Abstract
This paper examines the foreign financial institutions’ spillover effects in China’s banking sector through three channels, foreign strategic investment, employee turnover, and competition using qualitative analyses and quantitative analyses. Through comparing Chinese banks performance between pre- and post- foreign strategic investment, and the OLS regression analyses, we found that the foreign strategic investment did benefit Chinese banks, but the impact of strategic investment is not very obvious. Employee turnover gives Chinese banks opportunity to learn from foreign banks, but the employee mobility from Chinese banks to foreign banks benefit foreign banks more. Although Chinese banking sector is open to foreign banks, the growth of foreign banks in China is restricted, and the competition effects are not very obvious.
Highlights
Several studies show evidence that in emerging countries foreign banks are more efficient than domestic banks and their entry and investments play a key role in the banking sector (Berger et al, 2009; Bhattacharya et al, 1997; Bonin et al, 2005a, 2005b; Claessens et al, 2001; Denizer, 2000; Goldberg et al, 2000; Goldberg and Saunders, 1981; Levine, 1996; Walter & Gray, 1983; Weill, 2003)
The difference on raw value of COSTR between pre- and post- foreign strategic investment is negative and significant at the 3 periods, which indicates that the cost to income ratio of Chinese banks is improved after introducing foreign strategic investment
The coefficient of Adj_COSTR is negative and significant at 10% level which means that the cost to income ratio of Chinese banks with strategic investment is lower than the matching group banks
Summary
Several studies show evidence that in emerging countries foreign banks are more efficient than domestic banks and their entry and investments play a key role in the banking sector (Berger et al, 2009; Bhattacharya et al, 1997; Bonin et al, 2005a, 2005b; Claessens et al, 2001; Denizer, 2000; Goldberg et al, 2000; Goldberg and Saunders, 1981; Levine, 1996; Walter & Gray, 1983; Weill, 2003). Few studies examine how foreign banks affect the emerging countries' domestic banks, especially the relative empirical studies on the spillover effects. China‟s economy has been growing about 10% per year in real terms over the last decade, and is projected by some to become the world‟s largest economy in the coming decades This rapid growth maybe largely linked to the globalization of trade, but China has yet to „„globalize” its banking sector. Previous studies examine the impact of foreign bank entry on Chinese banks (Laurenceson & Qin, 2008; García-Herrero & Santabárbara, 2008; Berger et al, 2009; Shen et al, 2009; Yuan & Gunji, 2009). This study examines what are the channels of foreign banks' spillover effects in China‟s banking sector and gives the relative empirical evidence or anecdotal evidence to support the channels.
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