An Empirical Investigation of the Nexus Among Foreign Portfolio Investment, Stock Market Growth and Domestic Investment in Nigeria

Abstract

The study investigated the nexus among foreign portfolio investment, stock market growth and domestic investment in Nigeria from 1986 to 2022 using annual time series data. The study was anchored on the theoretical foundations of the foreign capital movement and the Tobin’s Qtheory of investment. The employed the Structural Vector Autoregressive (SVAR) to analyze the data. Findings of the study revealed that, there is a positive pass-through effect of foreign portfolio investment to domestic investment through the stock market growth in Nigeria. The study concluded that, foreign portfolio is important in stimulating domestic investment in Nigeria. Based on these findings, the study made the following recommendations. The government through the ministry of trade and investment in conjunction with the Central Bank of Nigeria (CBN) and the Security and Exchange Commission (SEC) should create market access by liberalizing the capital market by expanding the shareholdings of the foreign investors beyond the existing 10% to attract more inflows of foreign portfolio investment. Second, to retain foreign portfolio investment and avoid frequent investment rebalancing in the stock market, the government through the National Assembly should enact laws that ensure transparent regulatory framework in the stock market in the country. This would enable foreign investors to have a clear understanding of the rules and procedures governing their investments, as well as the regulatory framework in which they operate. This requires strong legal frameworks that safeguard investors’ rights, ensure fair treatment, and provide dispute resolution mechanisms.