Financial Market Development and Foreign Portfolio Investments in Nigeria and South Africa

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.

This study examined the relationship between financial market performance and foreign portfolio investment in Nigeria. The study specifically assessed whether there is a long run and short run causal relationship running from financial market performance to foreign portfolio investment in Nigeria. Financial market performance was measured using stock market performance, stock market liquidity and total new issues. The data for the study were source from the CBN statistical bulletin for the period 1984 to 2015. The exploratory design was combined with the ex-post facto research design; the data collection method was desk survey. The study used the Autoregressive Distributive Lag (ARDL) technique for data analysis. Findings from the analyses showed that financial market performance has no long run causal relationship with foreign portfolio investment in Nigeria. Also, stock market performance and stock market liquidity have no short run causal relationship with foreign portfolio investment in Nigeria. Lastly, total new issue has a short run causal relationship with foreign portfolio investment in Nigeria. The study on the basis of these findings recommends that stock market regulators should through conscious enlightenment campaigns encourage more domestic participation in the market to enhance the market performance, deepening and growth as this will strengthen its long run causality with FPI. Lastly, stock market regulators should through conscious risk reduction policies formulation and implementation reduce the riskiness of investing in the stock market to increase transactions and liquidity in the stock market, boost the rate of turnover to investors as this will attract foreign portfolio investors to the Nigerian financial market.

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.

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.

The study examines the link between exchange rate volatility and foreign portfolio in Nigeria using data that covers the period 1996Q1 to 2016Q4. The theoretical framework used is the return and creditworthiness model, which is based on the push and pull factors theory. In achieving the objective, the study adopted the vector autoregressive model in ascertaining the dynamics between exchange rate volatility and foreign portfolio investment in Nigeria. Also, the study examines the impact of exchange rate innovations (shocks) on foreign portfolio investment and equally assesses how induced variations in foreign portfolio investment are decomposed among the variables in the model. It was also found that exchange rate volatility and market capitalization significantly and largely explain the variations in foreign portfolio investment. The impulse response analysis shows that foreign portfolio investment was more responsive to standard deviation shocks in market capitalization and exchange rate, implying that these variables were more responsible for the dynamism in FPI. As the horizons expand, shocks to market capitalization and exchange rate increase foreign portfolio investment, whereas shocks to GDP and inflation made foreign portfolio investment dwindle. In the same manner, in decomposing the induced variation in foreign portfolio investment, forecast error shocks in market capitalization, exchange rate and GDP explain more of the variation in foreign portfolio investment.

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.

The study examined the impact of exchange rate on foreign private investment using quarterly time series date from Nigeria for the period 2007 to 2017. Foreign private investment in the study was disaggregated into foreign direct investment and foreign portfolio investment in order to ascertain their separate reactions to changes in the exchange rate of the naira against the US dollars. The empirical analysis was based on the VAR estimation procedure using three lagged periods adopted on the basis of various lag order selection criteria. The empirical result revealed that devaluation/depreciation of the naira adversely affects foreign direct investment and foreign portfolio investment in Nigeria. Increased in the size of the domestic market and development of the financial sector were found to stimulate foreign private investment while high inflation rate in the domestic economy discourages foreign private investment in Nigeria. The study, therefore, recommended among others that the Central Bank of Nigeria should continue to initiate more proactive policy intervention policies to stabilize the exchange rate of the naira in order to stimulate more foreign private investment in Nigeria.

This study investigates the impact of capital market performance on foreign portfolio investment (FPI) in Nigeria, analyzing key market indicators including the All Share Index (ASI), market capitalization (MCAP), volume of trade (VOT), value of shares traded (VST), and exchange rate (EXR) over the period 1987–2023. Employing an ex post facto research design and time-series data analyzed through econometric techniques such as stationarity testing and regression analysis in EViews, the study reveals significant positive relationships between ASI, MCAP, VOT, and FPI, while VST exhibits a negative association. Exchange rate fluctuations also significantly influence FPI inflows, albeit with lesser strength. The model demonstrates a strong explanatory power with an adjusted R-squared of 0.985, confirming the robustness of the findings. Results support theoretical perspectives including the Efficient Market Hypothesis and Portfolio Theory, highlighting that market size, liquidity, and performance are critical drivers of foreign investment inflows. Policy recommendations emphasize the need to enhance regulatory frameworks, improve market liquidity, strengthen investor education, and maintain exchange rate stability to attract and retain foreign portfolio capital. These measures are vital for deepening Nigeria’s capital market operations and fostering sustainable economic growth.

This study investigated the impact of financial deepening on domestic investment in Nigeria. The time scope of the study covered the period 2005-2022. The response variable was domestic investment (DI) while the treatment variables were financial deepening indicators (broad money supply, private sector credits, and stock market capitalization. The specific objectives were to investigate the impact of credits to private sector on domestic investment in Nigeria; determine the impact of broad money supply on domestic investment in Nigeria; examine the impact of stock market capitalization on domestic investment in Nigeria; and ascertain the impact of monetary policy interest rate on domestic investment in Nigeria. The study adopted ex post facto research and employed the ARDL technique to analyze the data. Diagnostics and stability tests were applied (unit root, CUSUM and CUSUM of squares). the findings of the study indicated the series to be stationary but of mixed order 1(0) and 1(1); while the cointegration test showed evidence of long-run relationship. The long-run coefficients (of the ARDL) estimation indicated broad money supply has significant positive impact on domestic investment; private sector credit has significant positive impact on domestic investment; and the stock market capitalization has significant positive impact on domestic investment. However, the interest rate indicated to be negative on domestic investment. The policy implication of these findings impinges on government and authorities in the financial sector to develop a roadmap to further deepen the financial space to drive growth in domestic investment. Based on the findings, the study recommended that the financial authority should strategize to satisfy the demand for business investment funds by expanding the broad money supply and the private sector credits. Also, the monetary policy interest rate should be reviewed down in order to reverse its negative effect on investments.

The Indonesian capital market is growing and is significantly influenced by domestic and international macroeconomic factors. Foreign investment is one of the worldwide factors considered to affect the growth of Indonesia's capital markets. The objective of this study is to investigate the impact of foreign investor in term of Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) on the value of Indonesian stock market capitalization (MarCap). This study utilized a quantitative-descriptive research approach. Annual time series for 21 years starting from 2000 to 2020 of FDI, FPI, and MarCap data utilized. Data processing uses SPSS-25 which includes Classical Assumption Test, Multiple Linear Regression, Coefficient of Determination Test, and t-test. The findings of current study prove that both FDI and FPI have a favorable and statistically significant influence on the development of stock market capitalization in Indonesia. The study implies that the government must formulate regulation which encourages macroeconomic stability and appropriate policies to attract more foreign investors to participate in Indonesia and contribute to the development of the stock market.

Purpose: This study aims to examine the association between the different forms of inbound foreign investments and the Palestine Exchange (PEX) index to shed light on the nature of that impact. Theoretical Framework: Several academic studies have examined stock market index factors. Chen, Roll, and Ross's (1986) seminal study on macroeconomic conditions and U.S. stock returns provides an example. Interest rate, inflation, industrial production, risk premium movements, and dividend yield positively explain expected stock return. Abusharbeh and Karim (2016) found that interest and consumer price index positively affect banking and investment firm profits on The Palestine Exchange (PEX). Shahbaz (2013) examined how foreign direct investment affects Pakistan's stock market. Results supported foreign direct investment's stock market complementarity. Design/Methodology/Approach: The market index and panel quarterly data for inward foreign investments are used in this study. From 2009 to 2022, end-of-quarter data were collected on total inward foreign investments, their sub-components (direct investments, stock portfolio investments, and currency and deposits in Palestine), and the market index (Al-Quds index) closing value. Fifty-six observations were gathered. Findings: The study found that the overall model integrating all three types of inward foreign investments significantly explains the market index. Foreign portfolio investments (FPI) are significantly associated with the stock market index. However, the results showed that inward foreign direct investments (FDI) and foreign deposits and currency investments (FCI) have no significant impact on the stock market index, indicating that they do not complement or substitute each other. Research, Practical & Social Implications: This study can help the stock market, regulators, and policymakers create incentives and regulations to attract different forms of inward foreign investments. It also examines why foreign direct investments (FDI) and foreign deposits and currency investments do not complement or substitute stock market development. Originality/Value: This study provides empirical evidence on the impact of the different forms of foreign investment in Palestine on the stock market. Further research is recommended to explore additional variables that might be significant, such as market capitalization and market volume.

While extensive research has explored the determinants of foreign direct investment (FDI) and foreign portfolio investment (FPI) in BRICS nations, there remains a notable gap in understanding the influence of intangible factors, particularly soft power and nation branding. Historically, academic discourse has underemphasized the role of nation branding as a crucial emotional and perceptual component in investment decision-making processes. Consequently, governments in BRICS countries must enhance their national branding efforts to attract both capital and portfolio investment flows. The principal aim of this study was to jointly analyse the tangible and intangible determinants influencing FDI and FPI in BRICS from 1994 to 2024. Employing advanced econometric techniques, specifically the Autoregressive Distributed Lag (ARDL) bounds testing approach for cointegration and Vector Error Correction Models (VECM) for estimation. This study makes a unique contribution to existing literature by examining the nexus between nation branding, FDI and FPI, thereby introducing a novel perspective on the factors driving investment in the BRICS context with an emphasis on non-tangible determinants. The findings indicate that nation branding, along with exchange rate stability, property rights, and financial market development, are significant positive determinants of FPI in these countries. Conversely, capital openness demonstrated a negative relationship with FPI. Moreover, the positive impact of nation branding on FDI within BRICS nations was reaffirmed. This study substantiates the critical role of nation branding as a pivotal driver for both FDI and FPI, emphasising its strategic importance in the economic landscape of BRICS countries.

The study analyzed the effect of macroeconomic aggregates on foreign portfolio investment (FPI) inflows in Nigeria for the period 1986-2022. GDP growth rate, exchange rate, inflation rate and monetary policy rate were adopted as macroeconomic aggregates. Data was sourced from Central Bank of Nigeria (CBN) Statistical Bulletin (various years). Error correction modeling (ECM) technique was employed to analyze the data. Findings revealed that GDP growth rate had positive and significant effect on foreign portfolio investment (FPI) inflows in Nigeria while exchange rate had negative and significant effect on foreign portfolio investment (FPI) inflows in Nigeria. The study further showed that inflation rate and monetary policy rate had negative and insignificant effect on foreign portfolio investment (FPI) inflows in Nigeria. The study recommended that the Nigerian government should fashion out ways of growing her economy so as to encourage the attractiveness of the country to foreign investors. In this way, foreign portfolio investment (FPI) inflows would be increased.

The Indonesian stock market is a growing financial industry that plays a strategic role in the growth of the country’s economy. Its development is affected by various factors. This study examined the impact of the exchange rate, gross domestic product (GDP), interest rates, inflation, foreign portfolio investment (FPI), and domestic political stability on stock market capitalization. Quarterly data between 2000:Q1 and 2020:Q4 are used. The autoregressive distributed lag (ARDL) method is applied to identify long-run relationships between variables. To understand how fast the system reaches equilibrium after a shock, the model also examines short-run relationships using an error correction model (ECM). The findings show that the impact of exchange rate, interest rate, and inflation on stock market capitalization is negative in the long run. While the GDP, FPI, and political stability are positive. Increment in the US Dollar against the Indonesian Rupiah, interest rate, and inflation by 1% respectively, caused stock market capitalization to fall by 1.31%, 0.06%, and 0.04%. A rise in GDP, FPI, and political stability by 1% respectively, increases the stock market’s value by 1.17%, 1.08%, and 1.28%. In the short run, the coefficient of ECM indicates the speed of adjustment of the system: the occurrence of the shock to reach long-run equilibrium is quick enough, at 63.8% each quarter. The study recommends governments evaluate the impact of these factors when formulating monetary policies, promote economic growth, and continuously implement good governance, thus supporting stock market development.

This study investigated the impact of trade openness on investments in the Nigerian economy, focusing specifically on foreign direct investment (FDI) and foreign portfolio investment (FPI) from 1984 to 2022. Utilizing the Autoregressive Distributed Lag (ARDL) estimation technique, the research explores both the short-run and long-run dynamics between trade openness and investment, incorporating macroeconomic variables such as exchange rate, GDP growth rate, population growth, interest rate, and manufacturing sector capacity utilization. Stationarity tests using the Augmented Dickey-Fuller (ADF) and PhillipsPerron (PP) methods confirmed mixed integration orders, while the bounds testing approach indicated the existence of long-run relationships among the variables. Empirical findings revealed that trade openness does not significantly influence either FDI or FPI in Nigeria, suggesting that the country has not fully leveraged the potential investment benefits of open trade policies. However, exchange rates were found to significantly impact FDI, and GDP growth rates significantly influenced FPI. These results imply that trade openness alone is insufficient to drive investment inflows without supportive macroeconomic and institutional frameworks. Based on these findings, the study recommends that the Nigerian government prioritize infrastructure development, strengthen regulatory protections for investors, promote innovation, and enhance financial market infrastructure to attract more foreign investment and ensure long-term economic growth.