The IUP Journal of Applied Finance
The Impact of FDI on the Financial Performance of Life Insurance Companies: A Comparative Analysis

Article Details
Pub. Date : Oct, 2021
Product Name : The IUP Journal of Applied Finance
Product Type : Article
Product Code : IJAF21021
Author Name Rajvee Kajiwala and Binny Rawat
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 27



India is a developing country, and long-term investments are essential for the development and growth of the country. Insurance industry in India, being an attractive destination for foreign players, has been witnessing a large number of cross-border mergers and acquisitions. Even the Foreign Direct Investment (FDI) cap has been increased from 26% to 49% and now to 74%. Still this has not satisfied the demand of the sector, and now again the demand for 100% FDI is raised in the insurance sector. Thus, this study examines the impact of FDI on the financial performance of life insurance companies. For that the financial performance of FDI-based and non-FDI-based life insurance companies are compared using CARAMEL model which includes Capital Adequacy, Asset Quality, Reinsurance and Actuarial Issues, Management Soundness, Earnings and Profitability, and Liquidity. These variables are taken as dependent variables and type of company (FDI-based and non-FDI-based) is taken as the independent variable. The study is based on secondary data, and Mann-Whitney test and Anova test are used for analysis. The results suggest that FDI has a significant impact on life insurance companies and FDI-based life insurance companies perform better than non-FDI based life insurance companies in terms of capital adequacy, management soundness and earnings and profitability.


Foreign Direct Investment (FDI) happens when an individual or a company located in one country invests in the business located in another country. The FDIs are normally favored over other tools of external finance because they are non-volatile, free of debt and their returns depend on the financial performance of the businesses in which the investors have made investments. Today, in this highly competitive world, every business requires one or the other type of investment. With increasing globalization, FDI is today considered as the most effective investment tool which can integrate the firms and the economies around the world. The FDI leads to the development of a transparent, broad and effective policy environment in the developing countries and acts as a catalyst for growth and development. FDI brings not only risk-free investment and capital inflow, but also advantages such as advanced technology and management practices to the recipient company. For a nation, FDIs contribute toward creation of jobs, foreign exchange earnings, and increase in the national income. Therefore, large FDI inflows are needed not only for a particular company or for business development but also for a country's sustainable development and growth.