Who lose when foreign banks enter?

It is not clear whether the entry of foreign banks will benefit local small businesses that are previously underserved by domestic banks. Foreign banks certainly will bring competition to the market which should improve allocation of credits, but as new entrants it is also easier for them to focus on small number of big and very profitable corporations, without stretching too much to reach numerous small businesses. 

But one thing is clear:  connected firms won’t benefit from foreign banks. Foreign banks don’t care whether you are nephew of Suharto!

Mariassunta Giannetti (Stockholm School of Economics) and Steven Ongena (Tilburg University) assess the credit conditions in Eastern Euroopean countries after entry of foreign banks. They find that, one the one hand, small firms benefit less than large firms, but they do benefit; on the other hand, those firms set up in the early stage of economic transitions, presumably by those most connected red barons, are absolute losers facing  the new landscape of banking sector.

Financial Integration and Entrepreneurial Activity: Evidence from Foreign Bank Entry in Emerging Markets    
An extensive empirical literature has documented the positive growth effects of equity market liberalization. However, this line of research ignores the impact of financial integration on a category of firms crucial for economic development, i.e. the small entrepreneurial firms. This paper aims to fill this void. We employ a large panel containing almost 60,000 firm–year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and leverage, but the effect is dampened for small firms. The biggest losers from foreign bank entry however appear to be businesses that can be identified as connected to the government or domestic banks. Overall, our findings suggest that foreign banks can help mitigate connected lending problems and improve capital allocation.