XXV Edition

1-2 December 2016"

Will Strangers Help You Enter? The Effect of Foreign Bank Presence on New Firm Entry

Kalyvas Antonios, University of Greenwich
Bermpei Theodora, Nottingham Trent University
Neri Lorenzo, University of Greenwich

This paper examines the effect of foreign bank presence on new firm entry rates in a global sample of 83 economies over the 2005-2013 period. To this end, we employ the recent dataset on foreign bank ownership of Claessens and van Horen (2014, 2015). Results show that foreign bank presence exerts a positive and significant effect on new firm entry rates. This result is robust to alternative estimation techniques such as fixed effect models, dynamic panel (system-GMM) models, and panel vector autoregression (VAR) models. Furthermore, we examine for non-linearities of this result with regards to the creditor rights and credit information sharing in the host economies and reveal some interesting findings. We find that the positive effect of foreign bank presence on new firm entry strengthens in countries with weak creditor rights protection. Additionally, the positive effect of foreign bank presence on new firm entry strengthens in economies with high depth of credit information sharing. In further analysis, we also find that the positive effect of foreign bank presence on new firm entry strengths in the presence of a private credit bureau in the host economy while it subdues in the presence of a public credit registry. These results provide evidence that foreign bank presence could substitute for weak legal structures in the host economy in terms of entrepreneurship. Furthermore, policy makers in countries with high foreign bank presence should focus on strengthening the information sharing infrastructure of their economies, especially through private credit bureaus, in order to facilitate foreign bank credit to entrepreneurial efforts.

Area: Banking

Keywords: , foreign banks, entrepreneurship, new firm entry creditor rights, information sharing

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