The impact of foreign bank entry on domestic banking markets: a note

Claessens, et al. (2001) empirically investigate the impact of foreign bank entry on domestic banking markets. They show that foreign bank entry reduces income, profits and costs of domestic banks. They conclude that foreign entry improves the functioning of national banking markets through increased market competition and improved efficiency of domestic banks. We redo their analysis using data of domestic banks in LDCs only and generally find opposite results: foreign entry leads to increases of income, profits and costs. This suggests that foreign bank entry may have a different impact on domestic banking markets in developed and developing countries. Moreover, we find evidence for an inverted U-shaped relationship between foreign bank entry and domestic bank performance, indicating that for banks in these countries competition and efficiency effects only take place after the extent of foreign bank entry has reached a certain minimum level.