Research in International Business and Finance 56 (2021) 101371

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Bank efficiency, market structure and strategic interaction:

Evidence from Vietnam
Huong Nguyen Quynh Le a, Thai Vu Hong Nguyen b, *, Christophe Schinckus c
a
School of Banking, University of Economics Ho Chi Minh City, 59C Nguyen Dinh Chieu, District 3, Ho Chi Minh City, Viet Nam
b
School of Business and Management, RMIT University Vietnam, 702 Nguyen Van Linh, District 7, Ho Chi Minh City, Viet Nam
c
School of Finance and Economics, Taylor’s University, Lakeside Campus, 1 Jalan Taylors, 47500 Subang Jaya, Selangor, Malaysia

A R T I C L E I N F O A B S T R A C T

JEL Classifications: This study investigates the impacts of Vietnamese banks’ efficiency on the strategic interactions
G21 with their rivals. The study argues that efficient banks will compete the market to grow, and then
D40 become more responsive to the strategies from their rivals. The study extends the Efficiency
L10
Structure theory to capture the behaviours of banks after the evolvement of market structure as
Keywords: the result of efficiency improvement. The study further argues that the speed of growth plays a
Efficiency
key role in moderating the relationship between efficiency and strategic interaction. The study
Strategic interaction
finds evidence that the impact of efficiency on strategic interaction is stronger at the lower level
Market power
Growth of growth.
Vietnamese banks

1. Introduction

How the market structure evolves as efficiency improves has been long discussed, yet remained controversial. Two competing
strands of literature, namely, efficiency structure theory (ES) and structure conduct performance theory (SCP), predict opposite di­
rections for market structure evolvement. The former posits the roles of efficiency in altering market structure (Demsetz, 1973), the
latter views efficiency as the results of the structure change (Bain, 1951, 1956). Recently, Bayar et al. (2018) bring up the argument by
providing new evidence that strategic interaction negatively affects firm efficiency, and this impact is stronger (weaker) with strategic
substitutes (strategic complements). Strategic interaction is defined as a firm’s reaction to price and/or quantity change by its com­
petitors (Bayar et al., 2018). One firm’s aggressiveness is decreasing (increasing) with its rival’s debt if the firms’ strategies are
substitutes (complements) (Lyandres, 2006). As strategic interaction is one of the characteristics of market structure, the finding from
Bayar et al. (2018) supports SCP theory. Nevertheless, the literature largely ignores how efficiency may inversely affect strategic
interaction, which is the gap our study would like to fill in. Our study views strategic interaction from the lense of ES theory and argues
that firms’ efficiency leads to growth which, in turn, guides firms’ behaviours in interaction with their rivals. The moderating role of
growth in the relationship between efficiency and strategic interaction is demonstrated through the asymmetric behaviours of effi­
ciency to strategic interaction in different regimes of growth, i.e. low growth versus high growth. This is in line with the argument that
efficient firms defeat the competition and grow (Homma et al., 2014). By doing this, the study extends the ES theory emphasizing the

* Corresponding author.
E-mail addresses: quynh_huong@ueh.edu.vn (H.N.Q. Le), thai.nguyenvuhong@rmit.edu.vn (T.V.H. Nguyen), Christophe.Schinckus@taylors.edu.
my (C. Schinckus).

https://doi.org/10.1016/j.ribaf.2020.101371
Received 20 May 2020; Received in revised form 2 September 2020; Accepted 2 December 2020
Available online 5 December 2020
0275-5319/© 2020 Elsevier B.V. All rights reserved.
H.N.Q. Le et al. Research in International Business and Finance 56 (2021) 101371

importance of efficiency on market structure manifested through strategic interaction.

The banking industry of Vietnam provides an ideal context to examine the impact of efficiency on strategic interaction. This is
because the Vietnamese banking industry is highly regulated, where the State Bank of Vietnam (SBV - the central bank of Vietnam) sets
the target on the number of banks, and hence, takes control on the rigorous approval process for entering, exiting, and merging of
banks in the market1 . Therefore, in this context, the strategic interaction, rather the number of banks, can arguably better capture the
evolvement of the market structure. In addition, the Vietnamese banking industry has become increasing competitive after joining the
World Trade Organization in 2007. In the context of a transitioning economy, it is interesting to see how banks strategically interact
with their rivals when their efficiency improves.
The study finds the positive relationship between efficiency and strategic interaction. In other words, as banks’ efficiency improves,
they tend to be more active in strategic interaction with their rivals. Moreover, we provide evidence that the impact of efficiency on
strategic interaction is stronger for banks with lower growth. The findings of this study are robust to different measure of bank market
structure. Our study contributes to the literature on three fronts. First, the study extends the ES theory by examining the impact of bank
efficiency on strategic interaction, which remains a gap in the literature. Second, the study sheds light on banking strategic interaction
in the context where the number of banks is set and regulated by the government, leaving the reaction to rivals’ moves an interesting
tool shaping market structure. Third, the study examines the asymmetric impacts of efficiency on strategic interaction in two regimes
of bank growth, i.e. low versus high growth.
The remainder of this study has a following structure. Section 2 provides a brief overview of the Vietnamese banking system,
reviews the literature and develops the hypotheses. Section 3 presents data collection and econometric models. Section 4 discusses the
main estimation results and robustness tests. Finally, section 5 concludes this study.

2. Vietnamese banking overview, literature review and hypothesis development

2.1. Overview of vietnamese banking system

Vietnamese two-tier banking system consisting of four state-owned banks, joint stock commercial banks, joint venture commercial
banks and foreign banks, has been undergoing the process restructuring to tackle bad debt problem. Since 2011, SBV has dramatically
enforced the privatization of state-owned commercial banks, M&A of weak banks, and improving asset quality. M&A has been
considered as an effective method to reduce non-performing loans (NPL) and strengthen the competition of the banking system. Fig. 1
shows the number of commercial banks as well as non-performing loans (as a ratio of gross loans) over last 12 years. It is worth noting
that the number of joint stock commercial banks has fallen significantly during this period as the result of strong merging and
acquisition process (M&A). NPLs figures shown an upward trend from 2% (2007) to 4.55 % (2013). After reaching a peak at 4.55 % in
2013, NPLs decreased significantly to 1.9 % (first half of 2019). Vietnam Asset Management Company (VAMC) has also been estab­
lished to buy NPLs away from troubled banks.

2.2. Efficiency and market structure

The two competing theories, SCP theory and ES theory, posit opposite causal relationship between efficiency and market structure.
SCP theory argues the direct positive impact of market concentration on efficiency based on the presumption that banks in a highly
concentrated market can collude to earn higher profits (Bain, 1951, 1956). Most of the empirical studies find evidence supporting SCP
theory (Lloyd-Williams et al., 1994; Molyneux and Forbes, 1995; Al-Muharrami and Matthews, 2009; Fu and Heffernan, 2009; Fang
et al., 2011; Ferreira, 2013; Mohammed et al., 2015), except for the cases of Vietnam (Nguyen and Stewart, 2013) and Turkey (Celik
and Kaplan, 2016). As an extension of SCP theory, the relative market-power theory (RMP) argues that higher profit does not
necessarily come from collusive behaviour, but individual banks with large market shares and well-diversified products are able to
exert their market power in pricing and earn supernormal profits (Berger, 1995; Mensi and Zouari, 2010; Guillén et al., 2014).
Nevertheless, the negative impacts of market concentration on efficiency are also documented with the argument that high market
concentration may demotivate innovation and efforts toward efficiency maximization, and firms in these market structures tend to
follow ‘quiet life’ an enjoy the monopoly profit (Hicks, 1935; Coccorese and Pellecchia, 2010; Zhang et al., 2013; Homma et al., 2014).
On the other hand, ES theory predicts the positive impacts of efficiency on market structure as profitable banks can improve market
performance, hence, expanding their market shares and resulting in a concentrated market (Demsetz, 1973). Efficiency improvement
may come from the forms of cost minimization (X-efficiency) or economies of scale (scale efficiency) (Berger and Hannan, 1997).
Homma et al. (2014) extend the ES theory by arguing that efficient firms defeat the competition and grow. Homma et al. (2014) treat
growth variable instead of market share in their analysis to examine its role in ES theory. However, Homma et al. (2014) do not test
subsequent causal relationship from growth to market structure. Khan et al. (2017) examine ES theory by considering a complete
causality nexus from efficiency to growth and then from growth to bank market structure.
In Vietnam, the banking industry is dominated by the 4 largest state-own commercial banks, which are not fully profit-oriented as
they are also serving political and social purposes (see Jeffries, 2007). Therefore, we argue that the Vietnamese banking structure

1
On August 8, 2008, SBV issued Document No. 7171 / NHNN-CNH to the Preparatory Committee for the Establishment of Joint Stock Com­
mercial Bank, requesting the adjustment of criteria for establishment of joint-stock commercial banks. According to this document, while no new
criteria have been issued, the suspension has not allowed the establishment of new commercial banks.

2
H.N.Q. Le et al. Research in International Business and Finance 56 (2021) 101371

Fig. 1. Bank numbers and non-performing loans in Vietnam.

Source: Annual Statements of the State Bank of Vietnam

would have limited impacts on efficiency, supporting the finding from Nguyen and Steward (2013). We view the relationship between
efficiency and market structure from the lense of ES theory and are interested in examining if efficient banks can defeat and grow.
Following Khan et al. (2017), we hypothesize that efficiency has a positive impact on growth, and that efficient and fast-grow banks
will gain more market power.
Hypothesis 1. Efficiency has a positive impact on growth.
Hypothesis 2. Growth has a positive impact on market power.

2.3. Bank efficiency, growth and strategic interaction

The ES theory predict the positive impacts of efficiency on market concentration (Demsetz, 1973), however, the empirical studies
largely ignores how efficient banks behave in the new market structure evolving after the efficiency improvement and growth. We
extend the proposition of Homma et al. (2014) and Khan et al. (2017) that ‘efficient banks defeat the competition and grow’ to examine
how market power gained from the efficiency improvement and growth would shape the behaviours of banks in strategic interaction
with their rivals. Sundaram et al. (1996) empirically evidence that firms in more concentrated industry tend to compete more in
strategic complements. We posit that banks with increasing market power gained from their efficiency improvement move the market
toward higher degree of oligopoly, which arguably allows higher level of strategic interaction, in either strategic complements or
strategic substitutes. Therefore, we hypothesize that efficiency improvement leads to more strategic interaction.
Hypothesis 3. Efficiency has a positive relationship with strategic interaction.
We further argue that the effect of efficiency on strategic interaction is weaker at higher level of growth. The reason is that, from
risk management perspective, a fast growing firm leading to a large market share may expose itself to a number of risks that its smaller
competitors do not encounter (Bloom and Kotler, 1975) and to difficulties with business organization resulting in low profitability
(Miralles-Quiros et al., 2018). In the context of banking industry in Vietnam, fast credit growth is subject to capital requirements and
may attract scrutinization from the government. Therefore, bank managers may try to follow competitive pacification strategy to
minimize the pressure from external sources, i.e. competitors, customers and governmental authorities (Hambrick, 1983), to control
expected risks and costs lower than expected gains from increasing market shares (Bloom and Kotler, 1975). Managing the business
with competitive pacification strategy may require banks to “refrain from reacting strongly to the strategy changes of their rivals”
(Bloom and Kotler, 1975), and consequently lowering the level of strategic interaction. Therefore, we argue that fast growing banks
tend to prioritize their resources to maintain efficiency and become less responsive to their rivals’ strategy moves. We hypothesize that
the impacts of efficiency on strategic interaction is weaker at higher level of growth.
Hypothesis 4. Strategic interaction has a negative relationship with the interaction between efficiency and growth.

3. Methodology and data

3.1. Variable measurement

3.1.1. Measurement of strategic interaction

We follow the studies of Sundaram et al. (1996); Lyandres (2006) and Bayar et al. (2018) in constructing the Competitive Strategy

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H.N.Q. Le et al. Research in International Business and Finance 56 (2021) 101371

Measure (CSM) to proxy for strategy interaction which captures the correlation between the responsiveness of a firm’s profits with
respect to changes in its rivals’ actions. Firms may respond to the competition with strategic complements or strategic substitutes
(Bayar et al., 2018). With strategic complement, firms lower their prices in price competition, increase their output in quantity
competition, and increase levels of advertising in response to greater advertising by rivals. With strategic substitutes, when one firm
increases its output, competitors lower their outputs in response. CSM is better in capturing the strategic interaction in comparison to
Herfindahl index which may be both positively and negatively related the extent of competitive interaction (Lyandres, 2006), and to
advertising expenditure which tends to be driven by capital structure (Grullon et al., 2002).
Following Bayar et al. (2018) and Lyandres (2006), we apply the following formula to measure strategic interaction:
[ ]
Δ̃πi
CSMi = corr , ΔSR (1)
Δ̃Si

Where Δ̃πi is the change in a bank’s profit margin, as the ratio of the change in operating profit (Δ̃
πi ) to the change net operating
Δ̃Si
revenue (Δ̃ Si ). ΔSR is the change in the sum of all rivals’ revenue. Under the assumption that banks react quickly to their rivals’
changes, the correlation in Eq. (3.1) is estimated in three-year windows. This study emphasizes on the degree of strategic interaction
regardless of the type of strategic interaction (i.e. strategic complements or strategic substitutes), so the absolute value of CSM, i.e. |
CSM|, is used. The higher the |CSM| is, the higher the level of the strategic interactions among banks.

3.1.2. Measurement of market structure

Lerner index is the dominant measurement for market power in the literature of banking competition (Fu et al., 2014). Unlike
Concentration Ratio and Helfindhal-Hirschman Index, Lerner index can capture the market power at bank level (Khan et al., 2017). In
this study, we employ adjusted Lerner index which overcomes the bias from the conventional Lerner where cost and profit in­
efficiencies of non-optimal banks are ignored (Koetter et al., 2012). The conventional Lerner will be used as robustness tests. Following
Koetter et al. (2012); Fu et al. (2014); Khan et al. (2017) and Astuti and Saputra (2019) we apply the below procedure of estimating
conventional and adjusted Lerner indexes:
Step 1: Adopting the translog cost function:
∑
3
1∑ 3 ∑ 3 ∑3 ∑2 ∑3
lnTC = φ1 + φ2 lnTAit + φ3 lnTA2it + αk lnW k,it + βk,h lnW k,it lnW h,it + γk lnTAit lnW k,it + θk t k + μk lnW k,it t
k=1
2 k=1 h=1 k=1 k=1 k=1

+ ρlnTAit t + εit (2)

Where TC is total cost, including interest expenses, personnel expenses and other operating expenses; W1 (price of deposits) is the ratio
of interest expenses and total deposits; W2 (price of labour) is the ratio of personnel expenses and total assets; W3 (price of capital) is
the ratio of other operating expenses and total fixed assets; and TA is total assets, capturing a bank’s output (Q).
Step 2: Estimating marginal cost (MC) by measuring the change in total cost with respect to the change in total output.
( )
∂TCit ∂TCit TCit ∑3
MCit = = = φ2 + φ3 lnTAit + γk lnW k,it + ρt (3)
∂Qit ∂TAit TAit k=1

Step 3: Calculating the conventional Lerner and adjusted Lerner indexes:

(Pit − MCit )
Lerner index (Lit ) = (4)
Pit

Where Pit is the average output price of bank i in time t, measure as the ratio of the sum of interest income and non-interest income to
total assets.
The adjusted Lerner index is calculated by computing frontier estimates of bank profit (π), total cost (TC), marginal cost (MC) and
output (Q):
(πit + TCit − MCit × Qit )
Adjusted Lerner index (aLit ) = (5)
πit + TCit
The higher the Lerner index is the farther the market is from the perfect competition. All variables used for measuring the Lerner
index are statistically described in Appendix A.

3.1.3. Measurement of bank efficiency

Our study applies Data Envelopment Analysis (DEA) developed by Charnes et al. (1978) who examine the relationship between
input that a bank consumes and the output that a bank produces relatively to the market. The DEA with the assumption of input
orientation has been widely employed to measure efficiency in the literature (Nathan and Neave, 1992; Miller and Noulas, 1996; Iršová
and Havránek, 2010; Luo et al., 2011). We follow Drake et al. (2006) and apply two alternative models, namely, variable returns to
scale (VRS) and constant returns to scale (CRS), using three input variables, namely, personnel expenses, interest expenses, and total
deposits, and three output variables, namely, net interest revenue, other operating income, and total assets. Efficiency scores are then

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H.N.Q. Le et al. Research in International Business and Finance 56 (2021) 101371

calculated from the frontiers generated by the linear programming technique. Appendix B provides details of the calculations for 2
alternative measurements DEA-VRS and DEA-CRS.

3.1.4. Measurement of bank growth

Following Homma et al. (2014) and Khan et al. (2017), this study employs two alternative measurements of bank growth, i.e.,
annual percentage change in loans (Δloans) and the percentage change in loans in logarithms (Δlnloans). Focusing on the lending
market is considered better than other proxies (such as deposit) because it is the key activity of Vietnamese commercial banks (Homma
et al., 2014; Khan et al., 2017).

3.2. Empirical models

In order to estimate the causality effect of bank efficiency on strategic interaction in different regimes of growth, we employ three-
stage least square (3SLS) and system generalised method of moments (SGMM) estimators.

3.2.1. Three-stage least square estimation (3SLS)

A system of structural equations (three-stage estimation for systems of simultaneous equations) is applied in order to deal with
potential endogeneity and autocorrelations which make Ordinary Least Square estimations biased (Gallant, 1977). Compared to
two-stage least square (2SLS), three-stage least square (3SLS) estimator is more efficient and has consistent estimates of parameters
(Greene, 2003). In addition, 3SLS is also efficient with small sample size, as it can accommodate the test statistics shifting from χ2 and z
statistics to F statistics and t statistics (Lee et al., 2016). The following system of equations is formulated to capture the impacts of bank
efficiency and strategic interaction:
≥0
(6)
⏞
Growthit = α0 + α1 Ef f iciencyi,t− 1 + φit

≥0 ≥0
(7)
⏞ ⏞
Market powerit = ω0 + ω1 Ef f iciencyi,t− 1 + ω2 Growthi,t + δit

≥0 ≥0 ≤0
(8)
⏞ ⏞ ⏞
|CSM|it = γ0 + γ1 Ef f iciencyi,t− 1 + γ2 Growthi,t + γ3 Ef f iciencyi,t− 1 × Growthi,t + εit

Where Growthit is growth in loans of bank i in year t; Efficiencyi,t− 1 is the efficiency score of bank i at time t-1 with the assumption that
efficiency affects bank growth with one year lag (Homma et al., 2014; Khan et al., 2017). Market powerit is measured by adjusted Lerner
index. |CSM|it is the absolute value of Competitive Strategy Measure, reflecting strategic interaction; φit , δit and εit are random error
terms. The interaction between efficiency and growth in Eq. (8),(Efficiencyi,t− 1 Growthi,t ), captures the moderating effect of efficiency on
strategic interaction in different regimes of growth.

3.2.2. System generalised method of moments (SGMM)

The study also employs SGMM estimator to ensure the robustness of the findings and deal with potential endogeneity caused by the
lag of dependent variable as an explanatory variable. It is argued that SGMM has a lower bias and higher efficiency than all the other
estimators when the sample size is small and with relatively small time periods (Soto, 2009). Following Homma et al. (2014), we only
apply SGMM the following regression:
|CSM|it = γ0 + θ |CSM|i,t− 1 + γ1 Ef f iciencyi,t− 1 + γ2 Growthi,t + γ3 Ef f iciencyi,t− 1 × Growthi,t + μi + uit (9)

Where: |θ|< 1, E(μi ) = 0, E(uit ) = 0, E(μi uit ) = 0, for i = 1, …, N and t = 2, …, T.

3.3. Data collection and data description

We collect the financial data of commercial banks in Vietnam, whose financial statements are published on their websites, for the
period of 2007− 2018. We only focus on commercial banks as other types of banks may not be fully profit-oriented. Banks which are no
longer in operation at the time of data collection, or under special supervision/ investigation2 of the central bank, are excluded from
the sample. The final sample consists of 26 commercial banks, with 260 annual observations.
Tables 1 and 2 provide the statistics summary and unit root tests for the variables, respectively. We choose Levin–Lin–Chu and
Harris–Tzavalis tests for unit roots. Table 2 shows overwhelming evidence against the null hypothesis of a unit root and therefore
conclude that all variables are stationary. The strategic interaction score spans between 0.0012 and 0.9999. The Efficiency scores vary
between 0.6421 and 1 for both alternative measurements, whose means are only slightly different. The means of conventional Lerner
and adjusted Lerner are at 0.2979 and 0.3761, respectively, which suggests that Vietnamese banking system is quite competitive.
However, these results also indicate that Vietnamese banks appear to enjoy stronger market power compared to ASEAN banks whose

2
For example, The State Bank of Vietnam (SBV) placed DongA Bank under special supervision on August 13, 2015.

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H.N.Q. Le et al. Research in International Business and Finance 56 (2021) 101371

have lower average Lerner index of 0.2602 (Khan et al., 2017). While adjusted Lerner registers only positive values, conventional
Lerner has the min value of -14,0109, this is because the latter assumes that all banks are efficient, and the presence of a non-optimal
bank can result in a negative Lerner score (Koetter et al., 2012). The average credit growth is 25.55 % with the lowest value of -37.52 %
and highest of 164.96 %.

4. Regression results and discussions

The 3SLS regression results for Eqs. 6,7 and 8 are presented in Tables 3,4 and 5. The SGMM regression results are reported in
Table 6. In Table 3, Efficiency has a significant positive coefficient across 4 regressions with different measurements of Efficiency and
Growth. This finding is consistent with the studies of Homma et al. (2012, 2014) and Khan et al. (2017). The result confirms our
Hypothesis 1 that efficient banks subsequently grow and become bigger, and therefore, provides an empirical evidence supporting ES
theory. This finding is also in line with the studies of Goldberg and Rai (1996); Berger and Hannan (1998); Fu and Heffernan (2009);
and Celik and Kaplan (2016). However, these prior studies focus on the effect of efficiency on market share rather than on growth
variable. In this study, we follow the new test proposed by Homma et al. (2014) that efficient firms defeat the competition and grow. In
Table 4, although the coefficient of bank growth has an expected positive sign (except for model 8), but it is not significant. The result
implies that bank growth is not statistically related to market power. Thus, Hypothesis 2 is not supported. This result does not support
Hypothesis 2 and differs from the study of Khan et al. (2017). This may be because ES hypothesis is a composite hypothesis consisting
of many stages, and the causality in each stage may not be established. For example, Homma et al. (2014) points out that when large
inefficient firms lose market power to small efficient firms, the market becomes more competitive instead of more concentrated.
In Tables 5 and 6, the coefficient of Efficiency is positive and statistically significant across 3SLS and SGMM regressions, supporting
Hypothesis 3. This result indicates that efficient banks defeat competition and grow and tend to become more responsive to their rivals’
strategic moves. Therefore, this finding confirms the positive impacts of efficiency on growth from previous studies of Homma et al.
(2012, 2014) and Khan et al. (2017), and extends the empirical evidence on ES theory by documenting the impacts of efficiency on
strategic interaction. This new evidence on the impact of efficiency on strategic interaction is competing against the SCP theory where
strategic interaction has been found to have a negative impact on efficiency (Bayar et al., 2018).
Although growth has a positive impact on strategic interaction, the coefficient of the interaction term between growth and effi­
ciency is negative and significant at the level of 1% across all 3SLS and SGMM regressions (Tables 5 and 6). This result indicates that
efficient banks with fast growth tend to have lower level of strategic interaction compared to efficient banks with lower growth. This
supports Hypothesis 4 that fast-growing banks tend to follow competitive pacification strategy and prioritize their resources to
maintain efficiency, and hence, become less responsive to their rivals’ strategy moves. This result supports the argument of Bloom and
Kotler (1975) that companies with large market share are exposed to higher risks specifically to big firms that smaller ones do not
encounter, which makes them less responsive to their competitors. This is more pronounced in the context of Vietnamese banking
where big banks have faced challenges of stricter requirements on capital adequacy. Given the new capital adequacy regulations in
Vietnam, under Basel II, this suggests that Vietnamese banks tend to be more selective and careful in credit appraisal and devote
resources to attend regulatory requirements.
We further calculate the net effect of efficiency on strategic interaction, γneteff = γ 1 + γ 3 Growth, with respect to different levels of
growth, i.e., lowest value, zero growth, mean value, and highest value. Table 7 summarizes the net effect of efficiency on strategic
interaction at different levels of growth. The impact of efficiency on strategic interaction is statistically significant consistently and
positive at lowest growth and zero-growth levels but turns negative at average growth and highest growth levels. This is consistent
with our argument that efficient banks with lower growth tend to be more responsive to their rival’s strategies.

5. Conclusions

During the past 10 years, the Vietnamese banking industry has been growing fast and become increasingly competitive, motivating
commercial banks to improve efficiency. This context enquires the study on the impacts of efficiency on strategic interaction. This
study extends ES theory from the well-established casual impacts of efficiency on growth and consequently on market power, to the
strategic interaction of efficient banks heterogeneously to the speed of growth. Employing 3SLS and SGMM estimators on the sample of
26 Vietnamese commercial banks from 2007 to 2018, the study finds that efficiency has a positive impact on strategic interaction. This
evidence supports the ES theory that efficient banks defeat competition to grow and become more strategically interactive. This finding
is competing to the finding from Bayar et al. (2018) who document the negative impact of strategic interaction on efficiency in the
support of SCP theory. More interestingly, the study finds that the positive impact of efficiency on strategic interaction is weaker at
higher level of growth. This evidence indicates that fast-growing banks tend to prioritize their resources maintaining their efficiency,
and hence, become less responsive to strategic moves from their rivals. In addition, we calculate the net effect of efficiency on different
groups of growth and find that although the impact of efficiency on strategic interaction is statistically significant and positive for low
growth, this impact turns negative for banks reaching average growth rate. This confirms our argument that, for fast-growing banks,
the higher efficiency is more challenging to be maintained, hence, those banks will prioritize their resources to efficiency and reduce
strategic interaction accordingly.
With regard to implications to the managers, the positive impact of efficiency on growth confirms the importance of bolstering
efficiency as a key to banking development in Vietnam. In addition, the positive relationship of efficiency and strategic interaction
advocates efficiency improvement as a solution improving banking competition. Bank managers should focus enhancing efficiency to
ensure effective responses to competitors. The findings from this study also support the banking structuring process in Vietnam with

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Table 1
Summary Statistics.
Variable Mean Standard deviation Min Max

|CSM| 0.5789 0.3170 0.0012 0.9999

Efficiency-CRS 0.9159 0.0479 0.6421 1
Efficiency-VRS 0.9397 0.0511 0.7142 1
Growth (Δloans) 25.5518 26.8433 − 37.52 164.96
Growth (Δlnloans) 2.0830 2.1626 − 4.0336 12.5427
Market Power (aLerner) 0.3761 1.1383 − 14.0109 0.7610

Table 2
Panel-data unit-root tests.
Variable Harris-Tzavalis unit-root test Levin-Lin-Chu unit-root test

t-statistic bias-adjusted t-statistic

|CSM| 0.1226* − 10.4541*
Efficiency-CRS 0.4718* − 6.3269*
Efficiency-VRS 0.5419* − 6.2602*
Growth (Δloans) 0.1524* − 13.3099*
Growth (Δlnloans) 0.2066* − 11.819*
Market Power (aLerner) − 0.1724* − 4.7579*

Note: * Denotes the rejection of the unit root hypothesis at the 1% significance level.

Table 3
3SLS Regression for Growth.
Equation (6) – Dependent variable: Growth Model 1 Model 2 Model 3 Model 4

Growth: Δloans Δlnloans Δloans Δlnloans

L.Efficiency-VRS 84.779*** 8.453***
(32.124) (2.521)
L.Efficiency-CRS 111.005*** 10.797***
(33.787) (2.644)
cons − 53.784* − 5.862** − 75.841** − 7.814***
(30.225) (2.372) (31) (2.426)
N 260 260 260 260

Standard errors in parentheses.

*
p < 0.10, ** p < 0.05, *** p < 0.01.

Table 4
3SLS Regression model for Market Power.
Equation (7) -Dependent variable: Market power Model 5 Model 6 Model 7 Model 8

Growth: Δloans Δlnloans Δloans Δlnloans

L.Efficiency-VRS 5.270*** 5.277***
(1.212) (1.227)
L.Efficiency-CRS 6.038*** 6.065***
(1.273) (1.292)
Δloans 0.001 0.000
(0.002) (0.002)
Δlnloans 0.007 − 0.002
(0.029) (0.029)
cons − 4.570*** − 4.571*** − 5.207*** − 5.237***
(1.114) (1.120) (1.149) (1.159)
N 260 260 260 260

Standard errors in parentheses.

* p < 0.10, ** p < 0.05, *** p < 0.01.

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Table 5
3SLS Regression model for Strategic Interaction.
Equation (8) - Dependent variable: strategic interaction Model 9 Model 10 Model 11 Model 12

Growth: Δloans Δlnloans Δloans Δlnloans

L.Efficiency-VRS 15.037*** 17.518***
(4.674) (5.863)
Δloans 0.751*** 1.043***
(0.215) (0.298)
L.Efficiency-VRS* Δloans − 0.784***
(0.224)
Δlnloans 11.777*** 19.494***
(3.658) (6.441)
L.Efficiency-VRS* Δlnloans − 12.290***
(3.822)
L.Efficiency-CRS 22.813*** 31.583***
(6.924) (10.954)
L.Efficiency-CRS* Δloans − 1.108***
(0.317)
L.Efficiency-CRS* Δlnloans − 20.694***
(6.847)
cons − 13.745*** − 16.084*** − 20.746*** − 28.937***
(4.434) (5.557) (6.447) (10.203)
N 260 260 260 260

Standard errors in parentheses.

* p < 0.10, ** p < 0.05, *** p < 0.01.

Table 6
SGMM Estimations for Strategic Interaction.
Equation (9) - Dependent variable: strategic interaction Model 13 Model 14 Model 15 Model 16

Growth: Δloans Δlnloans Δloans Δlnloans

L. |CSM| 0.240*** 0.233*** 0.235*** 0.228***
(0.0798) (0.0791) (0.0751) (0.0743)
L.Efficiency-VRS 2.122* 1.963*
(1.055) (1.051)
Δloans 0.127*** 0.112***
(0.0418) (0.0358)
L.Efficiency-VRS* Δloans − 0.135***
(0.0439)
Δlnloans 1.577*** 1.390***
(0.552) (0.469)
L.Efficiency-VRS* Δlnloans − 1.662***
(0.578)
L.Efficiency-CRS 2.467* 2.23
(1.388) (1.337)
L.Efficiency-CRS* Δloans − 0.121***
(0.0384)
L.Efficiency-CRS* Δlnloans − 1.493***
(0.501)
cons − 1.56 − 1.40 − 1.83 − 1.60
(0.984) (0.981) (1.258) (1.211)
N 260.00 260.00 260.00 260.00
Number of instruments/ number of groups 21/26 21/26 21/26 21/26
AR(2) 0.371 0.328 0.338 0.326
Hansen P-value 0.307 0.283 0.302 0.292

Standard errors in parentheses.

*
p < 0.10, ** p < 0.05, *** p < 0.01.

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H.N.Q. Le et al. Research in International Business and Finance 56 (2021) 101371

Table 7
The average margin effects of Efficiency on Strategic Interaction.
3SLS SGMM
Growth level
Model 17 Model 18 Model 19 Model 20 Model 21 Model 22 Model 23 Model 24

1st level 44.14*** 74.41** 63.89*** 117.5** 7.101** 63.47** 2.949* 8.197**
(12.974) (23.932) (18.734) (39.439) (2.550) (22.25) (1.502) (3.077)
2nd level 15.07** 19.62** 22.84*** 32.47** 2.122* 1.963 2.467 2.225
(4.694) (6.647) (6.981) (11.294) (10.95) (1.055) (1.388) (1.337)
3rd level − 5.004*** − 8.905** − 5.501** − 11.82** − 1.315 − 40.51** 2.215 − 0.885
(1.472) (2.764) (1.787) (3.966) (0.688) (13.95) (1.332) (0.981)
4th level − 113.8*** − 144.7** − 159.1*** − 222.7** − 19.94** − 270.6** 1.019 − 15.69**
(32.368) (45.557) (45.545) (73.597) (6.390) (94.01) (1.105) (5.181)

Models 17–24 mimic models 9–16, respectively, for 4 different levels of growth (min, zero, mean and max values).
Standard errors in parentheses.
*
p < 0.10, ** p < 0.05, *** p < 0.01.

the focus on reducing the non-performing loans so that banks can become more efficient in asset management, and hence, promoting
the competition environment in Vietnamese banking industry.

Declarations of Competing Interest

None.

Appendix A. Sample-descriptive analysis

Variable Mean Standard Min Max Definition

deviation

Variables in Strategic interaction measurement

π 1694.02 2467.23 − 24.61 16682.81 Operating profit
S 6402.97 9242.85 63.06 53972.15 Operating revenue
Δπ1 36.82 1790.34 − 5292.37 16482.80 the change in bank’s operating profit (between two consecutive years)
ΔS1 155.07 5818.76 − 16530.81 47842.85 The change a bank’s operating revenue (between two consecutive years)
S2 150007.90 60859.72 58941.16 288022.80 Operating revenues of all rivals except the bank itself
ΔS2 3970.78 78813.60 − 94478.77 288022.80 The change in all rivals’ operating revenues (between two consecutive years)
Variables in Lerner index measurement
π 1694.017 2467.226 − 24.61 16682.81 operating profit (billion VND)
TA (Q) 179725.4 263512.7 2939.02 1,340,339 total asset
t 11 time trend
TC 11093.83 13882.49 154.75 71373.05 total costs: sum of interest expenses, personnel expenses, and other operating
expenses
W1 0.06246 0.02947 0.003522 0.217286 price of deposits: interest expenses/ total deposits
W2 0.011183 0.028477 0.000592 0.379345 the price of labor: personnel expenses/ total assets
W3 0.00968 0.022866 2.98E-07 0.294593 the price of capital: other operating expenses/ total fixed assets
MC 0.089693 0.155703 0.020728 2.039102 Marginal cost: shown in Equation (3)
Variables in bank efficiency measurement
y1 5203.78 7841.131 − 139.89 40877.32 Output 1: net interest revenue
y2 671.3099 1215.072 − 215.3 8559.04 Output 2: other operating income
y3 11.28405 1.324671 7.985831 14.10843 Output 3: Log of total assets
x3 11.1073 1.36935 7.462973 13.98471 Input 3: Log of total deposits
x1 6.419283 1.36429 3.436886 9.583972 Input 1: Log of personnel expenses
x2 8442.68 10493.27 114.14 51140.58 Input 2: sum of interest expenses on customer deposits and other interest expenses
Variables in bank growth measurement
Δloans 25.55182 26.84336 − 37.52 164.96 Annual percentage change in amount of total loans outstanding
Δlnloans 2.083087 2.162637 − 4.03362 12.54278 Annual percentage change in log of total loans outstanding

Appendix B. Models of DEA method

Model DEA1: DEA VRS input-oriented Model DEA1 and DEA2 uses three input variables (personnel
∑
Models of DEA Maximize sr=1 ur yrk + ck expenses, interest expenses on customer deposits and other
∑ ∑s
VRS Subject to: m i=1 vi xij − r=1 ur yrj − ck ≥ 0, j = 1, …, n interest expenses, total deposits in logarithm) and three output
∑m
method v x
i=1 i ik = 1 variables (net interest revenue, other operating income and
ur , vi > 0, ∀r = 1, …, s; i = 1, …, m total assets in logarithm).
(continued on next page)

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H.N.Q. Le et al. Research in International Business and Finance 56 (2021) 101371

(continued )

Model DEA2: ∑ DEA CRS input-oriented

Maximize sr=1 ur yrk
∑ ∑s
Subject to: m i=1 vi xij − r=1 ur yrj ≥ 0, j = 1, …, n
∑m
i=1 v i xik = 1
ur , vi > 0, ∀r = 1, …, s; i = 1, …, m
Where: yrk is the quantity of output r produced by firm k; xik is the quantity of
input i consumed by firm k; ck is the measure of returns to scale on the
variables axis; ur is the weighted output r; vi is the weighted input i; n is the
number of firms to be evaluated; s is the number of outputs; m is the number
of inputs.

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