In 2008, one quarter of the Australian workforce was born overseas (DIAC 2009c). Immigrants contribute to the growth of Australian economy mainly by their high propensity to work, by their skills and by increasing the working-age population (DIAC 2010). Among other positive economic outcomes for the country are a ‘brain gain’ representing the net increase in the number of skilled workers in Australia and immigrants’ strong contribution to the Australian Government budget. Economic theory, as described by Giordani and Ruta (2011), also suggests that immigrant workers raise national welfare through the increase of benefits accrued to ‘native capitalists’. In addition to these obvious and direct benefits for the Australian economy, immigration can also affect the country’s economic growth indirectly by influencing its financial environment.
Building a sound financial system is important for any country as it gives individuals and companies confidence to invest. Rousseau and Sylla (2001) defined the characteristics of a good financial system: sound public finances and public debt management; stable monetary arrangements; a variety of banks; a central bank to stabilise domestic finances and manage international financial relations; and well-functioning securities markets. A financial system that includes these components will be able to manage capital domestically and thus contribute to economic growth.
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Levine (2004) reviewed a vast range of literature debating the advantages and disadvantages of different types of financial systems. Some studies argued for a market-based system, others for a bank-based financial system. However, the prevailing argument was that ‘both financial intermediaries and markets matter for growth even when controlling for potential simultaneity bias’ (Levine 2004, p. 85). Both systems contribute to financial development and both can perform better if the legal system, for example, the legal protection of investors and shareholders, is improved. Many of the authors Levine reviewed also suggested that there are other determinants of financial development such as political, cultural and geographical factors. Nevertheless, as emphasised by Levine (2004), more research is required for a better understanding of what contributes to financial growth and the interaction between financial development and economic growth.
Although, according to Rodrik, Subramanian and Trebbi (2004), all factors explaining differences in countries’ development can be grouped into three major strands – geography, integration and institutions – the last group was found to be the most important. They argued that once institutions are controlled for, integration and geography have hardly any direct effects on incomes. This has been supported by findings from a number of studies investigating the link between institutions and economic performance (Efendic, Pugh & Adnett 2011; Rajan & Zingales 2003). This consensus supported the earlier proposition by North (1990) that institutions affect economic performance. He defined institutions as formal constraints devised by people and informal constraints that embody customs and traditions.
Unlike most research on the importance of the institutional environment for financial growth which use cross-country data, Osili and Paulson (2008) used American data to analyse the effect of informal institutions on the financial behaviour of immigrants. The authors claimed that changing formal institutions by the government is not as challenging as changing culture and behavioural norms. Hence, they investigated two crucially important features of economic development: financial market development and immigration.
A number of different measures of institutional quality were employed by Osili and Paulson (2008) to ensure the robustness of their results. First, they used the attributes of a developed financial system such as property rights protection and a transparent and reliable legal system that, in accordance with Rajan and Zingales (2003), could be regulated only by a country’s government. Osili and Paulson (2008) also accounted for a country’ geography to capture stronger institutional performance in countries located further from the equator (Rodrik,
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Subramanian & Trebbi 2004), and they also took into account human capital that, as they argued, also determines a country’s institutional quality.
The findings of Osili and Paulson (2008) suggested that the quality of home country institutions is an important determinant of immigrants’ financial behaviour in the US. In particular, they argued that: first, informal institutional constraints are enforced through immigrants’ behaviour; second, these institutional controls start influencing people at a very young age, presumably through school and family networks; and, finally, the informal institutional effects on immigrants’ financial behaviour differ from other cultural effects. For example, institutional constraints are not transferred through generations once the formal institution environment is altered, and they are not eradicated through obtaining more education.
The institutional effects in Australia may be different from those experienced in the US due to their different immigration policies and sources of migrants. According to Garnaut (2003), the distribution of costs and benefits from immigration in Australia is vastly different from that in the US. Due to the higher education level of Australian immigrants, their arrival tends to raise the average income of relatively unskilled labour in Australia in contrast with the depressing effect of immigration on the income of low-skilled Americans. In addition, the ‘multiculturalist policy’ followed in Australia is still a subject of debate in the US (Tehranian 2003).
Some work has been done to analyse how migration to Australia influences its financial markets. For example, Cobb-Clark and Hildebrand (2008) compared and analysed the net worth and asset portfolios of immigrant-only, mixed and native Australian families. Their results suggested that ‘the nativity gap is much smaller in Australia than in other immigrant- receiving countries’ (Cobb-Clark & Hildebrand 2008, p. 17). On average, they argued, single immigrants even have $185,000 more wealth than single natives do, whereas the net wealth of foreign-born couples is 83 per cent of that of native-born couples.
The difference in risk preferences has been suggested as one of the reasons for the gap in wealth accumulation (Amuedo-Dorantes & Pozo 2002). They claimed that risk preferences can affect wealth accumulation through investment and saving choices. Particularly, these preferences result in immigrants in the US saving less than natives. Additionally, Cardak and Wilkins (2009), in their study of determinants of risky assets holdings by Australian households, indicated a negative correlation of being an immigrant with a non-English-
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speaking background with household allocations to risky financial assets. Similarly, Bonin et al. (2007) argued that foreign nationals in Germany generally are more risk averse than natives are.
However, despite the great significance of taking higher financial risk, immigrants should practice this with caution. Even though assets involving greater financial risk, such as equities, are important contributors to household wealth, Australian’s asset portfolios are still dominated by housing and superannuation (Headey, Warren & Wooden 2008). Similarly, as suggested by Doiron and Guttman (2009), government policies should be aimed at improving labour market performance and eliminating barriers to wealth accumulation for immigrants. This suggests a balanced approach to policy reforms which would consider all aspects contributing to the growth of wealth.
The importance of financial development is undeniable. Hence, research on the factors contributing to financial growth is an area of great interest. Although the importance of the quality of institutions for financial growth is highlighted in the majority of papers, the effect of informal institutions on Australian financial markets through behaviour of its immigrants has not yet been investigated. In addition, risk preferences have been suggested as an important determinant of financial market outcomes in most studies; however, the factors affecting financial risk-taking have not been extensively explored.
The popular definition of risk attitude used in finance is equivalent to a risky choice based on a risk-return framework. For example, an investment in riskier assets should be expected to provide higher benefits. Hence, some researchers have used equity investment with its higher than average returns and higher riskiness as a measure of financial risk-taking (Cardak & Wilkins 2009). However, Sarin and Weber (1993) argued that although expected return is a good measure of value, this measurement of risk is not so clear. Risk-taking ability might be affected by factors which are difficult to quantify and some risk measurements can be inferred from a person’s choice. For instance, risk premium and variance are measures of risk derived from an expected utility model. This research suggests that people’s perception of the risks involved, which affects their assessment of the financial risk they are prepared to take, can also measure financial risk. Hence, financial risk in this study is measured by both equity investment and individuals’ perceptions of their level of financial risk-taking. The application of the former measure is consistent with the other studies; however, the application of the
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latter definition of financial risk and the interchangeability of both terms have not been tested yet.