Capital Market Development and Foreign Portfolio Investment Inflow in Nigeria (1985-2016)

Abstract

Investment as a catalyst for economic growth and development is an important prerequisite for an economy to attain and sustain industrialization. However, most developing countries lack the sufficient domestic capital to achieve the required level of investment necessary for growth. Thus, foreign capital is necessary to facilitate the investment-growth process. To attract adequate foreign capital needed for investment, capital market has been identified as one of the veritable means through which foreign investment flows into an economy. Consequently, this study examined the effect of capital market development on foreign portfolio investment in Nigeria over the period 1985 to 2016. The study employed secondary data sourced from Central Bank of Nigeria Statistical Bulletin and publications of Nigeria Stock Exchange. In order to achieve the objective of the study, the researcher adopted Vector Error Correction Mechanism (VECM) to analyze the short run and long run dynamism of the variables while also focusing on the direction of causality between capital market development and foreign portfolio investment in Nigeria, using granger causality test. The Granger causality test revealed that there is no causality between capital market development and foreign portfolio investment in Nigeria. Result from the vector error correction model indicated that Market Capitalization (MCAP) has negative significant effect on foreign portfolio investment in Nigeria while All Share Index (ASI) has positive relationship with foreign portfolio investment. Therefore, the study concluded that capital market development has significant effect on foreign portfolio investment in Nigeria within the period examined. Based on the findings, the study recommended that government and capital market regulatory authorities should develop and enforce policies that will further propel capital market development in such a way that it will sustain its positive effect in attracting foreign portfolio into the Nigerian economy as well as stimulate improved interest of foreign investors in subscribing to portfolio investment in Nigerian enterprises.