Foreign banks and the export performance of emerging market firms: Evidence from India

This paper assesses the case for foreign banks as part of a program of institutional reform geared toward export promotion in emerging market economies. It does so by empirically evaluating the impact of foreign bank participation on the export performance of emerging market firms. It hypothesizes that foreign bank participation will not have a statistically significant moderating effect on the anticipated positive relationship between firm size and export sales. Using an unbalanced panel of 930 firm-year observations for Indian chemical firms over the period 1997–2005, it employs the two-stage least squares (2SLS) method with fixed effects to estimate a simultaneous equations model. The empirical evidence suggests that higher foreign bank participation in the domestic banking sector may attenuate the positive firm size–export sales relationship; however, this mediating effect is not significant in both statistical and economic terms. The main policy implication is discussed.

► We estimate the mediating effect of foreign bank participation on the firm size–export sales relationship. ► Firm size and export sales are positively related. ► Greater foreign bank participation in the domestic banking sector may weaken the firm size–export sales relationship. ► The mediating effect of foreign banks is not significant in both statistical and economic terms. ► Domestic credit market conditions may not significantly improve for exporters merely with the entry of foreign banks.