#06-11
Foreign Banks in Mexico: New Conquistadors or Agents of Change?
Heiner Schulz, April 2006
Abstract: Since Mexico opened its banking sector to foreign competition following the 1994 financial
crisis, foreign financial institutions have acquired more than 80 percent of Mexican domestic
banking assets. Supporters of foreign direct investment (FDI) argue that foreign banks have
been an important source of capital as well as skills, technology, and management know-how.
Critics accuse foreign banks of earning excess profits without significantly contributing to
banking sector development. Based on an empirical analysis of foreign bank entry between
1997 and 2004, this paper shows that FDI had a positive, but limited impact on banking sector
development. The key contribution of foreign banks was the recapitalization of the banking
sector following the financial crisis. But there is only limited evidence that banking sector
efficiency increased as result of a transfer of skills, technology, or management know-how.
The main reason for the limited impact of FDI was the low level of competitive intensity in
the Mexican banking sector.
Keywords: Foreign Direct Investment, International Banking, Productivity, Mexico
JEL classifications : F21, G21.
