FDI and heterogeneity in bank efficiency: Evidence from emerging markets

Abstract

The inquiry into whether foreign firms are more productive than local firms has been one of the key research questions among international business scholars. We extend this line of research by addressing the heterogeneity among different performance measures. In this study, we examine the impact of foreign direct investment (FDI) on four internal measures of efficiency, i.e. overall technical, pure technical, scale and cost efficiencies, as well as an external measure of efficiency, i.e. revenue efficiency in the emerging markets banking sector. In contrast to previous studies that have perceived bank efficiency in a generic sense and have operationalized their efficiency measure with different measures of efficiency, we develop theoretical arguments to explain how the FDI-efficiency relationship can differ across these five types of efficiencies. We empirically test our hypotheses while accounting for endogeneity among efficiency, risk and capital under a three-stage least squares model. Our findings broadly suggest that foreign banks have an advantage in terms of overall technical efficiency and scale efficiency, but do not have an advantage in terms of pure technical efficiency, cost efficiency and revenue efficiency.