Foreign Bank Entry and Entrepreneurship

DRI Working Paper
By Laura Alfaro, Thorsten Beck and Charles W. Calomiris

Using unique firm-level data across 48 developing countries and 36 manufacturing industries we gauge the importance of international banks’ presence for promoting entrepreneurship, as measured by business formation. Our results suggest that greater foreign bank presence fosters greater business formation, especially in industries with higher needs for external finance. The effect is particularly strong when the foreign banks present are headquartered in other developing countries. We also investigate how an industry’s use of relatively standardized inputs affects the advantages it reaps from foreign bank entry. In developing countries, the effect on business formation of foreign bank presence is greater in industries with more standardized inputs, especially when the foreign banks present are from other developing countries. The effects of foreign bank presence on business formation are greater in economies with stronger legal enforcement,
and foreign bank entrants from developed economies are especially dependent on stronger legal frameworks; banks entrants from developing countries have larger effects on business
formation in developing countries where legal protections are relatively weak.