Determinants of German Foreign Direct Investment in Latin American and Asian Emerging Markets in the 1990s

Many empirical studies in the area of foreign direct investment (FDI) exclusively focus on flows between industrialized countries. This article makes a contribution to the still relatively sparse literature on FDI in emerging markets by estimating determinants of German FDI flows to Latin America and Asia during the past decade. Using data contained in a newly available Bundesbank microdatabase, an FDI flow variable, constructed from year-to-year differences in FDI stocks adjusted for certain otherwise distorting factors, is empirically tested with respect to several exogenous variables previously found to be significant in the literature. These include so-called non-traditional factors such as country risk and agglomeration effects which are widely regarded as influential for FDI in emerging market economies. This study therefore focuses on estimating the effects of various risk measures and finds that country risk, and partially political risk, is indeed detrimental to investments of German enterprises. Moreover, German FDI in Latin America are found to have been market-seeking while those in emerging Asia tended to exploit low factor costs. Methodically, this paper uses the SUR estimation technique which allows for the contemporaneous correlation of disturbances as well as first-order autocorrelation of the time series disturbances and cross-sectional heteroskedasticity. In arriving at a parsimonious regression for each region, an Extreme Bounds Analysis (Leamer, 1983 & 1985) is performed to select individual variables robust to the inclusion of other explanatory variables. Making empirical use of German firm-level data, additional estimations are performed for direct investment of the manufacturing sector and three of its sub-sectors. Regarding the latter, the hypothesis that capital-intensive industries react particularly strongly to the changes in the regulatory environment of the host country is confirmed by the data. -- Viele empirische Studien im Bereich der ausländischen Direktinvestitionen (?foreign direct investment? ? ?FDI?) beziehen sich ausschließlich auf Investitionsströme zwischen Industrieländern. Dieses Arbeitspapier trägt zu der noch vergleichsweise spärlichen Literatur zu Direktinvestitionen in Schwellenländern bei. Es schätzt die Determinanten deutscher FDIStröme in ausgewählten ?Emerging Markets? während der letzten Dekade. Mit Hilfe von Daten, die in einer seit kurzem verfügbaren Mikrodatenbank der Bundesbank enthalten sind, wird eine Stromgröße, die sich aus den Bestandsveränderungen der Direktinvestitionsbestände errechnet und die um verzerrende Einflüsse bereinigt wird, empirisch hinsichtlich verschiedener exogener, in der Literatur als signifikant befundener Variablen überprüft. Diese schließen sogenannte nicht-traditionelle Faktoren wie Länderrisiko und Agglomerationseffekte ein, die allgemein als einflussreich für Direktinvestitionen in Schwellenländern erachtet werden. Die vorliegende Studie konzentriert sich demnach auf die Schätzung der Bedeutung verschiedener Risikomaße und findet, dass das Länderrisiko und teilweise auch das politische Risiko den Investitionen deutscher Unternehmen abträglich sind. Außerdem wird gezeigt, dass deutsche Direktinvestitionen in Lateinamerika eher markterschließend waren, während jene in den Schwellenländern Asiens stärker die Nutzung niedriger Faktorkosten zum Ziel hatten. Methodisch wird die SUR Schätzmethode angewandt, die eine Berücksichtigung gruppenweiser Korrelation der Störgrößen, eines autoregressiven Prozesses erster Ordnung und Heteroskedastizität ermöglicht. Um ein sparsames Modell schätzen zu können, wird eine ?Extreme Bounds?-Analyse nach Leamer (1983 & 1985) durchgeführt, welche die Auswahl von solchen Variablen bezweckt, deren Einfluss gegen die Einbeziehung anderer exogener Variablen robust ist. Zudem werden Einzeldaten deutscher Firmen genutzt, um weitere Schätzungen der Direktinvestitionen des Verarbeitenden Gewerbes und dreier Untersektoren durchzuführen. Bezüglich Letzterer kann die Hypothese, dass kapitalintensive Sektoren besonders stark auf Änderungen im regulatorischen Umfeld der Empfängerländer reagieren, mit Hilfe der Daten bestätigt werden.foreign direct investment,emerging markets,country risk,panel data analysis

International financial linkages of Latin American banks: the effects of political risk and deposit dollarisation

This paper empirically investigates the extent to which the financial linkages of Latin American banks with the exterior are influenced by political risk and deposit dollarisation. We find that the sum of banks’ foreign assets and liabilities is a function of risk-return considerations and excess domestic credit demand. An increase in political risk is shown to be associated with a build-up of foreign positions by the banking sector, but this adverse effect on the banking system is mitigated in economies with a high share of dollarised deposits. These relationships largely hold when the determinants of foreign assets and liabilities are estimated separately, with risk-induced capital flight being moderated by a high degree of deposit dollarisation. While changes in overall country risk including the risk of macro collapse drive official capital outflows, for a wider measure of capital flight including informal flows only changes in political risk matter. In each case, deposit dollarisation is shown to possess a risk-mitigating property. The results suggest caution with active dedollarisation strategies in highly dollarised economies where political instability remains an issue. JEL Classification: E42, F36, G21banking systems, dollarisation, financial integration, Latin America, political risk

Foreign Bank Entry into Emerging Economies: An Empirical Assessment of the Determinants and Risks Predicated on German FDI Data

The paper investigates the factors crucial in the locational decisions of multinational German banks in selected emerging markets of central and eastern Europe, Latin America and Asia between 1994 and 2001. Emphasis is placed on testing variables of macroeconomic and financial sector risk along with measures of bank-client integration and host country market characteristics. Results indicate that FDI by non-banks exerted a strong pull effect on banking FDI flows, as did highly developed financial markets and a low country risk. No particularly meaningful effects are found in the sample for per capita GDP or trade linkages. A strong case can be made for a variable taken from the "early warning indicators" literature which measures the backing of short-term banking deposits by international currency reserves. In almost all regressions, this financial crisis variable turns out be highly negatively correlated with FDI flows. Disaggregation of the sample by region illustrates that the factors which are at work differ between the continents. Comparing pre- and post-Asian-crisis time periods, it is found that both variables of country riskiness gain significance in the later sub-sample, with the result being especially pronounced for the measure of financial vulnerability. --foreign direct investment,banks,emerging markets,macroeconomic risk

Does co-financing by multilateral development banks increase "risky" direct investment in emerging markets?

The paper discusses the question of whether financial participation of multilateral development banks does prompt private investors to inject more risky equity capital in emerging market banks. Using a theoretical model, it is stipulated that the presence of an official lender in a project gives the recipient country a stronger economic incentive to honor its contractual obligations instead of possibly restricting access to the investment position. An innovative endogenous variable measuring the amount of invested equity capital which, given a country's historical risk profile, can be considered "at risk" is tested in the empirical investigation. The observed outcome for the group of investors receiving co-financing by the International Finance Corporation (IFC) and/or the European Bank for Reconstruction and Development (EBRD) is related – applying a propensity score matching approach using information on the characteristics of non-participants – to the amount these firms would have invested had they not been selected for official support. The econometric results show that the "treatment effect" is significantly positive as stipulated. That is, in the German case financial participation of multilateral agencies in investment projects did have a positive impact on the risk exposure that investors were willing to bear. --foreign direct investment,banks,emerging markets,multilateral development banks,program evaluation,propensity score matching

International financial linkages of Latin American banks: the effects of political risk and deposit dollarisation

This paper empirically investigates the extent to which the financial linkages of Latin American banks with the exterior are influenced by political risk and deposit dollarisation. We find that the sum of banks’ foreign assets and liabilities is a function of risk-return considerations and excess domestic credit demand. An increase in political risk is shown to be associated with a build-up of foreign positions by the banking sector, but this adverse effect on the banking system is mitigated in economies with a high share of dollarised deposits. These relationships largely hold when the determinants of foreign assets and liabilities are estimated separately, with risk-induced capital flight being moderated by a high degree of deposit dollarisation. While changes in overall country risk including the risk of macro collapse drive official capital outflows, for a wider measure of capital flight including informal flows only changes in political risk matter. In each case, deposit dollarisation is shown to possess a risk-mitigating property. The results suggest caution with active dedollarisation strategies in highly dollarised economies where political instability remains an issue

Determinants of German Foreign Direct Investment in Latin American and Asian Emerging Markets in the 1990s

Many empirical studies in the area of foreign direct investment (FDI) exclusively focus on flows between industrialized countries. This article makes a contribution to the still relatively sparse literature on FDI in emerging markets by estimating determinants of German FDI flows to Latin America and Asia during the past decade. Using data contained in a newly available Bundesbank microdatabase, an FDI flow variable, constructed from year-to-year differences in FDI stocks adjusted for certain otherwise distorting factors, is empirically tested with respect to several exogenous variables previously found to be significant in the literature. These include so-called non-traditional factors such as country risk and agglomeration effects which are widely regarded as influential for FDI in emerging market economies. This study therefore focuses on estimating the effects of various risk measures and finds that country risk, and partially political risk, is indeed detrimental to investments of German enterprises. Moreover, German FDI in Latin America are found to have been market-seeking while those in emerging Asia tended to exploit low factor costs. Methodically, this paper uses the SUR estimation technique which allows for the contemporaneous correlation of disturbances as well as first-order autocorrelation of the time series disturbances and cross-sectional heteroskedasticity. In arriving at a parsimonious regression for each region, an Extreme Bounds Analysis (Leamer, 1983 & 1985) is performed to select individual variables robust to the inclusion of other explanatory variables. Making empirical use of German firm-level data, additional estimations are performed for direct investment of the manufacturing sector and three of its sub-sectors. Regarding the latter, the hypothesis that capital-intensive industries react particularly strongly to the changes in the regulatory environment of the host country is confirmed by the data.Viele empirische Studien im Bereich der ausländischen Direktinvestitionen (foreign direct investment - FDI) beziehen sich ausschließlich auf Investitionsströme zwischen Industrieländern. Dieses Arbeitspapier trägt zu der noch vergleichsweise spärlichen Literatur zu Direktinvestitionen in Schwellenländern bei. Es schätzt die Determinanten deutscher FDI-Ströme in ausgewählten ?Emerging Markets? während der letzten Dekade. Mit Hilfe von Daten, die in einer seit kurzem verfügbaren Mikrodatenbank der Bundesbank enthalten sind, wird eine Stromgröße, die sich aus den Bestandsveränderungen der Direktinvestitionsbestände errechnet und die um verzerrende Einflüsse bereinigt wird, empirisch hinsichtlich verschiedener exogener, in der Literatur als signifikant befundener Variablen überprüft. Diese schließen sogenannte nicht-traditionelle Faktoren wie Länderrisiko und Agglomerationseffekte ein, die allgemein als einflussreich für Direktinvestitionen in Schwellenländern erachtet werden. Die vorliegende Studie konzentriert sich demnach auf die Schätzung der Bedeutung verschiedener Risikomaße und findet, dass das Länderrisiko und teilweise auch das politische Risiko den Investitionen deutscher Unternehmen abträglich sind. Außerdem wird gezeigt, dass deutsche Direktinvestitionen in Lateinamerika eher markterschließend waren, während jene in den Schwellenländern Asiens stärker die Nutzung niedriger Faktorkosten zum Ziel hatten. Methodisch wird die SUR Schätzmethode angewandt, die eine Berücksichtigung gruppenweiser Korrelation der Störgrößen, eines autoregressiven Prozesses erster Ordnung und Heteroskedastizität ermöglicht. Um ein sparsames Modell schätzen zu können, wird eine ?Extreme Bounds?-Analyse nach Leamer (1983 & 1985) durchgeführt, welche die Auswahl von solchen Variablen bezweckt, deren Einfluss gegen die Einbeziehung anderer exogener Variablen robust ist. Zudem werden Einzeldaten deutscher Firmen genutzt, um weitere Schätzungen der Direktinvestitionen des Verarbeitenden Gewerbes und dreier Untersektoren durchzuführen. Bezüglich Letzterer kann die Hypothese, dass kapitalintensive Sektoren besonders stark auf Änderungen im regulatorischen Umfeld der Empfängerländer reagieren, mit Hilfe der Daten bestätigt werden

Foreign Bank Entry into Emerging Economies: An Empirical Assessment of the Determinants and Risks Predicated on German FDI Data

The paper investigates the factors crucial in the locational decisions of multinational German banks in selected emerging markets of central and eastern Europe, Latin America and Asia between 1994 and 2001. Emphasis is placed on testing variables of macroeconomic and financial sector risk along with measures of bank-client integration and host country market characteristics. Results indicate that FDI by non-banks exerted a strong pull effect on banking FDI flows, as did highly developed financial markets and a low country risk. No particularly meaningful effects are found in the sample for per capita GDP or trade linkages. A strong case can be made for a variable taken from the "early warning indicators" literature which measures the backing of short-term banking deposits by international currency reserves. In almost all regressions, this financial crisis variable turns out be highly negatively correlated with FDI flows. Disaggregation of the sample by region illustrates that the factors which are at work differ between the continents. Comparing pre- and post-Asian-crisis time periods, it is found that both variables of country riskiness gain significance in the later sub-sample, with the result being especially pronounced for the measure of financial vulnerability

Does co-financing by multilateral development banks increase "risky" direct investment in emerging markets?

The paper discusses the question of whether financial participation of multilateral development banks does prompt private investors to inject more risky equity capital in emerging market banks. Using a theoretical model, it is stipulated that the presence of an official lender in a project gives the recipient country a stronger economic incentive to honor its contractual obligations instead of possibly restricting access to the investment position. An innovative endogenous variable measuring the amount of invested equity capital which, given a country's historical risk profile, can be considered "at risk" is tested in the empirical investigation. The observed outcome for the group of investors receiving co-financing by the International Finance Corporation (IFC) and/or the European Bank for Reconstruction and Development (EBRD) is related - applying a propensity score matching approach using information on the characteristics of non-participants - to the amount these firms would have invested had they not been selected for official support. The econometric results show that the "treatment effect" is significantly positive as stipulated. That is, in the German case financial participation of multilateral agencies in investment projects did have a positive impact on the risk exposure that investors were willing to bear

Bank Efficiency Amid Foreign Entry

This paper investigates the efficiency of domestic and foreign banks in the Central American region during 2002-07. Using two main empirical approaches, Data Envelopment Analysis and Stochastic Frontier Analysis, the paper finds that foreign banks are not necessarily more efficient than their domestic counterparts. If anything, the regional banks that were acquired by global banks in a wave of acquisitions during 2005-07 can keep up with the local institutions. The efficiency of these acquired banks, however, is shown to have dropped during the acquisition year, recovering only slightly thereafter. Finally, it is important to account for the environment in which banks operate, as country-, sector- and firm-specific characteristics are found to have a considerable influence on bank efficiency.Banks;Foreign direct investment;International banking;banking, foreign banks, domestic banks, foreign bank, bank entry, banking sector, banking markets, market structure, return on assets, banking system, bank performance, banking industry, financial institutions, banking market, financial services, foreign ownership, regional bank, administrative cost, foreign entry, national bank, bank ownership, banking crises, bank interest, bank interest margins, increased competition, human capital, bank size, regulatory authorities, bank policy, bank assets, foreign ? banks, bank liquidity, bank managers, financial stability, state intervention, technological progress, banks ? assets, bank offices, bank mergers, competitive edge, bank products, domestic ? banks, banking concentration