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Business expansion and firm efficiency in the commercial banking industry: Evidence from the US and China

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Abstract

Despite a consensus that business expansion drives firm effectiveness, extant literature has neglected the exact relationship between business expansion and firm efficiency. Using secondary data from the US and Chinese banking industries, this study explores two efficiencies of exploratory expansion (i.e., investing in new business, outside the scope of the firm’s existing business) and exploitative expansion (i.e., expanding target markets in the existing business)—profitability and marketability. The empirical results reveal that exploratory expansion decreases profitability but increases marketability. Meanwhile, exploitative expansion has no significant effect on profitability, but it can increase marketability. Furthermore, the study reveals that Chinese banks are likely to benefit more from exploratory expansion, whereas US banks would benefit from exploitative expansion.

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Notes

  1. We thank an anonymous reviewer for suggesting this point.

  2. To test for robustness and enhance confidence in our results (Luo & Homburg, 2007), we reran the DEA with different combinations of inputs and outputs: DEA1 used the whole array of efficiency scores in our study; DEA2 split the efficiency scores for US and Chinese banks and then ran the DEA programming separately; DEA3 lagged the inputs for one year; and DEA4 included the inputs and outputs that were common across Luo’s (2003) and Seiford and Zhu’s (1999) studies. For profitability, the correlations were as follows: DEA1-DEA2 is .768; DEA1-DEA3 is .882; and DEA1-DEA4 is .775. For marketability, the correlations were as follows: DEA1-DEA2 is .916; DEA1-DEA3 is .920; and DEA1-DEA4 is .790. The significant, high correlations affirmed the robustness of the DEA programming results.

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Acknowledgments

The authors acknowledge the financial support from National Natural Science Foundation Grant of China (71402049, 71172210) and Program for New Century Excellent Talents in University of Ministry of Education of China.

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Authors and Affiliations

  1. School of Business Administration, Hunan University, Changsha, 410082, China

    Feng Wang

  2. Economics and Management School, Wuhan University, Wuhan, 430072, China

    Minxue Huang & Zhigang Shou

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  1. Feng Wang
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  2. Minxue Huang
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  3. Zhigang Shou
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Correspondence to Zhigang Shou.

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Wang, F., Huang, M. & Shou, Z. Business expansion and firm efficiency in the commercial banking industry: Evidence from the US and China. Asia Pac J Manag 32, 551–569 (2015). https://doi.org/10.1007/s10490-015-9408-1

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