The Impact of Foreign Bank Entry in Emerging Markets: Knowledge Spillovers or Competitive Pressure

By Zhu, M.

Abstract: This study examines whether there are managerial knowledge spillovers from foreign to domestic banks in Eastern Europe and Latin America, additional to competition effects. I estimate the ’pure’ managerial efficiency teasing out external (environmental) effects in a 3-stage Data Envelopment Analysis (DEA) framework. I then examine the evolutionary pattern of foreign and domestic banks’ managerial performance together with that of banking competition. The main results suggest that domestic banks’ managerial performance is positively associated with foreign bank presence. Even during the period when competition is relatively low, domestic banks are catching up with foreign banks. These results suggest the strong possibility of knowledge spillovers in addition to competition effects and call for future direct evidence.