International investment in financial services

This paper analyzes and models the significant components of international trade in financial services, namely, foreign direct investment in banking f or the US, the UK and Germany. It distinguishes between banks' activities a broad and FDI in banking by banks and non-banks. A model for FDI in banking is proposed which contains certain explanatory variables peculiar to FDI i n banking as compared to FDI in manufacturing. The components of the model of FDI in banking is different from those models designed to explain banks activities abroad. The empirical results of this study of FDI in banking in dicate that bilateral trade, banks' foreign assets, the cost of capital, re lative economic growth, exchange rates and FDI in non-finance industries ar e the major determinants of foreign investment in banking. (C) 2001 Elsevie r Science B.V. All rights reserved. JEL classification: G15; G24.