How the environment determines banking efficiency: a comparison of banking firms in Taiwan, Hong Kong, and Mainland China

Abstract

This study uses the three-stage data envelopment analysis (DEA) model to explore the true managerial efficiency of the banking firms in Taiwan, Hong Kong, and Mainland China. The empirical results indicate that the environmental conditions have a significant impact on banking efficiency. When the country-specific situations are important factors in explaining efficiency difference, the common frontier estimates obtained by neglecting those factors can generate biased and overestimated inefficiency levels. With findings obtained from the slack variable analyses, the current study can provide inefficient banks with ways to reduce their input waste through the adjustment of input allocations. The findings also confirm the importance of the three-stage DEA and its applications in determining the true managerial efficiencies of banks. Without the three-stage DEA, the management could be misguided when making strategic decisions and conducting inappropriate resource allocation.