Abstract
We examine drivers of foreign direct investment (FDI) and foreign portfolio investment (FPI) in nine selected African economies, during the period 1980 to 2014, with particular interest in the role of financial market development. We set out to explore the drivers of FDI and FPI in selected African countries, respectively. We employ the dynamic GMM methodology to assess the motivators of inward foreign flows. The results show that FDI inflows are generally dependent on past inflows of FDI, low inflation, infrastructural development, and real GDP growth rate; while stock market capitalisation, commercial bank assets gauged against commercial and central bank assets as well as domestic credit to the private sector by banks intermediate for financial market development. On the other hand, we find that FPI inflows are attracted to foreign destinations due to previous FPI inflows, the real exchange rate, inflation rates and the presence of developed infrastructure. Further, developed financial markets, as proxied by stock market capitalisation, were found to significantly and positively influence inward FPI flows, while a closed financial account and low interest rate discouraged FPI. The significant contribution of this paper is that its findings empirically confirm FDI and FPI theory, as postulated in Dunning’s eclectic paradigm insofar as the main “location” variables that enhance host country attractiveness are concerned, specifically in the African context. In light of these findings, we recommend that policy makers strengthen their domestic markets, complemented by appropriate regulations and institutions to attract foreign investment flows, while reducing their dependency on international aid and loans.
Highlights
According to De Santis and Ehling(2007), international capital flows have attracted the interest of policymakers, central banks, international institutions, investors and academia
Using country-level data for nine selected African countries for the period 1980 to 2014, this paper explores factors that give rise to inward foreign direct investment (FDI) and foreign portfolio investment (FPI) flows to selected African countries, looking at the role played by financial market development, by employing the dynamic generalized method of moments (GMM)
FDI and FPI disinvestment is deemed to have occurred in economies where the flow values were negative, thereby implying that outflows occurred during that period
Summary
According to De Santis and Ehling(2007), international capital flows have attracted the interest of policymakers, central banks, international institutions, investors and academia. International capital flows can be classified as either foreign direct investment (FDI), foreign portfolio investment (FPI) or foreign debt (Kirabaeva & Razin, 2013; Agbloyor, Abor, Adjasi & Yawson, 2014). Asiedu (2006) lamented that foreign portfolio investment is unavailable to most African countries, and most of the countries on the continent cannot raise funds from international capital markets because their own domestic financial markets are not sufficiently developed. Using country-level data for nine selected African countries for the period 1980 to 2014, this paper explores factors that give rise to inward FDI and FPI flows to selected African countries, looking at the role played by financial market development, by employing the dynamic generalized method of moments (GMM). The paper ends with a brief discussion of the findings, conclusion and policy recommendations
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