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Doctoral Dissertation Announcement
Candidate: Tamrat Workalemahu Gashaw
Doctor of Philosophy
Department: Applied Economics
Title: Three Essays on Banking Foreign Direct Investment
Dr. Michael Ryan, Chair
Dr. C. James Hueng
Dr. Donald Meyer
Dr. Kevin Corder
Date: Friday, December 9, 2011 11:00 a.m. to 1:00 p.m.
5302 Friedmann Hall
This dissertation investigates three aspects of banking foreign direct investment (FDI). One striking development in the banking sector over the past two decades is the significant increase in banking FDI. Multinational banks have become major players in the global financial system in terms of their asset positions, loan amounts, and operational scales. Despite this significant trend in banking FDI, there are few empirical studies explaining observed international banking FDI trends.
The first essay investigates the factors that determine a bank’s decision to invest abroad. I first develop a two-asset portfolio selection model to identify determinant factors, and then employ a three-way error component model for estimation. Using a bank-level data on 1156 banks, the results suggest that banks prefer to go to countries that have low bank-capital-to-asset ratios, better telecommunications infrastructure, and strong bilateral trade and cultural ties. The result is more robust when I consider banking FDI flow from North to North and North to South. Internet service does not matter for North-North banking FDI, while it does for North-South banking FDI.
The second essay investigates the factors that determine foreign and domestic banks’ risk-taking behavior as well as the asymmetric risk-taking reaction by these two groups. I consider alternative measures of bank risk that are based on banks’ accounting data. The results of the analysis suggest that banks tend to react significantly in response to both (over) bank- and country-level factors that affect bank risk. I also find foreign and domestic bank risk-taking behavior to differ in response to certain factors.
The last essay explores the impact of foreign banks’ presence on host country’s economy. This essay specifically investigates three channels through which foreign banks’ participation can affect the host countries’ economies. These are the growth-, credit-, and spillover-channels. I find that foreign banks have a positive impact on host economy’s growth and a positive spillover effects on the activities of domestic banks. I also find that foreign banks’ participation has a negative effect on host country’s credit supply.