Cost of capital and Australia's banking investment abroad

Abstract

As foreign direct investment in banking is part of trade in financial services and as the prospects of Australia's trade in financial services to Asian countries has increased, this paper intends to analyse and measure Australia's foreign direct investment in banking. The paper distinguishes between banks' activities abroad and investors' (banks and nonbanks) FDI in banking. The flow model of FDI in banking based on the eclectic theory of FDI identifies those factors which are most relevant to financial services as opposed to manufacturing. The empirical results of this study indicate that the relative cost of capital, the size of the foreign banking market, the exchange rate, relative economic growth, FDI in manufacturing and Australia's banks' foreign assets are the major determinants of her FDI in banking.