Foreign Bank Penetration, Resource Allocation and Economic Growth: Evidence from Emerging Economies

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms Abstract This paper examines the implications of foreign bank penetration on economic growth from the perspective of resource allocation in host countries. We use aggregate banking data, constructed from bank-level balance sheet and income statement information covering more than 1200 banks in the 35 emerging economies of Asia, Latin America and Eastern and Central Europe for the period from 1996 to 2003. By applying pooled OLS and fixed effects estimators, we present consistent evidence that the effect of gross fixed capital formation on output growth is higher in an economy with a more pronounced level of foreign bank penetration relative to an economy with a lower level of foreign bank penetration. This finding suggests that foreign banks play an important role in allocating capital in a more productive way, thus leading to a higher economic growth rate.