Institutional quality distance, foreign bank presence and domestic bank efficiency: Cross-country evidence

Abstract

Despite the importance of institutional environment during bank internationalization, little is known about how the institutional quality distance between host and home markets influences the impact of foreign bank presence on the host market. Using a bank-level panel dataset of 5256 banks from 2017 to 2021, this study finds that institutional quality distance helps mitigate domestic banks’ efficiency losses from foreign bank presence. Moreover, the mitigating effect of institutional quality distance is independent of whether the home countries of foreign banks are institutionally more or less developed. We further observe that the moderating role of institutional quality distance varies across the dimensions of legal, political, regulatory, and economic institutions. Overall, the findings suggest that although foreign bank presence generally hurts the local banking sector, relative institutional quality distance can provide leeway for domestic banks to build competitive advantages to better cope with competition from foreign entrants.