Bank Competition and Export Diversification

The role of the banking industry in export promotion cannot be over-emphasized as banks provide the necessary financial support for borrowers in various industries to undertake investment activities. With the help of an industry-level dataset on bilateral trade flows between various countries, I consider OLS and IV regressions to determine whether the Lerner Index of the banking industry, an indicator on the degree of competition, influences the number of industries exported. In order to consider the impact of competition in the banking industry on export diversification at different levels of financial development of the exporting countries, I split the countries into OECD member countries, non OECD countries and include a pooled set of countries. As macroeconomic conditions are likely to influence the market structure of the banking industry, I further split the samples of countries on the basis of the median levels of lending and the deposit rate spread, foreign bank participation rate and the ratio of government credit to private credit provided by the domestic banks for the respective groups of countries based on their OECD membership status and find varying results under different macroeconomic conditions and levels of financial development. In the recent years, several studies have determined the role of financial markets on exporting activities to be significant at the country-level as well as at the firm-level. To the best of my knowledge, this is one of the first paper to study the influence of competition within the banking industry on export diversification at the industry-level.