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.

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