Jacob Schumacher (Saïd Business School): Effects of Foreign Investment in the Chinese Banking Sector

Jacob Schumacher (Saïd Business School): Effects of Foreign Investment in the Chinese Banking Sector

Abstract
Improvements to domestic bank performance was a major justification for the liberalization of China's banking sector in the early 2000s.  This seminar examines the effect of foreign investment on the cost efficiency of domestic banks in China between 2001 and 2013. The model used to estimate cost efficiency is a stochastic cost efficiency frontier and is estimated with stochastic frontier analysis methods.  Institutional reforms and external events affecting the sector during this period are included in the model to increase the robustness of estimated results.  The final model evaluates the direct and indirect effect of foreign investment on domestic bank cost efficiency along with these additional parameters. All of the models are estimated with an unbalance panel data set which covers 159 Chinese banks from the period of 1999 to 2013.  Estimated results robustly indicate the presence of positive improvements to bank cost efficiency as a consequence of foreign investment. These improvements are both direct and indirect in nature suggesting that the performance of domestic banks improves in multiple ways due to the presence of foreign firms in the sector.  Suggestions for future research are suggested with particular emphasis on alternative model specifications as well as how to identify and measure channels through which such effects are being externalized to domestic banking firms. 

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