1
Economic determinants and entry modes of
foreign banks into Central Europe
Aneta Hryckiewicz†, Goethe University Frankfurt
Oskar Kowalewski‡, Warsaw School of Economics
Preliminary Version
January 2008
ABSTRACT
In the last fifteen years foreign banks have expanded their presence significantly in
almost all developing economies. The transition countries are among those economies
that have experienced one of the highest levels of banking internationalization in the
world. The foreign-controlled banking asset in these countries ranges from 70 per cent in
Poland to almost 100 per cent in Slovakia. With our study we examine the economic
determinants of entry into four local banking markets in Central Europe during the period
1994-2004. In addition, we study how the economic determinants affect different entry
modes of foreign banks into the Central European markets. Our results show that the
most important factors determining foreign bank entry were (i) large potential of the
Central European banking markets and low degree of their financial sophistication (ii) the
legal origin of the home country, (iii) the size of the economic growth rates differentials
between host and home markets, and (iv) finally the distance between the host country
and the foreign bank headquarter. We also find that most foreign banks entries occurred
in the period of poor creditor rights protection. Moreover, our results present that the
economic determinants had an impact on the decision of the organization form of the
foreign banks entering the Central European banking markets. Our results are robust to
several controls, including the lack of independence of entry decisions.
Keywords: international banking, foreign direct investment, foreign entry, mode of
foreign bank entry, Central Europe
JEL-Classification: G21; F2
† Chair of International Banking and Finance, Johann Wolfgang Goethe University, P.O. Box 111932
(Uni-Pf. 66), 60054 Frankfurt