Financial repression and liability of foreignness in developing countries

Abstract

Using non-parametric Data Envelopment Analysis, this paper suggests that the era of financial repression in developing countries, by providing policy-induced competitive advantages to domestic banks, may create liability of foreignness for foreign banks that impeded their resource utilization. Implementation of financial liberalization programme, which endeavours to create a more market-oriented financial sector, may enable foreign banks to overcome the liability of foreignness and enhance their resource utilization.

Acknowledgement

The authors would like to thank Saqib Jafarey for his comments on an earlier version of the paper. The usual disclaimer applies.

Notes

 This input–output specification, as Bhattacharyya et al. (1997) suggest, is consistent with the widely used ‘intermediation approach’ to specify banks’ inputs and outputs.

 Banks having zero recorded values for one or more output or input variables in any year are excluded from the analysis for that year in recognition of the fact that the DEA analysis is sensitive to outliers.

 Website: http://www.rbi.org.in/annualdata/index.html

 For DEA estimation, DEAP 2.1 is used, developed by Tim Coelli of University of New England, Australia.