Abstract
Research on the impact of the presence of foreign banks on the domestic banking industry in particular is a popular topic for policy implications. The paper examines whether the presence of foreign banks improves the performance of domestic commercial banks in Vietnam. On the sample of 26 domestic commercial banks and 9 fully foreign-owned banks in Vietnam in the period 2009-2018, the research result shows that the presence of foreign banks reduces the profitability of domestic commercial banks, whereas does not have any impact on their operating costs, showing that the combination of spillover effects and competition effects has not caused a positive impact on Vietnamese banking industry. This result leads to policy implications that competition and the introduction of substitute products should be promoted, in order to make good use of the benefits of the entry of foreign banks.
Highlights
Research on banking performance always attract attention of policymakers and researchers because of its important role for economic growth and development (Nguyen et al, 2016)
Mean of equity ratio is at 9.94%, due to capital adequacy requirement for banks in Vietnam
In order to test the hypothesis of the combination of spillover effect and competition effect from the presence of foreign banks in Vietnam, the authors have developed a regression equation on the relationship between the presence of foreign banks and the performance of host commercial banks in the period of 2009-2018 on the data of 26 domestic commercial banks
Summary
Research on banking performance always attract attention of policymakers and researchers because of its important role for economic growth and development (Nguyen et al, 2016). The most studied issue is the impact of FDI in the banking industry on the performance of domestic commercial banks. Lehner and Schnitzer (2008) argued that the entry of foreign banks has two effects: the spillover effect by increasing investment in research and development (R&D) and reducing operational costs; whereas the competition effect reduces incentives for R&D, reduces the investment on screening, and reduces the quality of a bank’s loan portfolio. Tran (2019) pointed out 7 factors that construct the competitive competence of commercial banks in Vietnam: (1) Management competence, (2) Marketing competence, (3) Financial power, (4) Innovation competence for products/services, (5) Customer care competence; (6) Risk management and (7) Adaptation to change in business environment The most studied issue is the impact of FDI in the banking industry on the performance of domestic commercial banks. Girma et al (2001) suggest that FDI can help increase total output, employment and exports; and associate with the higher productivity, and higher wages in the economy. Lehner and Schnitzer (2008) argued that the entry of foreign banks has two effects: the spillover effect by increasing investment in research and development (R&D) and reducing operational costs; whereas the competition effect reduces incentives for R&D, reduces the investment on screening, and reduces the quality of a bank’s loan portfolio.
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