the developing countries.However,statisticalanalysisof variousaspectsof FDIin banking as appliedto LDCsis almostnonexistent.Indeed,lack of empiricalstudies on multinational bankingwas also highlightedby Aliber[1984]in the only surveyof theliteratureon thissubject. This paperappliesvarioustheoriesof FDI that have been developedfor industriesto banking.Theanalysisfocuseson determining the manufacturing factorswhich have contributedto the growthof U.S. banksin developing areas. on the applicationof Existingtheoreticalworkson MNBshaveconcentrated the generaltheoriesof FDIwhichwere developedfor manufacturing firms. TheliteraturesuggeststhatstudiesconcerningMNBscanbe comparedto FDI in manufacturing [Aliber1976;Grubel1977;GrayandGray1981].Regulation of banking,thepresenceof MNCsfromthehomecountry,cost differentials, andpotentialreductionsin earningsvariabilityarehypothesizedas important factorsin determining thepresenceandgrowthof MNBsin othercountries. * ManijehSabireceivedherPh.D. in economicsfromNortheastern University.She is currentlyanAssistantProfessorat RussellSageCollege. The comments and assistance of Bruce Bolnick, Rajen Mookerjee, Syed Rizavi and anonymous referees
ofJIBSaregreatlyappreciated.
Received: July 1987; Revised: December 1987 & March 1988; Accepted: March 1988
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BUSINESSSTUDIES,FALL1988 JOURNALOFINTERNATIONAL
In addition,previousempiricalstudieshavefoundthefollowingvariablesas factorsforFDIin banking:theneedto provideservices significantmotivational to MNCclients[Fieleke1977;GoldbergandSaunders1981;Khoury1981], thevolumeof trade[GoldbergandSaunders1980;Terrell1979],reserveratio [Terrell1979;GoldbergandSaunders1981], relativeinterestrates[Khoury 1979], exchangerate[GoldbergandSaunders1981],marketsize of hostand homecountries[Terrell1979],variousproxiesforprofit[Terrell1979;Khoury andknowledgeof host 1979], experienceof banksoperatinginternationally country[BallandTschoegl1982]. diversificati
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