Does the Entry Mode of Foreign Banks Matter for Bank ... - EconomiX

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The line of literature that addresses the impact of foreign bank entry on bankperformance in the context of emerging and transition economies has done so mainly bycomparing the performances of foreign and domestic banks. Common findings inempirical studies generally point to a positive relationship between foreign involvement,foreign ownership, as denoted by different levels of participation of foreign banks indomestic banks, and bank performance (Bonin et al., 2005).Some studies have focused on the countries of interest to our paper, for instance,Sabi (1996) who compared the performance of domestic and foreign banks in Hungaryfor the period 1992-1993, when the foreign banks that were present in Hungary weremostly Greenfield investments. Using data on financial statements of banks from theHungarian Financial and Stock Exchange Almanac, the author constructs accountingmeasures of bank performance that reflect profitability, liquidity and credit risk, andcommitment to the market economy of both types of banks. The author then uses t- testsand Kruskal–Wallis tests and finds significant differences in these indicators generally infavor of foreign banks.(Nikiel & Opiela, 2002) examines the determinants of bank efficiency in Polandfrom 1997 to 2000. The authors first estimate cost and profit efficiencies usingDistribution Free Approach (DFA). Then, these efficiency scores are used in a secondstage regression with independent variables representing bank characteristics such assize, ownership, and customer type. The results show that foreign banks working withforeign clients are more cost-efficient than private domestic banks, while foreign banksworking with domestic clients are not. By contrast, foreign banks with foreign clients areless profit-efficient than private domestic banks, while foreign banks with domesticclients are not. Moreover, cost scale economy and profit diseconomy of scales are foundto be present.Weill (2003) uses stochastic frontier analysis to study bank efficiency in theCzech Republic and Poland in 1997. Cost efficiency scores reveal that on average,foreign banks are more cost efficient than domestic banks. In a second-stage regression,he models the inefficiency scores, controlling for size and structure of activities andconcludes that these factors had no impact on inefficiency.-4-
Working over an extended period running from 1993 to 1998, Hasan & Marton(2003) compute cost and profit efficiencies for banks in Hungary, using stochasticfrontier analysis and report that domestic banks are less cost- and profit-efficient thanthose with foreign participation. Furthermore, they divide foreign banks into four groupsbased on the extent of foreign involvement, and find that the higher the foreignparticipation, the higher the efficiency. Finally, the average inefficiency scores of allbanks exhibit a significant improvement over the sample years both in cost and profits.(Matousek & Taci, 2004) estimates cost efficiency for Czech banks from 1993 to1998 using Distribution Free Approach. The results show that on average, foreign banksare more cost-efficient than domestic banks, though their efficiency is similar to that of“good” small private domestic banks in their first years of existence.Havrylchyk (2006) also reports the superior performance of foreign banks forPoland using Data Envelopment Analysis. However, over the period under study - 1997to 2001, she finds that the efficiency of both foreign and domestic banks appears to havedeteriorated on average.This literature suffers from a main drawback. Indeed, although taking intoaccount various discriminating criteria amongst foreign banks such as levels of foreigninvolvement in bank ownership, types of foreign owners (strategic partners, institutionalinvestors…) or countries of origin of foreign banks, few studies have taken into accounttheir modes of entry. A likely reason for this deficit is the difficulty in tracking evolutionin bank ownership over time.Recent studies have attempted to bridge this gap but have not focused on bankefficiency per se. For instance, (Claeys & Hainz, 2006) investigates the impact of entrymodes of foreign banks on the degree of competition in the local banking markets, andconsequently on banks’ lending rates. Their results show that competition is strongerwhen market entry occurs through greenfield investments, which will cut down domesticbanks’ interest rates. (Haas & Lelyveld, 2006) studies credit behavior of foreign anddomestic banks in Central and Eastern Europe from 1993-2000, and finds that duringcrisis periods, domestic banks contracted their credit base, whereas greenfield banks didnot. Moreover, the credit behavior of greenfield institutions depends negatively on their-5-
Page 1 and 2: Does the Entry Mode of Foreign Bank
Page 3: two-stage approach commonly adopted
Page 11 and 12: separate legal entity incorporated
Page 13 and 14: multinationals and Hungarian monopo
Page 15 and 16: have steadily increased their marke
Page 17 and 18: - the government and the strategic
Page 19 and 20: Hypothesis 4: The nature of the inh
Page 21 and 22: are assumed to be independently and
Page 23 and 24: C1pln( ) = + ln + ln ln + ln( ) +p2
Page 25 and 26: Market share. We calculate a bank
Page 27 and 28: In this section, we present results
Page 29 and 30: ecomes significant. This therefore
Page 31 and 32: The results related to the age vari
Page 33 and 34: Berger, A. N., R. Young, H. Genay,
Page 35 and 36: Kalirajan, K. (1981). “An Econome
Page 37 and 38: Williams, J., & Liao, A. (2008). Th
Page 39 and 40: Table 2: Number of Banks by Ownersh
Page 41 and 42: Table 4: Determinants of Cost Ineff
Page 43 and 44: Table 6: Determinants of Cost Ineff
Page 45 and 46: year_11 -0.124 -0.059(0.043)*** (0.
Page 47 and 48: year_10 0.001 -0.001 -0.015 -0.047(
Page 49: year_10 -0.119 -0.121 -0.090 -0.173

Does the Entry Mode of Foreign Banks Matter for Bank ... - EconomiX

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