Leonardo Martinez‐Diaz
Oxford Univeristy
August 7, 2006
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Why all of a sudden this unrest and confusion?
(How solemn the faces have become).
Why are the streets and squares clearing so quickly,
and all return to their homes, so deep in thought?
Because night is here but the barbarians have not come.
And some people arrived from the borders,
and said that there are no longer any barbarians.
And what shall become of us without barbarians?
Those people were a kind of solution.
— Constantine P. Cavafy,
“Waiting for the Barbarians” (1904)
This paper introduces my current research on the political economy of banking in developing
economies and presents my research project’s main argument and summary findings. The
project focuses on a relatively novel form of international financial integration in the developing
world—the large‐scale entry of foreign direct investment (FDI) into the domestic banking
sectors of emerging economies. This inflow of capital, which began in the late 1980s but only
took on major proportions in the late 1990s, unfolded not only through the establishment of
new foreign‐bank branches and subsidiaries, but more significantly, through the acquisition of
major developing‐country financial institutions by foreign investors.
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What is novel about
this—or at least what has not been seen since the late 19
th
century—is not only the volume of the
FDI flows involved, but also the degree to which entry barriers have been removed to make the
entry of foreign capital possible.
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The value of financial‐sector FDI into developing countries ballooned from US$2.5 billion in 1991‐1995,
to US$51.5 billion in 1996‐2000, to US$67.5 billion in 2001‐2005. Meanwhile, foreign participation in the
banking sectors of low‐income countries increased from 19 to just over 40 percent from 1995 to 2000 alone.
(Financial‐sector FDI is measured here as the value of cross‐border mergers and acquisitions in which
developing‐country banks were the target, while foreign participation is measured here as the total
percentage of banking sector assets controlled by foreign banks.) Dietrich Domanski, “Foreign banks in
emerging markets economies: changing players, changing issues”, BIS Quarterly Review (December 2005),
p.70 and World Bank, Global Development Finance, (Washington, DC: World Bank, 2002), p.65.
Convention