Classification of Foreign Capital Flows of Insurance Companies

Abstract

In economic literature, international private capital flows are classified into direct and portfolio investment. The distinction has a wide usage, and is employed not only by economists and students of business, but also by government policymakers when legislating in this area. Because of the financial nature of the insurance operation, there are problems in the application of the standard definition to the foreign investment decisions of insurance companies. The purpose of this paper is to suggest more detailed criteria for classifying these flows, which it is hoped will clarify the issues and permit a more careful delineation between the investment of the insurance industry and that of other enterprise abroad. Foreign private investment is usually classified into two main types: direct and portfolio investment. Foreign direct investment is usually reserved for the situations where the flows are basically undertaken to establish, maintain, or expand a branch or subsidiary or some otlher permanent interest abroad. In contrast, overseas portfolio investment is viewed as a purely financial phenomenon and undertaken without the desire for, or possibility of, management responsibility. Portfolio investment takes tlhe form of the acquisition of money claims against foreign governments or against persons engaged in the construction or operation of production facilities abroad, and in the purchase of equity shares in the property of production facilities, where the resultant holding is insufficient to represent a controlling interest. When an equity acquisition results in Gerard M. Dickinson, Ph.D., F.I.S., is Assistant Professor of Finance in the University of British Columbia. From 1966 to 1969, Dr. Dickinson was a Research Fellow in the University of Sussex, England. Prior to that time, he was an investment analyst for a United Kingdom insurance company. This paper was submitted in April, 1970. a holding in excess of 50 percent of the total stock, there is no difficulty in making the distinction between direct and portfolio investment. In cases where the holding remains below 50 percent, problems arise in defining control, since control is not only a function of the actual percentage holding but also of the dispersion of the remaining interests. It is therefore impossible to state on this criterion, without a more detailed knowledge, what constitutes a direct or a portfolio investment. For statistical convenience, however, it is generally assumed that holdings of or over a certain percentage, usually 25 percent,' represent such a controlling