International Investment in Insurance Services in the US
The details of assignment
number of pages: 15
name of course: FINS3616 international business finance
topic: International investment in insurance services
format: double line spacing, times new roman font, font size 12, in-text reference needed, harvard ref. style
Required writing style : academically publishable paper ( abstract, introduction, literature review , conclusion and references)
The data that we attached -&gt;
computing assignment.doc : the question, the format, and list of reference (all stuff u need to know about the assignment)
moshirian-jmXXX.pdf : –&gt; there are 3 of them that are compulsory to be used as the references
PS: the list of references is already included in the attachment above, it would be mandatory to use the given references but not all of them is required. Please delete the papers you did not use in the above list and you may add additional papers if needed which are not included in the given list.
Topic: International Investment in Insurance Services in the US
Due Time: 18:00 pm, Lecture 12
Submission Format: Email you electronic version to Donghui@unsw.edu.au
***One hour delay will incur a reduction of 20% of your assignment mark!***
Maximum number of people allowed in one group is three. The assignment with the following group number is acceptable: one, two, or three.
Recommended group number: 3.
Required writing style: academically publishable paper (abstract, introduction, literature review, conclusion, and references). Each of these components is ESSENTIAL for you to obtain a satisfactory mark in assignment.
Required format of report: double line, maximum 20pages.
There are 8 factors affecting FDI, explain each factor in equation (4) of page six! How to determine above each factor will affect the hypothesis formed? \What does it mean if the signs are positive or negative? (You need to make hypothesis towards each factor)
It is required to read the 3 articles that you have been given on blackboard to understand the meaning of positive or negative relationship of each factor.
Foreign direct investment (FDI) has been important for the world economy for decades and often functions as the principal vehicle of international capital movement, via which the integration of the global economy, or what is popularly known as “globalization”, is promoted (see for instance, Helpman and Krugman, 1989; and Ma, et al., 2000). There are several categories of FDI in the US, one of which is the FDI in insurance services, as opposed to FDI in manufacturing or banking.
In the past, there were extensive empirical studies on FDI in general, manufacturing and banking. The recent literature regarding financial services includes Yamori (1998) and Moshirian (2001). More specifically, Yamori (1998) examines the factors affecting the location choice of Japanese multinational financial institutions. Moshirian (2001) analyzes and models FDI in banking services for the US, the UK and Germany. He finds that bilateral trade, banks’ foreign assets, the cost of capital, relative economic growth, exchange rates and FDI in non-finance industries are the major determinants of foreign investment in banking. The only research papers directly examining FDI in insurance services in the US have been written recently by Moshirian (1997, 1999).
The purpose of this project is to analyze and discuss FDI in insurance services in the US over the period from 1987 to 1998 by building and extending on the previous studies of FDI in insurance services by Moshirian (1997 and 1999).
- A model of FDI in insurance services
The proposed model for FDI in insurance services in the US is as follows:
IN = f (NI, RR, WG, TI, ER, BK, PR, MF) (1)
IN = the stock of FDI in insurance services in the US.
NI = national income of the US.
RR = relative cost of capital between the US and the source countries. This is proxied by the government long-term bond corrected for corporate tax and inflation rates. The source countries’ cost of capital is the weighted average of the individual country’s cost. The weights are based on the individual country’s share of FDI in insurance services in the US.
WG = relative wage rate between the US and the source countries. This is the proxy for cost of labor. The foreign wage rate is the weighted average of the individual country’s wage rate. The weights given to each country are based on that country’s share of FDI in insurance services in the US.
TI = total trade in insurance services of the US.
ER = exchange rate variability of US dollar, the exchange rate is the real effective exchange rate.
BK = the stock of FDI in banking in the US.
PR = source countries’ average insurance premiums.
MF = the stock of FDI in manufacturing in the US.
The following brief explanations are provided for the use of the above factors in measuring the FDI in insurance services.
1) National income (NI)
US GDP is used as NI in this project.
- The relative cost of capital between the US and the source countries (RR)
It is hypothesized that the larger the difference between the US real long-term cost of capital vis-à-vis the source countries, the less will be the level of FDI in insurance services in the US. The measure for the relative cost of capital is as follows:
CC = (1-Tx) (B-i) (2a)
RR= Ln (CCus / CCfr) (2b)
Where, CCus and CCfr are cost of capital for the US and the source countries, respectively. RR is the relative cost of capital. Tx is the corporate tax rate, B is the long-term government bond yield and i is the actual inflation rate.
3) Relative wage rate of the US versus the source countries (WG)
It is hypothesized that the higher the wage rate in the US relative to the source countries, the lower
the FDI in insurance services in the US will be. The measure for the relative wage rates is as follows:
WG= Ln (WGus / WGfr) (3)
Where, WGus and WGfr are wage rates for the US and the source countries, respectively, WG is the relative wage rates. It is hypothesized that the relative wage rate between the US and source countries has a negative impact on FDI in insurance services in the US.
4) Total trade in insurance services (TI)
Moshirian (1997) documents a negative relationship by arguing that FDI is a substitute for trade in insurance services. However, in this study, it is argued that trade in insurance services will build on the relationship between the US and its trading partner countries and stimulate FDI in insurance services. Thus, in this study, one would expect to see that trade in insurance services has a positive relationship with FDI in insurance.
5). Exchange rate movements (ER)
Increased uncertainty about exchange rates will lead to a lower level of FDI, if the FDI decision making is based on initial costs of establishing foreign branches, however it will increase FDI if foreign investment decision making is based on long term anticipated gains from income generating branches.
6) FDI in banking (BK)
In this study, it is hypothesized that the availability of bancassurance following the increase in FDI in banking will increase FDI in the insurance sector.
7) Source countries’ insurance market size (PR)
Liu et al. (1997) document the positive significant influence of market size on FDI in China. Moshirian (1997) investigates the insurance sector in the source country and concludes that the source countries’ insurance market size has a significant positive impact on FDI in insurance services. In this study, it is hypothesised that the larger the source country’s insurance sector, the larger is the FDI in insurance services in the US.
8) FDI in Manufacturing (MF)
In this study, it is hypothesized that the availability of FDI in manufacturing will influence that of insurance.
Given the above explanations for the model to be used in estimating FDI in insurance services, the reduced model for FDI in insurance services in the US can be expressed as:
IN = b0+b1NI+b2RR+b3WG+b4TI+b5ER+b6BK+b7PR+b8MF (4)
This part concludes your assignment.
What are the papers or previous studies you have quoted in your assignment? Please list them here. Please delete the papers you did not use in the following and add the papers you have used which are not included in the following. Any interesting papers can be found in our library upon the help from a librarian.
Baldwin, R.F., 1990. Factor market barriers are trade barriers: gains from trade from 1992. European Economic Review 34, 831-845.
Bargas, S., Lowe, J., 1994. Direct investment positions on a historical basis. Survey of Current Business, June, 72-85.
Barrell R., and Pain N., 1996. An econometric analysis of U.S. foreign direct investment. The Review of Economics and Statistics, 200-207.
Barrell R., and Pain N., 1999. Trade restraints and Japanese direct investment flows. European Economic Review 43, 29-45.
Browne M.J., and Kim K., 1993. An international analysis of life insurance demand. Journal of Risk and Insurance, 60: 616-634.
Cushman, D. O., 1985. Real exchange rate risk, expectations, and the level of direct investment. Review of Economics and Statistics 67(2), 297-308.
Cushman, D.O., 1988. Exchange-rate uncertainty and foreign direct investment in the US. Weltwirtschaftliches 124(2), 322-336.
Froot, K.A., and Stein, J.C., 1991. Exchange rates and foreign direct investment: an imperfect capital markets approach. The Quarterly Journal of Economics 106(4), 1191-1217.
Goldberg, L.G., and Grosse, R., 1994. Location choice of foreign banks in the United States. Journal of Economics and Business 46, 367-379.
Goldberg, L.G., and Saunders, A., 1981. The determinants of foreign banking activity in the United States. Journal of Banking and Finance, 15, 1093-1112.
Grosse, R., and Goldberg, L., 1991. Foreign bank activity in the United States: an analysis by country of origin. Journal of Banking and Finance 15(6), 1093-1112.
Grosse, R., and Trevino, L.J., 1996. Foreign direct investment in the United States: an analysis on country of origin. Journal of International Business Studies 27 (1), 139-155.
Helpman, E., and Krugman, P.R., 1989. Trade policy and market structure. IT Press, Cambridge, MA.
Howard, L.S., 2000. Consolidation keeps reshaping insurance. National Underwriter.
Hultman, C.W., McGee, L.R., 1989. Factors affecting the foreign banking presence in the US. Journal of Banking and Finance 13, 383-396.
Jeon, Y., 1992. The determinants of Korean foreign direct investment in manufacturing industries. Weltwirtschaftliches Archiv 128(3), 527-545.
Liu, X., Song H., Wei, Y., and Romilly, P., 1997. Country characteristics and foreign direct investment in China: a panel data analysis. Weltwirtschaftliches Archiv 133(2), 313-329.
Ma, Y., Morikawa, K., and Shone, R., 2000. A macroeconomic model of direct investment in foreign affiliates of Japanese firms. Japan and the World Economy 12, 311-355.
Moshirian, F., 1997. Foreign direct investment in insurance services in the United States. Journal of Multinational Financial Management 7: 159-173.
Moshirian, F., 1999. Sources of growth in international insurance services. Journal of Multinational Financial Management 9: 34-49.
Moshiran, F., 2001. International investment in financial services. Journal of Banking and Finance 25(2), 317-337.
Newey, W.K., and West, K.D., 1987. A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix. Econometrica 55(3), 703-708.
O’Sullivan, P., 1985. Determinants and impact of private foreign direct investment in host countries. Management International Review 25(4), 28-35.
Outreville J.F., 1996. Life insurance markets in developing countries. Journal of Risk and Insurance 63 (2): 263-278.
Poterba, J., 1991. Comparing the cost of capital in the United States and Japan: a survey of methods. Federal Reserve Bank of New York Quarterly Review 15 (3-4), 20-32.
Trevino, L.J., and Daniels, J.D., 1994. An empirical assessment of the preconditions of Japanese manufacturing foreign direct investment in the United States. Weltwirtschaftliches Archiv 130, 576-599.
Truett D.B., and Truett L.J., 1990. The demand for life insurance in Mexico and the United States: a comparative study. Journal of Risk and Insurance 57: 321-328.
Ueda, K., 1990. Japanese capital outflows. Journal of Banking and Finance 14, 1079-1101.
UNCTAD, 2001. World investment report: foreign direct investment and the challenge of development. United Nations Conference on Trade and Development, New York.
WTO, 1996. Annual report. World Trade Organization.
WTO, 1999. Annual report. World Trade Organization.
Yamori, N., 1998. A note on the location of multinational banks: the case of Japanese financial institutions. Journal of Banking and Finance 22: 109-120.
According to WTO (1996), FDI occurs when an investor based in the home country acquires an asset in the host country with the intent to manage that asset. There are three main categories of FDI: 1). Equity capital (the value of the MNC’s investment in shares of an enterprise in a foreign country). Ten per cent or more of the ordinary shares or voting power of an equity capital stake in an incorporated enterprise, or its equivalent in an unincorporated enterprise, is normally considered as a threshold for the control of assets. Mergers and acquisitions (M&A) and the creation of new facilities fall in this category. 2). Reinvested earnings (the MNC’s share of affiliate earnings not distributed as dividends or remitted to the MNC). 3). Other capital (short or long-term borrowing and lending of funds between the MNC and the affiliate).
 According to the US Department of Commerce, FDI in the US is defined as the ownership by a single foreign person (or an associated group of foreign persons) of at least 10% of the voting stock of an incorporated US business enterprise, or an equivalent interest in an unincorporated US business enterprise.
 For a review of the earlier literature, please refer to Moshirian (1997 and 2001).
 In the past, the only close available study, by Hultman and McGee (1988) has examined FDI in ‘finance, insurance and real estate’.
 However, Jeon (1992) argue that there is a negative relationship between imports and inward FDI in the host country because growing imports imply lower tariff/non-tariff trade barriers and therefore lead to a temporary fall in FDI. Trevino and Daniels (1994) have found insignificant influence of trade on FDI. Moshirian’s (1997) study document a negative relationship between bilateral trade in goods and FDI in insurance services.
Title;International Investment in Insurance Services in the US