4. RESULTS FROM THE SURVEY MODEL
4.4 What knowledge diffusion do foreign banks contribute to bring into SA
This section identifies directly from table 4.6 the types of knowledge that have spilled over in the SA banking sector from the foreign banks. As in previous sections, not all banks answered this question but they made up a maximum of 44.16% of total foreign banking assets, which is representative and significant. At the time of entry, foreign banks adopted “new products and services”, “management methods and skills” and “risks management processes”.
Table 4.6: Skills and knowledge transfer
Knowledge / skills / systems
Before 2000 2000-10 2011 and + % o f y es Sh a re in t o ta l fo re ig n ba nk ing a ss et s % o f y es Sh a re in t o ta l fo re ig n ba nk ing a ss et s % o f y es Sh a re in t o ta l fo re ig n ba nk ing a ss et s Information technology 66.67 44.16% 66.67 26.56% 66.67 41.00%
New products and services 83.33 44.76% 100 45.20% 66.67 41.00%
Project assessment methods 33.33 22.20% 66.67 23.23% 50.00 22.80%
Management methods and skills 83.33 44.76% 100 45.20% 66.67 41.00%
Marketing knowledge and techniques 16.67 21.21 % 50 22.64% 33.33 22.20%
Retail knowledge and techniques 16.67 0.60%% 50 2.03% 33.33 1.59%
Wholesale knowledge and techniques 33.33 39.41% 66.6 41.00% 66.67 41.00%
Risk management processes 83.33 44.76% 83.33 44.76% 83.33 44.76%
Internal control processes and systems 66.67 41.00% 66.67 41.00% 66.67 41.00%
Source: Questionnaire feedback (Annex 3.10).
These three received the highest score (83%) and from the majority of the panel respondents (44.76%). “Information technology” and “internal control processes and systems” received an above-average score (66.6%).
Moving to the period 2000-10, other areas seem to be affected by the transfer, such as “wholesale knowledge and techniques and project assessment method, which received a high score but only from a limited number of respondents.
In the future, the banks would accentuate the transfer in almost all activities except in project assessment methods, marketing knowledge and techniques and retail knowledge and techniques, whose scores dropped below average.
In light of the answers provided by the foreign banks, it seems that foreign banks have been playing a significant role in the process of introducing new knowledge, skills and modern risk management systems and this is not surprising as domestic banks in developing countries are generally characterised by outmoded, inefficient management skills. This is reflected by the fact that a bureaucracy culture makes them consider first aspects of bureaucracy such as procedures and recording, as more important than profitability, customer service, training and innovative products (Bascom, 1997). This table 4.6 shows that the foreign banks have demonstrated the availability of new communication technologies, modern skills and management practices (Lensink/Hermes, 2004) in the SA market. As a result, it could be considered that the domestic banks may have imitated and adopted these modern skills and competencies (Lensink and Hermes, 2004) and therefore they may have improved the efficiency of their operations (Lehner and Schnitzer, 2008). Secondly, the availability of modern risk management systems that allows better portfolio diversification can in fact contribute directly to improve the efficiency of financial intermediation by reducing the cost of searching for processing information about potential borrowers (Hermes and Lensink, 2004; Levine1996; Agenor, 2003), and as mentioned above, foreign banks from more advanced economies may have better available risk management techniques (Berger et al., 2000; Claessens and Van Horen, 2008). These aspects exemplify a straightforward possible direct spillover effect of foreign banks in the SA wholesale banking market.
These results from table 4.6 that show the availability of new knowledge, skills and modern risk management systems in the SA market imply the existence of a technology gap before and after 2000. As domestic banks are operating in this segment of investment banking where the foreign banks are active, it is fair to say that some absorptive capacity existed or exists. Then, if absorptive capacity exists, it is likely that domestic banks enhanced their technological level by imitating foreign technologies as suggested earlier. This is complex because if the survey informs about the availability of new skills, knowledge and technology in the SA market, it does not tell what is the level of absorptive capacity of domestic banks. Unfortunately I cannot conclude on how and/or if any spillover effects occur in the light of this survey
because a large technological gap reflects a lower absorptive capacity of domestic firms and reduces the likelihood of spillover effects (Dimelis, 2005; Kokko 1994). The critical level of the technological gap is essentially determined by the complexity of foreign technologies as well as the extent of, and the increase in market penetration by, foreign corporations (Perez, 1997). In addition, if foreign technologies are developed for the specific market conditions in a particular country or for the specific needs of a certain firm, domestic firms may not have the required skills to adopt them (Moosa 2002; Blomstrom and Kokko 1998; Perez, 1997). And spillover effects are unlikely to occur if foreign firms operate in isolated market segments (Kokko, 1994) as is the case here. This aspect of absorptive capacity (AC) is a transmission factor for spillovers or determinant for spillovers effects as analysed in chapter 1. From this angle I cannot conclude that spillover effects have occurred.
Furthermore, management know-how is mostly implicit and to be adopted, it requires sufficient personal contact between the sender and receiver of that know-how (Smeet and deVaal, 2005). One factor that can facilitate the diffusion of management know- how and the transfer of skills and implicit knowledge is labour turnover (McKendrick, 1994). This aspect of turnover is one of the components of spillover effects or channels of FDI knowledge spillovers. Unfortunately the survey does not provide information on that aspect of turnover.
However, in light of the outcomes of table 4.6 as mentioned earlier, it can be confirmed that the foreign banks have demonstrated the availability of new information technology, new products and services, new management methods and skills, new risk management processes and new internal control processes and systems. The next question would be whether or not the domestic banks have imitated and adopted these new skills and techniques (Lensink and Hermes, 2004). If the answer is yes then it could be concluded that there is a case for some demonstration effects. Although table 4.6 does not provide with this answer, however, competition is the condition for demonstration effect to take place. The existence of such competition effect in the segment of wholesale banking would clearly imply that demonstration effects occurred. And as demonstration effects are channel of spillover effects (as seen in chapter 1) I could conclude that the SA wholesale banking sector
has experienced some knowledge spillovers (or spillover effects). The next table may provide some more insight, as it deals with competition and as the survey assesses the banks over a relatively long period of time before 2000 and after 2011.