Foreign Direct Investment in the Financial Sector. The Engine of Growth for Central and Eastern Europe?

Markus Eller, Peter Haiss, Katharina Steiner

Publikation: Working/Discussion PaperWU Working Paper

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This paper examines the impact of financial sector foreign direct investment (FSFDI) on economic growth by estimating a panel data model for 11 Central and Eastern European countries (CEECs) between 1996 and 2003 in a cross-country growth accounting framework. The analysis concentrates on the efficiency channel linking FSFDI to economic growth. The results clearly indicate that there can be a relationship between FSFDI and economic growth. Approaching a medium degree of financial M&A is rewarded by higher economic growth after two periods. Beyond it, FSFDI seems to spur economic growth depending on a higher human capital stock. FSFDI-induced knowledge-spillovers to domestic banks can be an explanation for this phenomenon. Above a certain threshold, the crowding-out of local physical capital caused by the entry of a foreign bank seems to hamper economic growth. The value of the paper lies in (1) providing novel data on FSFDI in CEECs, (2) analyzing the impact of FDI on a sectoral level and (3) in modeling the hitherto only qualitatively discussed relationship between foreign banks and economic development into a structural, econometric model that combines two streams of economic research: the FDI-growth-literature and the finance-growth-literature. (author's abstract)
HerausgeberEuropainstitut, WU Vienna University of Economics and Business
PublikationsstatusVeröffentlicht - 2005


ReiheEI Working Papers / Europainstitut

WU Working Paper Reihe

  • EI Working Papers / Europainstitut