How to Get the Most Out of Foreign Direct Investment in Commercial Banking

Abstract

In this paper, I examine the impact of Foreign Direct Investment (FDI) on efficiency of local firms in the commercial banking industry. FDI in banking has accelerated rapidly in the last decade, especially in Latin American and Eastern European countries. Despite this increase in the number of foreign banks, there are still many restrictions on which foreign banks can enter, what they can do and how they can compete. In addition, banking FDI is still contentious since banking systems are so important to the health of the economy. I argue that to get the most out of FDI, policy makers should focus on improving the general institutional environment and reducing the regulatory burden on companies. Regulations that encourage competition and allow free entry will maximize the positive impact of foreign bank investment on local banks’ efficiency.