Impact of augmented FDI on efficiency of Turkish banks: better or worse?

Abstract

This study investigates the relationship between foreign investment and bank productivity in Turkey over the 1992-2010 period by examining and decomposing the DEA Malmquist index scores of 17 commercial banks. Four questions are at the center of this study: What are the productivity scores of foreign invested private commercial banks? How was it affected by increased FDI? Did foreign investors target more productive and profitable banks to invest in? What are the most important components of productivity growth: technical progress, efficiency gains, better management or the realization of scale economies? Empirical findings support the hypothesis that productivity scores of foreign invested banks are higher than domestic banks before the time of foreign investment. Overall, decomposed productivity figures indicate that the most significant factor on the total factor productivity change (TFPC) is the technological change (TC) and bank specific factors are important. Interestingly, no significant relationship found between FDI and the Malmquist components.