Date Added: Oct 2009
Modern trade theory emphasizes firm-level productivity differentials to explain the cross-border activities of non-financial firms. This paper tests whether a productivity pecking order also determines international banking activities. Using a novel dataset that contains all German banks' international activities, the authors estimate the ordered probability of a presence abroad (extensive margin) and the volume of international assets (intensive margin). Methodologically, they enrich the conventional Heckman selection model to account for the self-selection of banks into different modes of foreign activities using an ordered probity.