Nonlinear Dynamics of Information and Communication Technology, Income Diversification, and Competitiveness in Emerging Banking Markets: Evidence from Vietnam

Abstract

This study examines the effects of information and communication technology (ICT) adoption and income diversification (IDI) on bank competitiveness in emerging economies, with evidence from Vietnam. Both ICT and IDI serve as strategic drivers of performance, yet their joint and nonlinear impacts remain underexplored in developing financial systems undergoing digital transformation. Using a dynamic panel of 29 Vietnamese commercial banks from 2010 to 2022, the study employs the system generalized method of moments (S-GMM) estimator to address endogeneity and capture nonlinear and interaction effects. Bank competitiveness is measured by the Lerner index, with controls for bank-specific and macroeconomic factors, including the COVID-19 shock. The results indicate inverted U-shaped relationships between ICT, IDI and competitiveness, implying diminishing returns beyond optimal thresholds. The negative interaction between ICT and IDI suggests that simultaneous overinvestment may weaken competitive advantages, while macroeconomic volatility further moderates these effects. The study contributes to the literature by revealing the nonlinear and interactive mechanisms through which digital transformation and diversification jointly shape bank competitiveness in a developing economy, offering practical implications for balancing innovation and diversification strategies.