FDI and Heterogeneity in Bank Efficiency: Evidence from Emerging Markets

Abstract

The inquiry whether foreign firms are more productive than local firms have been one of the key research questions among the 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 FDI on three internal measures of efficiencies, i.e. technical, managerial and cost efficiency 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 efficiency measures, we develop theoretical arguments to explain how FDI-efficiency relationship can differ across these five types of efficiencies. We empirically test our hypothesis 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 technical efficiency, managerial efficiency, and scale efficiency but do not have an advantage in terms of cost efficiency and revenue efficiency.