The Determinants of Foreign Bank Expansion: Eclectic vs. Internalization Theory in Southeastern Europe

Transcription

1 The Determinants of Foreign Bank Expansion: Eclectic vs. Internalization Theory in Southeastern Europe Stefanos Fotopoulos, Harry Papapanagos, Fotios Siokis June 2013 Abstract Applying the OLI Paradigm to international banking we seek to shed light on the determinants of the expansion of Greek banks in five transition economies in South Eastern Europe (SEE). We argue that the utilization of internalization factors led to the great expansion of Greek banks in South Eastern Europe for the period of 2000 to By controlling for ownership advantages, our results indicate that the location advantages have a stronger effect than the internalization factors. Also, on the basis of the follow the customer hypothesis we claim that Greek banks did not follow their home-clients to SEE but rather, they have expanded by utilizing location advantages of the region. Therefore, we conclude that Greek banks expansion is best explained within the context of the eclectic approach. JEL classification: F21; F23; G15. Keywords: International Banking; Location Advantages; Eclectic Approach; Foreign Direct Investments. Address for correspondence: Professor Harry Papapanagos, University of Macedonia, Department of Balkan, Slavic and Oriental Studies, Division of Economics and International Business, 156 Egnatia Street, P.O. Box 1591, Thessaloniki, , Greece. Phone: ; Fax: ; hp@uom.gr 1

2 1. Introduction After the fall of the communist regimes in Eastern and Southeastern Europe, a large number of state-owned enterprises were privatized and foreign capital began to flow into the respective transition economies. Large scale investments were utilized while significant foreign participation in domestic financial systems characterized the transition experience of the SSE region. Over the course of the last 15 years, most SEE countries implemented reforms in their respective banking sectors and as a result have experienced great internationalization of their markets. Among foreign participators, Greek banks have been very active and expanded rigorously in five SEE economies (from now on 5-SEE) 1 with the pace of entry accelerating sharply during the period. Greek banks penetrated domestic markets and acquired numerous domestic banks in the host economies of SEE, reinforcing their presence in the region. In particular, Greek Banks with a growing network of over branches in the SEE area have competed very aggressively in all loan markets, resulting in gaining of more than 30% of market share. Key characteristics regarding the mode of Greek banks entry in the 5-SEE are presented in Table 1. This paper attempts to contribute to the ongoing research of the main determinants of the foreign bank entry process. There are two main theories of the internationalization of banks; the internalization theory and the eclectic theory. The first theory emphasizes the importance of the transaction cost in imperfect markets while the second one stresses three factors of bank s decision to invest abroad, ownership, location and internalization (the OLI paradigm). Based on this framework we attempt to identify the determinants of Greek banks expansion in the 5-SEE. We apply the three sets of advantages suggested by the OLI Paradigm and we employ a number of variables in order to capture their significance. 2

3 Table 1. The presence of Greek banks in the 5-SEE, Countries Number of Greek Banks Total Number of Operations a Number of Greenfield Investment s Furthermore, regarding internalization advantages, special attention is given to the follow the customer hypothesis which is examined along with ownership and location advantages. To the best of our knowledge, there are no previous attempts in trying to explain, using the OLI paradigm, why foreign banks enter the SEE economies and the resulting growth and penetration of the Greek Banks. Also, there is a rigorous and in depth evaluation of the location advantages and their decomposition in two subsets, namely economic and regulatory conditions. Lastly, due to a lack of time series data for the specific area, we construct a data set by utilizing a number of resources such as Central Banks, Commercial Banks year books, and IFS statistics, etc. Number of M&As Total Number of Greek Branches Total Number of Employees Albania Bulgaria FYROM Romania Serbia Total Source: Hellenic Bank Association (2007), Greek banks full year reports ( ) and authors calculations. a Operations refer to either greenfield or M&As. On the question of why Greek Banks expanded abroad, we do not argue that Greek banks may have initially crossed their borders in order to follow their customers abroad and therefore to internalize he bank-client relationships established back at home. However we show that factors such as favorable host market conditions, profit opportunities, and especially similarities in governance between Greece and the host countries can better explain the expansion of Greek banks relative to the follow the customer hypothesis during the period. In other words, in the context of the eclectic Paradigm we 3

4 claim that once Greek banks initially entered SEE, factors other than the traditional internalization ones explain Greek expansion into the 5-SEE banking markets. Empirically, we provide evidence that the three factors of the Eclectic Paradigm significantly affected Greek banks expansion. More specifically, we show that during the period Greek banks utilized ownership advantages, especially the intangible ones, while the highest significance is attributed to location advantages. 2. Literature Review The main claim in the pre-existing literature is that the internationalization of financial enterprises is a result of the internationalization of other non-financial home enterprises. Brimmer and Dahl (1975) suggested that banks seek to internalize existing bank-client relationships so as to avoid being supplanted by other banks, domestic and foreign as well. An established bank-client relationship provides the client with the benefit of minimizing the costs associated to learning the banking requirements of operating abroad. Additionally, in the case of a bank following its customer abroad, the bank applies this knowledge advantage at relatively low marginal costs. In line with the above, Williams (1998) supported that the flow of information regarding home clients becomes a public good within the bank which can be best exploited via foreign direct investment. Nigh et al. (1986) concluded that there is a positive relationship between US banks foreign activities and the size of the US FDI, while Goldberg and Johnson (1990), stressed the pivotal role of internalization advantages, supporting that the internationalization of US banks can be best considered in the context of the follow the customer hypothesis. Proponents of the follow the customer hypothesis state the overwhelming significance of internalization advantages. On the other hand, the eclectic theory asserts that internalization advantages cannot sufficiently explain an entity s internationalization. It 4

5 suggests the utilization of two sets of advantages, namely ownership and location, along with internalization. Gray and Gray (1981) and Sabi (1988) were among the first to apply the eclectic theory to international banking. The authors claimed that banks may follow their customers abroad but also seek local market opportunities to preserve their ownership-specific and location-specific advantages. Regarding location advantages, Goldberg and Saunders (1981) and Seth et al. (1992) found that foreign banks entry in the US was significantly affected by interest rate differentials and home institutional characteristics while Yamori (1998) found that host profit opportunities played the most significant role on US banks expansion abroad. Modelling the components of foreign direct investment in banking for the US, the UK and Germany, Moshirian (2001) showed that the cost of capital and relative economic growth are the most significant determinants of cross-border operations while Buch (2000), utilizing German data, underlined the role of domestic demand and host regulatory conditions in addition to internalization factors. Mutinelli and Piscitello (2001), investigated the case of Italian banks, and found that internalization advantages were significant, yet less significant than ownership advantages. Regarding the latter, Cho (1986) and Focarelli and Pozollo (2001) suggested that a home bank s size and financial development might be strong determinants for banks expansion abroad. Lastly, special attention is given to the roles of relative country conditions; relative profit opportunities and relative regulatory conditions are claimed to stimulate financial integration (Buch and DeLong, 2004; Rossi and Volpin 2004; Magri et al. 2005). Moreover, Focarelli and Pozzolo (2005) argue that regulatory conditions constitute a stronger determinant for bank s expansion compared to host profit opportunities, while Focarelli and Pozollo (2008) underlined the significance of distance, economic and cultural 5

6 integration. The authors also supported that multinational banks may utilize comparative (location) advantages given that the of destination countries have lower GDP per capita and less developed credit markets. From the above literature review it is clear that both approaches, either the initial internalization or the eclectic approach, offer a theoretical context in which international banking can be considered. 3. Data and Variables Choice We apply the eclectic Paradigm to the internationalization of Greek banks. We claim that Greek banks expansion in the 5-SEE was motivated simultaneously by three factors; Ownership (O), location (L) and Internalization (I). Our data spans 2000 to 2007 and more details can be found in the appendix. We estimate the following equation using panel data: GrBankj,t = aoj,t,+ βecj,t,+ γrcj,t,+ δij,t + εj,t (1) where j = Albania, Bulgaria, FYROM, Romania, and Serbia and t = 2000,, GrBankj,t denotes Greek banks presence in the 5-SEE captured by the assets of Greek banks in the domestic economies. The volume of total assets is a commonly accepted measure of foreign banks expansion (see Goldberg and Johnson, 1990; Moshirian and Van der Laan, 1998). Alternatively, we employ the number of Greek banks branches in the 5-SEE economies. Oj,t is a set of variables capturing ownership advantages. The size of the mother banking institution favors multinationality (Grubaugh, 1987), therefore we use the size of the home Greek banking sector in attempting to capture ownership advantages. Alternatively, we use Greek banks intangible assets by constructing a variable measuring Greek banks international experience. 6

7 ECj,t is a set of variables relevant to host economic conditions. Initially we employ the growth prospects in the host economies (see Brealey and Kaplanis 1996; Fisher and Molyneux, 1996; Focarelli and Pozzolo, 2008). We claim that higher growth rates, implying augmented credit demand, motivated Greek banks expansion. Furthermore, we test whether the growth differentials between Greece and the domestic economies have favored Greek banks expansion. Additionally, given that the need to finance consumption may have stimulated Greek banks expansion, we employ total consumption in the 5-SEE economies. We also employ market conditions proxied by domestic population; a big market implies great domestic demand and therefore banking intermediation leads to profit opportunities. Opportunities for banking intermediation are also captured by the foreign direct investments (FDI) undertaken in the region by non-greek enterprises. Lastly, the extent of privatization in these economies and the reformation of the respective banking systems are also included in the list of explanatory variables ECj,t, describes specific banking sector s characteristics and we employ the differentials of the interest rate spreads between Greece and the domestic economies (Goldberg and Saunders, 1981). Taking into consideration that the greatest portion of banks profit comes from interest rate revenues, we believe that Greek banks were attracted by the relatively high spreads in the banking markets of SEE. Also, following Focarelli and Pozollo (2008), we utilize the ratio of total claims to the real GDP for each host country, capturing therefore the depth of the respective financial system. RCj,t describes governance conditions in the domestic economies. Such conditions reflect the institutional environment in which any corporation, financial or not, may efficiently operate efficiently (Sagari, 1992; Miller and Parkhe, 1998; Yamori, 1998). We use alternative governance indicators and we expect Greek expansion to be positively 7

8 related to improvements in host governance. Furthermore, we claim governance similarities between Greece and the host countries (governance convergence) encouraged Greek bankers to further expand in the 5-SEE. To test such a claim, following Esperance and Gulamhussen (2001), we calculate the differentials between Greek governance indicators and the respective host ones. We claim regulatory differences discourage flows of capital and we therefore expect a negative sign of the relevant variables. Lastly, Ij,t refers to internalization advantages. Initially we employ bilateral trade volume between Greece and the recipient economies. We believe Greek banks internalized the established commercial relationships between them and the 5-SEE. Additionally, in a narrower context, Ij,t refers to the follow the customer hypothesis captured in the literature by the FDI undertaken by non-financial home enterprises (see, for example, Goldberg and Saunders, 1981; Moshirian and Van der Laan, 1998; Buch, 2000) We test the above hypothesis by employing FDIs in the five domestic economies by Greek nonfinancial enterprises. 4. Empirical Results and Variables Economic Significance 4.1. Baseline O.L.I. Estimations Panel data estimations regarding the basic OLI econometric setup are given in Table 2. All sets of advantages are significant while the signs of the coefficients are the expected ones. 2 Greek banks presence in the 5-SEE is significantly affected by all three sets of advantages providing therefore supportive evidence of the eclectic Paradigm. Results regarding the economic significance of each set of advantages are discussed in depth below, while details on the variables employed, the data utilized, and the sources are listed in the data appendix. 8

9 Table 2. Fixed Effects Panel data estimations of Greek banks expansion in the 5-SEE, O.L.I. setup Dependent Variable: Greek bank s assets in the 5-SEE (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) SIZE ** ** ** ** ** ** * (0.322) (0.318) (0.276) (0.233) (0.227) (0.014) (0.222) (0.524) EXPERIENCE (0.301) (0.974) TRADE ** (0.368) (0.377) (0.405) (1.301) (0.531) (0.438) NONFINFDI (0.298) (0.179) (0.268) (0.974) POP ** ** (10.823) (11.318) (10.000) (10.443) (9.135) (12.157) (17.405) (13.556) (2.727) CLAIMSGDP * * (1.155) (0.651) (0.350) (0.757) POLIT (0.102) VOICE_DIFF ** * (0.453) (0.396) (0.281) RULE_DIFF ** (0.343) (1.628) Obs R-squared F-Statistic Note: The symbol indicates a significance level of 1% or less; ** between 1 and 5%; * between 5 and 10%, while robust standard errors are indicated in the parentheses Ownership Advantages Ownership advantages captured by the variable SIZE (measures Greek banks assets) are significant in all specifications. However, the relatively low value of the variable s coefficient implies that ownership advantages might be influenced by the other two sets of advantages (ownership and location). Contractor and Kundu (1998) claimed that in the case of several service sectors, size may not be an ownership advantage. Also, according to William s (1998), economies of scale deriving from bank s size are not regarded as 9

10 important ownership advantage in multinational banking, as they appear to be exhausted in banking at a size below that attained by most banks prior to multinationality. Based on the above, we claim that the size of the seven Greek multinational banks may have allowed their initial internationalization but it did not stimulate further expansion in the 5-SEE. Alternatively, in specifications (4) and (10), we use the variable EXPERIENCE, which is significant in both specifications and was constructed by taking into account the number of countries in which Greek banks have operated during the period under examination. 3 The positive sign indicates that Greek banks international experience affected their expansion into the 5-SEE economies. It is important to note that the coefficients of the variable EXPERIENCE is much higher than the respective coefficients of the variable SIZE implying that it was the utilization of intangible rather than tangible assets that stimulated Greek banks international expansion Location Advantages Location advantages are captured by two sets of local conditions being employed simultaneously in all specifications of Table 2, namely economic conditions and regulatory conditions. Regarding economic conditions, we employ the variable POP (capturing host markets size) and the variable CLAIMSGDP (capturing host financial systems depth). Both variables have the expected positive sign and are statistically significant. The significance of the variable POP indicates that the size of the host markets attracted Greek banks, while the significance of the variable CLAIMSGDP (specifications 5-6) indicates that the augmentative banking intermediation in SEE, which implies bank profit opportunities, attracted Greek banks. Regulatory conditions are proxied by the differential variables VOICE_DIFF and RULE_DIFF. VOICE_DIFF captures the differences between the voice and accountability 10

11 of the Greek government and of the domestic economies and RULE_DIFF captures the differences regarding the rule of law. Both variables are significant while their negative sign indicates that regulatory differences had a negative influence on Greek banks decision to expand further. On the other hand, we claim that regulatory convergence between Greece and the host economies formed a safe operational context in which to operate in, similar to which Greek banks had been accustomized back at home. Lastly, the variable POLIT measuring the political stability in the host economies is statistically significant and its correct sign indicates the positive relationship between local political conditions and Greek banks expansion in the region Internalization Advantages and the Follow the Customer Hypothesis The variable TRADE, for capturing internalization advantages, measures the bilateral trade relationships between Greece and the 5-SEE economies. The significance and the positive sign of the variable TRADE (see Table 2 specifications 1 6) indicate that the intensification of commercial relationships between Greece and the host economies had positive effects on Greek banks decisions to undertake investments in the region. We argue that Greek banks managed to efficiently internalize the benefits deriving from the commercial links between Greece and the neighbouring economies of SEE. 4 Given that internalisation advantages mainly relate to the follow the customer hypothesis, we utilize the volume of FDIs of non financial Greek enterprises, NONFINFDI (specifications 7-10). The coefficient has the expected sign but it is not statistically significant in any specification, casting doubts on the validity of the follow the customer hypothesis. In other words, the insignificance of the NONFINFDI indicates Greek banks did not actually follow their home clients abroad during the period of period. On the other hand, the above finding may not be surprising if one takes into 11

12 consideration the time period of our analysis. The follow the customer hypothesis might hold for the early 90 s which was a period in which Greek banks started expanding in the 5-SEE economies. Nevertheless, we will now demonstrate that the main motivation for the expansion of Greek banks abroad is the utilization of location advantages Focusing on Location Advantages In Table 3 we depict a number of specifications aiming at capturing the significance of location advantages. 5 The alternative variables employed capture economic and regulatory conditions while looking more closely at each specification some interesting results arise. 6 Regarding host regulatory conditions, RULE and CONTROL capture the rule of law and the control of corruption (in the 5-SEE) respectively. Both variables are significant with their positive sign indicating that the improvement of local political and governance conditions encouraged Greek banks to expand further. Additionally, CONTROL_DIFF and POLIT_DIFF which measure the differences in the corruption levels between Greece and the respective host economies (political stability). The negative sign of both variables indicates that the less the governance differs between Greece and the domestic economies, the greater the Greek banking expansion in these economies. The above finding confirms our claim regarding the significant role that the political and governance convergence has played_on_greek_banks _expansion. 12

13 Table 3. Fixed Effects Panel data estimation of Greek banks expansion in the 5-SEE, Location advantages Dependent Variable: Greek banks assets in the 5-SEE (1) (2) (3) (4) (5) (6) (7) GDPPC (0.368) (0.384) GDPPC_DIFF 0.404* (0.465) FDIREST (0.041) (0.058) POP 2.405** * 31.89** (1.041) (0.580) (0.639) (1.919) (11.591) CONS 1.768** (0.816) CLAIMSGDP (0.381) SPREADDIFF ** (0.012) (0.014) BSR (0.465) PRIVAT ** (0.739) (1.333) (1.605) RULE (0.238) CONTROL 0.483** (0.219) RULE_DIFF ** ** (0.533) (0.647) (0.595) (0.540) VOICE_DIFF (0.231) (0.230) (0.219) (0.197) (0.278) Obs R-squared F-Statistic Note: The symbol indicates a significance level of 1% or less; ** between 1 and 5%; * between 5 and 10%, while robust standard errors are indicated in the parentheses. As for the domestic economic conditions, GDPPC and CONS (measuring real gross domestic product and domestic consumption respectively) are strongly significant implying that favorable domestic market conditions attracted Greek banks. Furthermore, by taking into account the difference between the real Greek GDP per capita and the domestic one (GDPPC_DIFF), we demonstrate that growth differentials between Greece and the recipient economies increase the capital flow from Greek banks towards SEE. 7 13

14 Additionally, one variable of great importance in terms of explaining location advantages and its impact is the interest rate differential between domestic and Greek markets (SPREADDIFF). Note that during the period under investigation interest rates in the SEE markets were much higher compared to those of the Greek banking market. Therefore, taking into consideration that spreads imply profit opportunities, Greek banks have tried to benefit from the relatively high interest rate spread during the period. In this vain, reforms and privatization processes (BSR and PRIVAT) such as degree of openness, liberalization of the banking system and the improvement of the operational environment, encouraged Greek banks to assume large scale investments in the region. Additionally, privatization in the host economies implied a potential clientele base for Greek banks and therefore encouraged their expansion. Such a claim is based on the fact that it is more probable for a private domestic enterprise to cooperate with a foreign bank, Greek or non- Greek, rather than with state owned banks. Table 4. Fixed Effects Panel data estimation of Greek banks expansion in the 5-SEE, Location advantages Dependent Variable: Number of Greek branches in the 5-SEE (1) (2) (3) (4) POP (1.515) (0.915) (1.609) CONS (0.363) SPREADDIFF (0.013) (0.015) BSR (1.345) PRIVAT 3.344* (1.927) (1.788) (1.137) POLIT 0.128** (0.060) CONTROL_DIFF (0.242) POLIT_DIFF (0.145) RULE_DIFF * (0.954) (0.762) Obs R-squared F-Statistic Note: The symbol indicates a significance level of 1% or less; ** between 1 and 5%; * between 5 and 10%, while robust standard errors are indicated in the parentheses. 14

15 The negative sign of FDIREST, which measures the non-greek FDIs in the 5-SEE, indicates that the intense competition in the domestic markets may have discouraged Greek banks further expansion, i.e.; Greek banks might have been crowed out by other non-greek foreign investors in the region. Lastly, substituting the dependent variable with the variable BRANCH, which measures the number of Greek branches in SEE, our findings regarding the significant role of location advantages are not altered at all (Table 4). 5. Conclusion In this paper we tried to shed light on the determinants of Greek banks expansion into five Southeastern European economies during the period. Applying the eclectic Paradigm to Greek international banking, we tested the validity of three sets of advantages; ownership, location, and internalization. Controlling for ownership advantages, our findings indicate Greek mother banks tangible and intangible assets have positively influenced Greek banks expansion while intangible assets did so at a relatively higher magnitude. Regarding location advantages, favorable host market and financial conditions and growth prospects were proved to be significant factors in addition to the reform of the host banking systems. Surprisingly, the penetration of non-greek investors in the 5-SEE was proved to have been a location disadvantage for Greek banks. In addition, improvements in governance conditions in SEE encouraged Greek banks expansion in the region while similarities in governance between Greece and the recipient economies exhibited even greater significance. Our results indicated that governance conditions convergence intensified Greek banks expansion. Lastly, in respect to internalization advantages, established commercial relationships between Greece and the five host economies stimulated Greek banks presence in the region. Furthermore, examining internalization advantages in a narrower context, our findings did 15

16 not confirm the follow the customer hypothesis. We argue that Greek banks followed their Greek non-financial corporations to SEE from 2000 to Once Greek banks initially entered the neighboring economies, other less defensive factors seem to have determined Greek banks further expansion in the region. Finally, we suggest that Greek banks expansion into the 5-SEE economies can be best considered in the context of the eclectic approach. In this context, the utilization of location advantages, supplemented by ownership and internalization advantages, can best explain Greek banks expansion into the 5-SEE during the period. However, in spite of these findings, two caveats have to be taken into account. First the sample period is short and secondly, data quality might be a concern. References Brealey, R.A., and E.C. Kaplanis The determination of foreign banking location. Journal of International Money and Finance 15: Brimmer, A., and F. Dahl Growth of American international banking: Implications for public policy. Journal of Finance 30: Buch, C Why do banks go abroad? Evidence from German data. Financial markets, Institutions and Instruments, 9: Buch, C., and G. Delong Cross-Border Bank Mergers: What Lures the Rare Animal? Journal of Banking and Finance 28: Cho, K. R Determinants of international banks. Management International Review 26: Contractor, F., and S. Kundu Modal choice in a world of alliances: Analyzing organizational forms in the international hotel sector. Journal of International Business Studies 29:

17 Esperance, J.P., and Gulamhussen M.A (Re)Testing the follow the customer hypothesis in multinational bank expansion. Journal of Multinational Financial Management 11: Fisher, A., and Molyneux P A note on the determinants of foreign bank activity in London between 1980 and Applied Financial Economics 6, Focarelli, D., and Pozzolo A.F The patterns of cross-border bank mergers and shareholdings in OECD countries. Journal of Banking and Finance 25: Focarelli, D., and Pozzolo A.F Where do banks expand abroad? An empirical analysis. Journal of Business 78: Focarelli, D., and Pozzolo A.F Cross-border M&As in the financial sector: Is banking different from insurance? Journal of Banking and Finance 32: Goldberg, L., and Johnson D The determinants of US banking activity abroad. Journal of International Money and Finance 9: Goldberg, L., and Saunders A The determinants of foreign banking activity in the United States. Journal of Banking and Finance 5: Gray, J., and Gray P The multinational bank: A financial MNC? Journal of Banking and Finance 5: Grubaugh, S Determinants of direct foreign investment. Review of Economics and Statistics 69: Magri, S.; Mori A.; and Rossi P The entry and the activity level of foreign banks in Italy: An analysis of the determinants. Journal of Banking and Finance 29: Miller, S., and Parkhe A Patterns in the expansion of U.S. banks foreign operations. Journal of International Business Studies 29: Moshirian, F International investment in financial services. Journal of Banking & Finance 25:

18 Moshirian, F., and Van der Laan A Trade in financial services and the determinants of banks. foreign assets, Journal of Multinational Financial Management 8: Mutinelli, M., and Piscitello L Foreign direct investment in the banking sector: The case of Italian banks in the 90 s. International Business Review 10: Nigh, D., Cho K.R. and Krishnan S The role of location-related factors in US banking investment abroad: An empirical examination. Journal of International Business Studies 17: Rossi, S., and Volpin P Cross-country determinants of mergers and acquisitions. Journal of Financial Economics 74: Sabi, M An application of the theory o foreign direct investment to multinational banking in LDCs. Journal of International Business Studies 19: Sagari, S.B United States foreign direct investment in the banking industry. Transnational Corporations 19: Seth, R.; Nolle D.; and Mohanty S Do bank follow their customers abroad? Financial Markets, Institutions and Instruments 7: Williams, B Positive Theories of Multinational Banking: Eclectic Theory versus Internalization Theory. Journal of Economic Surveys 11: Yamori, N A note on the location choice of multinational banks: The case of Japanese financial institutions. Journal of Banking and Finance 22:

19 Data Appendix Variable Description Source(s) BRANCH The number of Greek banks branches in the 5-SEE host economies. Source: Hellenic Bank Association. BSR Indicator measuring the reform of the banking system in the transition economies. The indicator takes values from 0 to 4 with higher values indicating more liberalized and privatized banking systems. Source: European Bank for Reconstruction and Development, Transition Reports CLAIMSGDP The volume of loans of financial intermediaries to the private sector (IFS lines 22b and 42d) divided by GDP of the respective economies (IFS line 99b). Source: IMF s International Financial Statistics. CONS The ratio of consumption in the 5-SEE to the GDP of the respective economies. Source: World Bank. CONTROL Indicator measuring the extent to which corruption is controlled in the 5-SEE economies. The indicator Control of corruption takes values from -2.5 to 2.5 with higher values indicating more favourable conditions regarding the corruption in the host economies. Source: World Bank/ WGI. EXPERIENCE The international experience of Greek banks. The values of the variable are the number of foreign countries in which Greek banking sector as a whole has been operating in a given year, or the number of Greek banks cross-border operations in a given year. Source: Greek banks full year reports, own calculations. FDIREST The total volume (assets) of the non-greek foreign direct investments (FDI) in the 5-SEE economies. The difference between the total FDI in the 5-SEE and the Greek FDI in the respective economies. Source: Bank of Greece, Central Banks of the five host economies, and Greek Embassies in the 5-SEE economies and the respective Offices for Economics Commercial Affairs, own calculations. GDPPC The real gross domestic product of the 5-SEE economies (IFS line 99b) divided by population of the respective host country (IFS line 99z). Source: IMF s International Financial Statistics. GDPPC_DIFF The difference between the GDPPC of Greece and the GDPPC of the respective host economies. Source: own calculations. GRASSETS The volume of total assets of the seven Greek banks operating in the 5-SEE economies. Source: Balance sheets of Greek banks, balance Sheets of Greek banks subsidiaries NONFINFDI The total volume (assets) of foreign direct investment undertaken by non-financial Greek enterprises in the 5-SEE economies. Source: Bank of Greece, Central Banks of the five host economies, Greek Embassies in the 5-SEE economies and the respective Offices for Economics Commercial Affairs. POLIT Governance indicator measuring the political stability of the 5-SEE economies. The indicator takes values from -2.5 to 2.5 with higher values indicating more favourable conditions. Source: World Bank/ WGI. 19

20 Data Appendix (continued) Variable Description Source(s) POLIT_DIFF The difference between the values of the indicator Political Stability of the 5-SEE economies and Greece. Source: World Bank/ World Government Indicators, own calculations. POP The population in the five host economies. Source: Transition Reports ( ), EBRD. PRIVAT Indicator measuring the privatization process in the transition economies. The indicator takes values from 0 to 4 with higher values indicating full privatization. Source: European Bank for Reconstruction and Development, Transition Reports RULE Indicator measuring the rule of law of the 5-SEE. The indicator takes values from -2.5 to 2.5 with higher values indicating more favourable conditions regarding the rule of law in the host economies. Source: World Bank/ World Government Indicators. RULE_DIFF The difference between the values of the indicator Rule of Law of the 5-SEE economies and Greece. Source: World Bank/ World Government Indicators, own calculations. SIZE The volume of total assets of the seven Greek mother banks operating in the 5-SEE economies. Source: Balance sheets of Greek banks, Greek banks Full Year Results. SPREADDIFF The difference between Greek interest rate spread (IFS line 60p IFS line 60l) and the respective spread in each host SEE economy. Source: own calculations. TRADE Bilateral total trade volume (import plus exports) between Greece and each one of the five South Eastern European economies. Source: 5-SEE Central Banks, Greek Chambers of Commerce in the 5-SEE economies. VOICE_DIFF The difference between the values of the indicator Voice and Accountability of the 5-SEE economies and Greece. The indicator Voice and Accountability measures the voice and accountability of the 5-SEE governments. The indicator takes values from -2.5 to 2.5 with higher values indicating more favourable conditions. Source: World Bank/ World Government Indicators, own calculations. 20

21 Notes 1 5-SEE refers to Albania, Bulgaria, FYROM, Romania, and Serbia. 2 We employ the Fixed Effects method so as to capture cross-section differences. The values of the F-Statistic indicate the heterogeneity of the cross-sections suggesting thus the employment of Fixed or Random Effects. Additionally the Chi-Square Test indicates that the constant term is different among the cross-sections. 3 Alternatively, employing the number of Greek cross-border operations during the period we study did not alter the results. 4 It is easier and safer for a bank to expand in a foreign country in which the domestic population is already familiarized to the investor s country (in our case Greece) through their bilateral commercial relationships. 5 The explanatory power of all specifications (as indicated by the values of R-squared) is maintained at satisfactory levels despite the absence of the other two sets of advantages. 6 Note that some of the specifications of Table 3 include variables capturing location advantages, economic and regulatory as well, being already employed in the specifications of Table 2. Given that the significance and the sign of these variables do not change at all we do not deal with these variables when interpreting the econometric results of Table 3. 7 The significance of such differentials provides evidence for the traditional Ricardian theory which demonstrates that differentials between countries promote capital flows between them. 21