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International Investment in Us Insurance Industry

Essay by review  •  May 13, 2011  •  Research Paper  •  3,402 Words (14 Pages)  •  1,566 Views

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Abstract

The purpose of this paper is to analyse and measure which factors that are the determinants of FDI in insurance services in the US over the period from 1987 to 1998 using OLS regressions. The results indicate that the relative wage between the US and the source countries and the variable of manufacturing in the US are the major determinants of FDI in insurance services in the US. Furthermore, the empirical results indicate that the higher the wage rate in the US relative to the source countries, the lower the FDI in insurance services in the US. It also indicates that FDI in insurance services is positively affected by the contribution of manufacturing expansion. Hence, the higher growth rate in FDI in manufacturing sectors in the US, the higher the expansion rate in FDI in insurance services in the US and the relationship between the US and the source countries is become more important.

1. Introduction

The integration of the global economy has strengthened the international integration of goods, technology, labour and capital. This process of cross-border restrictions eliminations on international capital flows has increased the growth of foreign direct investment (FDI) activity. Many countries make every effort to attract FDI because it will bring a substantial growth to their economy, in addition to its function as the principal vehicle of international capital movement.

There is a widely shared view that FDI accelerates host countriesÐ'ÐŽÐ'¦ growth by augmenting domestic savings and investment, helping transfer of technology from theÐ'ÐŽÐ'ЁleadersÐ'ÐŽÐ'Ё, increasing competition in the host countryÐ'ÐŽÐ'¦s domestic market, increasing exports, earning foreign exchange and imparting several other types of positive externalities to the economy at large.

Corresponding to the above, since early 1980s, according to the World Investment Report (United Nations, 1994), worldwide flows of foreign direct investment have grown at unprecedented rates to reach a total outflow of US$ 225 billion in 1990. In addition, the World Bank accounts that the global FDI flows during the 1990s increased from about US$ 198.4 billion in 1990 to US$ 619.3 billion in 1998.

The United States has been attractive to foreign investors for decades, although the amount of FDI expanding into the country fluctuated. Study by Leopold and Maniam (2006) pointed out some factors that draw the foreigners to undertake investments in the US; low cost factors of production, technological advancements, economies of scale in the production processes and, the most attractive factors, market size and stability. One of the industries in which foreigners have invested is the insurance industry.

As indicated by Moshirian (1997), FDI in insurance in the US will increase as the US market becomes a base for market penetration into Mexico and Latin America. Furthermore, the new single policy implemented in Europe is expected to encourage the European insurance companies to further invest in the US market.

Whereas there have been large number of researches on FDI in general, manufacturing and banking in the US, there were only a few studies that explores FDI in insurance in the US. In the past, Hultman and McGee (1988) have examined FDI in Ð'ÐŽÐ'Ґfinance, insurance and real estateÐ'ÐŽÐ'¦, but the closest available empirical works that directly examining FDI in insurance services in the US have been written by Moshirian (1997, 1999). Thus, in this study, data is provided to measure the FDI in US not only in general, or manufacturing, but also in insurance services.

The paper is structured as follows: Section 2 will review some of the relevant literatures in FDI in the US; Section 3 will briefly re-visit some factors which determine FDI in insurance services in the US based on the paper by Moshirian (1997); Section 4 will propose a model of FDI in insurance services in the US; Section 5 will describe sources of data and the methodology used in this paper; Section 6 will report the empirical findings; and Section 7 will conclude the findings.

2. Literature Review

2.1. FDI in Manufacturing

There have been some researchers who had analysed and measured which factors that are the major determinants of foreign FDI into the US. Most of these studies are focus on FDI in manufacturing industries in the US.

Ajami and BarNiv (1984) attempted to explain the variability of FDI across countries. They emphasized in following determinants of FDI in US: relative size of the US market, change in exports to the US, growth of GNP in the home and host countries, decline in value of the US dollar during the late 1970s, inflation rates in the home and host countries, attractiveness of the US capital markets and research and development and manufacturing as a percent of GNP.

Schoenberger (1985) examined the growing phenomenon of foreign manufacturing investment in the US in order to develop an understanding of the factors that draw production to the US market despite relatively high cost of production in the international context. This study founds that technology-intensiveness is an important factor in the foreign firmÐ'ÐŽÐ'¦s decision to locate production at the US market; moreover a supply constraint is also considered an important factor to penetrate into US market. It is said that new developed product requires continued scientific and engineering inputs into the production process. Production must remain close to supplies of this type of labour, especially in advanced industrial areas and, more specifically, in the area the product was first innovated.

Tallman (1988) investigated the proposition that home country political risk factors influence outward investment. While factors such as market size and expected return are factors in attracting foreign investments into the US, he expresses that home country variable might exert a level of force leading firms to invest abroad. He found that the level of political risk and economic development in the home country were positively related to the level of FDI in US.

Cushman (1988), Froot and Stein (1991) and Klein and Rosengren (1994) observed the relation between exchange rates and foreign direct investment and found that FDI in US was significantly negative correlated with the value of dollar.

Bagchi-Sen (1995) specifically examined the attributes of incoming FDI in manufacturing- these attributes are the mode of entry, the sectoral choice within manufacturing, and the regional location within the United States. Moreover, the research also analyzed the association between shifts in direct investment

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