Disentangling the impact of foreign bank presence on domestic banks performance: Does the degree of foreign ownership in domestic banks matter?

While extant studies typically measure foreign bank presence only considering the percentage share of foreign-owned banks among the banking industry of one country, there comes one interesting question: whether the impact of the micro-level foreign presence, i.e. foreign investment in domestic banks, may be similar? Drawing on theoretical arguments from FDI spillover and corporate governance, this paper hypothesizes that macro-level foreign bank presence mainly threatens domestic banks’ performance due to increased competition, whereas micro-level foreign presence enhances banks’ efficiency. Empirical analyses based on a cross-country bank-level dataset from 2002 to 2020 support these hypotheses. The mechanism analysis shows that macro-level foreign presence hampers domestic banks’ outputs, while micro-level foreign presence helps reduce banks’ input prices. Furthermore, the impact of macro-level foreign presence is more pronounced in less developed economies, while the positive impact of micro-level foreign presence is significant in more developed economies or those with low banking concentration. Our findings enrich the literature on foreign bank presence by considering micro-level foreign investment in domestic banks, and expand the FDI and corporate governance literature by incorporating the banking context.