Foreign banking in India: does origin matter?

Abstract

Globalization has led to free movement of goods, labor and other resources of production across boundaries. As firms expand to new countries in their efforts to dominate a particular industry, the sources of their finance such as banks are also not left behind. Today, there are a large number of foreign banks in any country, operating through basic banking functions to complex investment and securities management functions. The same is true of India. With economic liberalization and RBI s roadmap to allowing increased local operations by foreign banks, there have been a large number of foreign banks that have entered the Indian market. This paper attempts to study the factors that affect the entry of foreign banks in India. In order to perform this study, a list of intuitive factors that might affect the entry of a foreign bank from a particular country into India such as Bilateral trade with the home country, FDI flowing in from that country, the difference in sovereign rating of the home and host (India) countries, Size of the bank in the home country, Basel norm compliance of the home country and so on are used and various hypotheses formed with respect to each of these factors. The data on these factors obtained are regressed to understand the nature and magnitude of their effect on the assets that the foreign bank has in India. The same analysis has been carried out by dividing the data into those on banks with developing vs. developed countries of origin. This is to understand whether origin matters when foreign banks contemplate expansion into India. The paper also looks at the concept of liability of foreignness whether it exists or not for foreign banks operating in India. This refers to the difficulty that firms face when operating in unfamiliar host country environments where competing local firms would be better embedded into the information networks of the country giving the foreign firm a competitive disadvantage. In this context, X- efficiency is used as a measure to understand whether there is any liability of foreignness involved when operating in India. Further, the different operational efficiency factors like Return on Assets, Profit per employee, Business per employee etc are also looked at in order to understand if there are any differences in efficiencies of foreign banks originating in developing vs. developed countries with respect to their operations in India.