Better the Devil that You Know: Evidence on Entry Costs Faced by Foreign Banks

Institutional and legal differences between countries increase entry costs and reduce the ability of banks to expand abroad. We use bilateral foreign banking data for 176 countries to estimate a gravity model in which bilateral cross-border banking activity is explained, in addition to standard variables, by legal and institutional differences. We find that foreign banking is negatively affected by absolute differences in the legal setup and in basic institutions between source and host countries. Differences in the legal origin, for example, reduce bilateral participation in the banking system by nearly 11 percent. Additionally we do not find strong evidence suggesting asymmetries in adapting to better or worse institutional/legal environments

Entry Regulations, Product Differentiation and Determinants of Market Structure

We use a dynamic oligopoly model of entry and exit to evaluate how entry regulations affect profitability and market structure in retail. The model incorporates demand and store-level heterogeneity. Based on unique data for all retail food stores in Sweden, we find that the average entry costs for small and large stores are 10 and 18 percent lower, respectively, in markets with liberal compared with restrictive regulations. Counterfactual simulations show that lower entry costs in restrictive markets result in higher entry rates and allow us to quantify the consequences of regulations in light of trade-offs between small and large stores