Foreign Banks’ Entry and Local Banks’ Strategies in China

Abstract

The opening of the Chinese banking sector encourages the entry of foreign banks through greenfield investment or cooperation with local banks. The entry strategies of foreign banks are therefore influenced by the strategies of local banks. This paper examines the interaction between local and foreign banks. The results demonstrate that the superior capabilities of foreign banks to liquidate collateral facilitate their greenfield investment. Otherwise, foreign banks will cooperate with local banks, whose cooperation depends on local banks’ self-development capability. Our results suggest that foreign banks are more likely to cooperate with large local banks in China unless small local banks have greater self-development capabilities.