DP11821 The Role of Foreign Banks in Trade
|Author(s):||Stijn Claessens, Omar Hassib, Neeltje Van Horen|
|Publication Date:||February 2017|
|Keyword(s):||credit constraints, Financial Development, foreign banks, International Trade|
|JEL(s):||F14, F15, F21, F36, G21|
|Programme Areas:||Financial Economics, International Trade and Regional Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=11821|
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 greater local foreign bank presence, especially from the importing country, is associated with higher exports in sectors more dependent on external finance. The association, which only arises for emerging markets, is stronger when these countries' 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 by increasing the availability of external finance and helping overcome information asymmetries.