Foreign Direct Investment in the Banking Sector: Experiences and Lessons from CEECs

Foreign Direct Investment in the Financial Sector: The Engine of Growth for Central and Eastern Europe?

“…They analyzed data of 67 banks in six CEE countries from 1994 to 2002. Papi & Revoltella (2003) provide an explanation for the contradictory findings about the relationship between ownership and bank efficiency on which we will draw in interpreting our empirical analysis. They argue that a certain threshold in foreign ownership is necessary to achieve changes in efficiency levels of the acquired bank.…”

“…They might also be crowded out as foreign owners "cherry pick" and only riskier target groups remain. Periods of severe instability in the financial sector might follow (IADB 2005, Papi & Revoltella 2003.…”

“…The rising involvement of foreign banks in private sector credit may have a positive impact on investment activities. According to Papi & Revoltella (2003), foreign bank lending is mostly directed to subsidiaries of multinational corporations because the assessment of information coming from the local private sector is often too difficult due to missing transparency or even lack of information. Mehl & Winkler (2003, 17) find for South-Eastern Europe that foreign owned banks "cherry picked" the best borrowers, particularly those from their own country of origin.…”

The impact of foreign direct investment on total factor productivity growth

“…Alternatively, FDI inflows can have a negative effect on firm productivity, especially in the short run, if they face costly transaction costs in learning to “catch up” with new technologies (Liu, 2008). Furthermore, negative effects may arise where banks, particularly in less developed economies, use inferior production technologies and low‐skilled workers, which amount to a low “absorptive capacity” of domestic banks to benefit from FDI spillovers (Papi and Rovoltella, 2003). The net effect of aggregate FDI on bank productivity could therefore be positive or negative[7].…”