Foreign bank efficiency in Australia: what makes a difference?

Purpose – The purpose of this paper is to explore the factors that affect differences in measured efficiency of foreign‐owned banks operating in Australia. The relevance of both comparative advantage theory and new trade theory to multinational banking in Australia will be tested. Design/methodology/approach – A three stage research method is employed. First, estimates of foreign bank efficiency are drawn from a larger sample of domestic and foreign banks in Australia. Efficiency is estimated using parametric distance functions, applying several different specifications of inputs and outputs. Second, factor analysis is used to estimate a series of common factors drawn from the above theories. Third, general to specific modelling is used to determine which of the factors from the second stage determine differences in foreign bank efficiency. Findings – Following clients (defensive expansion) was found to increase host nation efficiency, and new trade theory tended to, (but not conclusively), dominate comparative advantage theory. The limited global advantage hypothesis was found to apply for US bank revenue creation efficiency, but not for transformation of physical inputs into outputs. Banks from the UK and Japan were also found to display superior revenue creation efficiency. Competitor market share reduces host nation efficiency and positive parent bank attributes such as size, credit rating and profits are associated with lower host nation efficiency, as is home nation financial development. Originality/value – This is the first study that has used a combination of factor analysis and general to specific modelling to study determinants of foreign bank efficiency in the host nation.