Regional Integration and Foreign Direct Investment in Banking Sector: Three Case Studies

Abstract

Using a panel dataset of bilateral flows of banking sector foreign direct investment (FDI) in developed and developing countries, we study the impact of regional integration agreements (RIAs) on the location of banking sector FDI. The results indicate that the impact of RIAs vary depending on different kinds of regional integration. The response to integration between developed countries (North-North integration) may differ from the response to integration between developing countries (South-South integration) or to an agreement between countries at different levels of development (North-South integration), depending on the significance and nature of environmental change brought about by the RIAs, the locational advantage of the country or region and the degree of integration at the outset. The RIAs between developed countries had relatively little influence on foreign bank entry, since much of the financial service trade between the member countries had been liberalized long before the agreement was established. By contrast, North-South integration agreements and South-South integration agreements brought about significant region’s policy environment changes and more proximity institutional, which suggests that they may have a notable (although varying) impact on banking sector FDI in the member countries.