Foreign banks and the business environment in transition: a cointegration approach.

Abstract

The contribution of foreign banks to the development of the financial sectors in emerging markets, and especially the transition economies of Central and Eastern Europe, is well-known. The purpose of this article is to focus on an area of foreign bank influence that has thus far only begun to emerge from the extant literature: the effect of foreign banks on the broader business environment in transition. In addition to improving financial intermediation and broader access to credit, has the presence of foreign financial institutions helped to shape a better business environment in the long-run? Or did foreign banks retard local institutional development and thus worsen the overall business environment? Using cointegration techniques across a sample of 21 diverse transition countries from 1983 to 2015, I find that foreign bank entry had a positive impact across business environment indicators, but with some indicators taking longer to influence than others. The policy implications are that business environments can be improved by facilitating foreign bank entry rather than restricting it.