Global bank linkages and foreign direct investment

Abstract

This study explores the impact of bank networks on foreign direct investment (FDI) using data on country pairs. Global bank linkages are quantified by the number of connected bank pairs engaged in international lending between the source and host countries. The empirical analysis reveals a positive correlation between bank linkages and bilateral FDI stocks. We interpret this relationship as indicating that bank connections facilitate FDI by addressing information asymmetry stemming from factors such as uncertainty, global financial crises, or host country shocks. Our findings remain robust across various robustness checks. This research suggests that governments should promote cross-border bank investments to attract FDI.