Production economies of foreign-owned and domestic-owned banks in Hong Kong

Abstract

This paper compares and contrasts production economies of Foreign-Owned Banks (FOBs) and Domestic-Owned Banks (DOBs) operating in Hong Kong using translog cost function methodology. Using 1995-1997 sample period, overall and product-specific economies of scale and scope measures are derived and contrasted. The results indicate that the cost structure of DOBs and FOBs operating in Hong Kong are dissimilar The production economies of both the FOBs and DOBs are characterized by increasing return to scale and presence of economies of scope. However, it was found that the larger and medium size DOBs have comparative cost advantage over the FOBs and smaller DOBs. In regard to the product-specific economies of scale scope, there are positive and statistically significant product-specific economies of scale and scope for DOBs and FOBs' production of "loans" and "securities", but not "other earning assets".