Government Ownership and Competitive Advantage: The Impact on Performance of Indonesian Regional Development Banks

Abstract

Local governments in Indonesia are allowed to establish their own Regional Development Banks (RDB) in their respective provinces. Apart from Indonesian national banks, these RDBs also have to compete with privately-owned and international banks in the country. In addition, each RDB from various regions also have to compete with one another. This study aims to determine the impact of local government ownership and competitive advantage on the financial performance of the RDBs. The influence of competitive advantage of state-owned banks has not yet been studied. Data for RDBs for the year 2015 were gathered from their annual reports available from the websites. Additional secondary data were also obtained from the Indonesian Central Bank and Financial Services Authority (FSA). The final analyses using OLS regression involved a total of 26 RDBs throughout Indonesia. The results of this study show that only capital adequacy as a proxy of government ownership has a positive and significant impact (at 1 percent level) on the performance of RDBs while competitive advantage does not contribute to their financial success. The results contribute to improve the current understanding of RDBs’ performance as government banks. This study also provides input to local governments in managing their funds and resources to ensure the sustainability of RDBs.