Foreign direct investment and stock market development

Abstract

PurposeThe purpose of this paper is to examine two novel theories that concern the relationship between stock market development (SMD) and foreign direct investment (FDI). The authors focus on Greece that was demoted to the emerging market category in 2013–2014 in the international lists.Design/methodology/approachThis study is based on the period 1988–2014 that includes the sub-periods 1988–2001 (emerging market) and 2002–2014 (developed market). The authors adopt cointegration methods examining, on the one hand, if the relationship between SMD and FDI is positive or negative and, on the other hand, if it is long run or short run. The authors complete the analysis using the Markov Switching regression model for the test of robustness.FindingsThe results exhibit a weak positive and symmetric long-run relationship for the full period. In the first sub-period, the relationship is strong but in the second sub-period it is not significant. The results are confirmed by the Markov Switching regression model.Originality/valueThe precise definition of a theoretical framework that is tested by a compact empirical methodology leads to a novel suggested policy that will upgrade the Greek market to developed market as soon as possible.