Are Foreign Banks Disadvantaged Vis-À-Vis Domestic Banks in China?

Li Xian Liu, Fuming Jiang, Milind Sathye and Hongbo Liu
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Li Xian Liu: College of Business, Law and Governance, James Cook University, Douglas, QLD 4811, Australia
Fuming Jiang: School of Management, RMIT University, Melbourne, VIC 3000, Australia
Milind Sathye: Faculty of Business, Government and Law, University of Canberra, Bruce, ACT 2617, Australia
Hongbo Liu: Innovation and Development Institute, Anhui University, Hefei 230039, China

JRFM, 2021, vol. 14, issue 9, 1-36

Abstract: Do foreign banks enjoy a competitive edge in the Chinese banking market or are they disadvantaged vis-à-vis domestic banks? This is the question that the present paper seeks to answer. The issue is important since on the one hand, these banks face the challenges the liability of foreignness brings, but at the same time, they have bank-specific advantages. We examine this issue in light of the literature of the liability of foreignness. In our path-breaking study, we found that due to the cost of foreignness, foreign banks’ performance was not as good as that of the local banks. Furthermore, despite the same amount of location- and bank-specific advantages, they performed badly as compared to their local counterparts. It was found that the cost of location-based disadvantages outweighed the cost of bank-specific disadvantages for foreign banks, and recent policy changes may help them overcome some of the cost of foreignness.

Keywords: liability of foreignness; transitional banking sector; location-based advantages; firm-specific advantages (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
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