Three essays on foreign entry and banking performance in China : 1999-2006

Abstract

The thesis address two research questions that relate to foreign entry and banking performance in China over the period 1999-2006. The main body of the thesis consists of three essays. The first two essays in Chapters 3 and 4 focus on the impact of foreign bank entry on China's banking performance from two different perspectives, and the third essay in Chapter 6 examines how financial system efficiency influences the growth impact of foreign direct investment. A limitation of existing empirical studies on the impact of foreign bank entry in a host country lies in the measurement of foreign bank presence. To overcome weaknesses associated with the conventional aggregate measures, the first essay contructs a spatially disaggregated measure of foreign presence for local Chinese banks, employing location data of foreign bank branches. Using these new measures, it re-examines the relationship between foreign presence and banking performance in China. The estimation results show that the improved measures are vital in resolving the unexplained discrepancies found in existing empirical studies contingent on aggregate measures. Importantly, the study provides strong empirical evidence that foreign entry is supportive of a more competitive and efficient banking industry in China. Since the World Trade Organization (WTO) accession in 2001, China has seen an increasingly large inflow of foreign investment to its banking sector in a particular form of foreign entry: foreign strategic investment (FSI). Employing data on 86 Chinese commercial banks for the period 1999-2006, the second essay tests whether FSI has exerted effective impacts on banking performance in China, as the authorities expected. In particular a stochastic frontier approach is applied to examine the impact of FSI on Chinese banks' cost efficiency. The results indicate a significant and strong correlation between the presence of foreign board members, one component of the FSI package, and local bank cost efficiency improvements, whereas foreign equity participation per se fails to deliver such impact. The results confirm that the positive effects of FSI on China's banking industry are through managerial cooperation over the study period. The third essay analyses the facilitating role of financial system efficiency in the growth effect of foreign direct investment in China. In spite of being the second largest recipient of FDI in the world, China shows limited evidence of considerable foreign direct investment (FDI) benefits on growth (Fan and Hu 2007; Luo 2007; Ran et al. 2007). Motivated by Alfaro et al.'s (2003) model, this essay tests whether poor financial market development might be responsible for the relatively low benefits of FDI on in China. Blundell-Bond System GMM estimators are applied to a panel of Chinese provinces. The results indicate that poor financial intermediation does indeed the transmission of FDI benefits within the Chinese economy. Moreover, the study reveals preliminary evidence that banks' credits to unproductive state-owned enterprises constitute poor financial intermediation with negative growth implications. In contrast, credits to small private enterprises are associated with a positive impact of FDI growth. Show more