Home Country Bias: A Ranked List of Nations

Which countries are most—and least—reluctant to allocate across borders?

(July 29, 2013) – The known benefits of diversification haven’t persuaded investors to reach en masse outside of their own borders. 

But according to German researchers Hans-Peter Burghof and Helena Kleinert, the methods of measuring home country bias have long been flawed.

If a US pension system has 60% of it equities portfolio invested domestically, for example, is it as biased as a Belgian fund who has also invested 60%, but in a much smaller home market? 

Burghof—the chair of banking and finance at the University of Hohenheim—and PhD student Kleinert would say no. In a white paper, the two presented a formula for measuring both home country and foreign market bias. It considered 15 variables grouped into the following six categories: economic development, stock market development, capital control, investor protection, cultural dimensions, and familiarity. 

Investors’ tendency to allocate both at home or to a specific foreign country was most influenced by the economic development variables.

For foreign bias, specifically—asset owners’ willingness to invest outside their border—investor protection proved to be a crucial factor. Kleinert and Burghof quantified this quality through an index of nation’s willingness and ability to protect investors.

Cultural familiarity also seemed to influence where investors allocated beyond their own boarders. The researchers’ regression analysis found a negative correlation between distance and asset flows. The further away two nations were, the less investment passed between them. Furthermore, a common language tended to correlate with higher investment levels between foreign nations.

Kleinert and Burghof drew their data set from the International Monetary Fund’s Coordinated Portfolio Investment Survey, which tracks listed investment on a security-by-security and aggregate basis for 26 countries. The data covered holdings between 2001 and 2011, all of which were expressed in US dollars. 

Read Hans-Peter Burghof and Helena Kleinert’s entire paper, “Cultural Influences on Domestic and Foreign Bias in International Asset Allocation,” here.  

See next page for table…

The below table contains the values of the domestic bias of domestic investors and the average foreign bias of foreign investors in a target country, across a sample of 26 home countries. The domestic bias measures the deviation from a county’s actual domestic investment weight to its optimal weight. The optimal weight was calculated according to that country’s world market capitalization weight. The study calculated the average foreign bias of foreign investors in a host country by averaging the foreign bias across all remaining countries. The table shows the average values for the sample period of 2001 to 2011. 


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