A Study On Banking Sector FDI In Emerging Markets

One of the most striking developments in the banking sector in emerging markets economies has been the sharp increase of banking foreign direct investment (FDI) entry during 1990s. Governments of host countries liberalize their banking markets with the intention to attract new capital and to promote the restructuring of their often rather inefficient banking systems, and also decrease the fragility of banking systems. Governments, commercial banks and academic research all concern why banks expand internationally and how banking FDI affect domestic banking markets. The aim of the paper is to analyze the motivation and the impact of banking FDI entry on host countries, emphasizing the emerging market context.Existing theoretical works on banking sector FDI have concentrated on the application of multinational enterprises theory and lag behind the practice. The literature review considers the theories as single-factor and multi-factor theories and suggests that internalization and eclectic theory have limitation on banking sector FDI in emerging markets and thus need innovation. For assessing the push and pull factors of the surge of banking sector FDI in emerging markets, a perspective that incorporates both supply-side and demand-side is constructed. The financial liberalization experience in Latin America, Central and East Europe and East Asia emerging markets supports it.The impact of banking sector FDI on host emerging markets includes efficiency and fragility of domestic banks. There are two channels through which foreign banks may influence the domestic banking market, namely spillovers and an increase in competition. Spillovers and competition reinforce each other. Data envelopment analysis (DEA) was used to analyze the 2002-2006 input/output efficiency of 14 sample banks operating in China. It was found that stock-joint banks are "better practice" banks than state-owned banks. Then the foreign bank entry factor is introduced in the empirical study and comparation.The data set is constructed from the BANKSCOPE database and the Financial Yearbook of China including 14 main commercial banks and covering the period from 2000 to 2008. The result shows that the asset share of foreign banks is associated with an increase in interest rate margins, non-interest income and bank overheads and a reduction in pro-tax profits. It implies that the competition and spillover effect of foreign bank participation is not obvious. And several results are conflict with previous empirical studies. After estimating the previous regression equation in first differences, the estimation results indicates that 10 stock-joint banks is more efficient than 4 state-owned banks, it implies that the competition effect works on stock-joint banks. On the basis of equilibrium analysis of financial regulation failure and liberalization under open economy, it studies the relationship between banking sector FDI and the fragility of emerging market banking systems through the investigation of increasing competition in the light of foreign bank entry, the credit supply of foreign banks and the possibility of systematic banking crisis in emerging markets due to foreign participation. It concludes that banking sector FDI has both positive and negative effects on the fragility of emerging market banking systems; the long-run and short-run effect is different. The shape of the relationship is inverted-U. Whether positive or negative effect works depends on the macro-economic enviroment, government supervision and country risk. It is significant for the commercial banks in large open emerging China to improve the performance under the foreign competition pressure and for the policy-maker to pay attention to the timing of the liberalization process and ensure adequate regulation and supervision.