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Spillover Effects and Efficiency by Alex PIETRUS a Dissertation Submi School of Business and Management The Impact of FDI into the South African banking sector: Spillover Effects and Efficiency by Alex PIETRUS A dissertation submitted for the Doctor of Philosophy December 2013 © Queen Mary, University of London 2013. All rights reserved. No part of this publication may be reproduced without the written permission of the copyright holder. i The Impact of FDI into the South African banking sector: Spillover Effects and Efficiency. Alex PIETRUS Supervisor: Professor Brigitte Granville Co-Supervisor: Dr Martha Prevezer Queen Mary, University of London School of Business and Management Mile End Road, London, N1 4NS UK This dissertation is submitted in partial fulfilment of the requirements for the Doctor of Philosophy December 2013 ii Declaration of Authorship I, Alex PIETRUS, certify that the dissertation entitled “The Impact of FDI into the South African banking sector: Spillover Effects and Efficiency” for the Degree of PhD of the University of London (Queen Mary College) is the result of my own work and includes nothing, which is the outcome of work done in collaboration except where specifically indicated in the text. This dissertation contains approximatively 73800 words, 10 figures and 33 tables. Alex PIETRUS School of Business and Management Queen Mary University of London Monday, 2nd of December, 2013 iii Content ABSTRACT ........................................................................................................................................ VI ACKNOWLEDGEMENT ................................................................................................................ VII LIST OF TABLES ........................................................................................................................... VIII LIST OF FIGURES ............................................................................................................................ IX ANNEXES ............................................................................................................................................ X LIST OF ACRONYMS ....................................................................................................................... XI GENERAL INTRODUCTION ........................................................................................................ XII 1. A MULTI-SECTOR REVIEW OF THE THEORY OF FDI ................................................. 1 1.1 The theory of FDI in the manufacturing sector ................................................... 2 1.1.1 Channels of FDI knowledge spillovers .................................................................................. 2 1.1.1.1 Vertical linkages ..................................................................................................................................................... 3 1.1.1.2 Worker Mobility ..................................................................................................................................................... 4 1.1.1.3 Demonstration effects .......................................................................................................................................... 5 1.1.2 Transmission factors of spillovers.......................................................................................... 7 1.1.2.1 Absorptive capacity (AC) and backwardness ............................................................................................. 7 1.1.2.2 Geographic localisation ....................................................................................................................................... 7 1.1.2.3 Intellectual property rights (IPRs) ................................................................................................................... 8 1.1.2.4 Competition .............................................................................................................................................................. 9 1.1.3 Effects of the multinational enterprises foreign activities ...................................... 11 1.1.3.1 Ownership .............................................................................................................................................................. 11 1.1.3.2 Nationality of parents ....................................................................................................................................... 12 1.1.3.2 Motives for FDI: Technology or market seeking .................................................................................. 13 1.1.4 ICT a General Purpose Technology and a source of spillovers .............................. 16 1.2 FDI in the banking sector and theories of multinational banks ................. 18 1.2.1 Internalisation theory ............................................................................................................. 18 1.2.4 Spillover effects in the banking sector ............................................................................. 21 1.2.4.1 Direct and indirect effects ................................................................................................................................ 21 1.2.4.2 Channels of spillover effect ............................................................................................................................ 22 1.2.4.3 Determinants of spillover effects .................................................................................................................. 23 2. THEORETICAL FRAMEWORK FOR THE ANALYSIS OF SPILLOVERS INTO THE SA BANKING SECTOR ................................................................................................................... 25 2.1 Competition and FDI spillovers: theory and hypotheses ............................... 26 2.1.1 Effects of foreign banks entry on domestic banks performance ........................... 27 2.1.2 The complex relationship between bank entry and the technological gap ..... 29 2.1.3 FDI Spillovers and competition due to foreign banks entry and domestic market segmentation ............................................................................................................................... 32 2.1.4 Hypotheses on competition and FDI spillovers ............................................................. 33 2.2. Efficiency as a measure of knowledge spillovers: theory and hypothesis 37 2.2.1 Theory of efficiency to measure knowledge spillover ................................................ 39 2.2.2 Hypothesis on efficiency as measure of knowledge spillover ................................. 42 2.3. Discussion and conclusion ....................................................................................... 45 3. DATA AND METHODOLOGY OF ALL EMPIRICAL MODELS...................................... 47 3.1. Survey Methodology for Analysis on foreign banks and branches operating in SA.......................................................................................................................... 48 iv 3.1.1 Survey methodology .................................................................................................................. 48 3.1.2 Survey process .............................................................................................................................. 50 3.2 The main source of bank data for models on competition and efficiency ... 53 3.3 Data and methodology for the effect of foreign bank entry on SA domestic banks ............................................................................................................................................ 54 3.3.1 Data ................................................................................................................................................... 54 3.3.2 Method ............................................................................................................................................. 62 3.4. Efficiency analysis of foreign and domestic banks in SA ............................... 64 3.4.1 Method of frontier efficiency costs ...................................................................................... 66 3.4.2. Data .................................................................................................................................................. 67 3.4.3 Other factors that influence SA banks efficiency scores ........................................... 71 4. RESULTS FROM THE SURVEY MODEL .......................................................................... 74 4.1 What are the reasons for entry of the foreign banks in SA market? .......... 74 4.2 In which type of clients foreign banks are interested, in SA market? ....... 77 4.3 What products and service innovation do foreign banks contribute to bring into SA market? ............................................................................................................. 82 4.4 What knowledge diffusion do foreign banks contribute to bring into SA market? ....................................................................................................................................... 85 4.5 What is the impact of foreign banks on competition, quality and efficiency in SA market? ............................................................................................................................ 88 4.6 What is the probability of future scenario in SA banking system? ............. 91 4.7 Conclusion ......................................................................................................................
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