Abstract
The purpose of this study is to empirically analyze the role of foreign direct investment in developing host country’s stock markets and to examine whether they are related or not. The key interest turns around the admiring role of FDI in Stock market development of Pakistan. Our work also aims to investigate the effect of foreign direct investment along with domestic savings, exchange rate and inflation in developing Pakistan stock markets in a rapidly changing political environment. This study applies Ordinary Least Square (OLS) method of regression by using annual time series data for the period 1988-2009 in case of Pakistan to estimate empirical relationships among variables. The results disclose a positive impact of foreign direct investment along with other explanatory variables in developing Stock markets of Pakistan. The study findings can be used to help government policy makers to encourage FDI and take various steps to provide incentives and save foreign investors interest in a volatile political environment that prevailing in the country. Adequate facility of infrastructure can enhance FDI. The volatility of exchange rate and inflation rate should also be minimized through monitory policy while domestic savings must also be encouraged in the country through appropriate and encouraging saving policies. Our effort exclusively study development of Stock markets in Pakistan with special reference to foreign direct investment and other variables. Our study depicts a closer relationship between FDI and Stock Market Development.
Highlights
A very important and integral part of a country’s financial system is the stock market and a strong financial system guarantees the financial development and growth of that country
An ordinary least square (OLS) regression method was applied to determine the impact of Foreign Direct Investment on Stock Market Development in Pakistan
The purpose of this study is to analyze the role of Foreign Direct Investment (FDI) in stock market development of a lower middle-income developing country like Pakistan
Summary
A very important and integral part of a country’s financial system is the stock market and a strong financial system guarantees the financial development and growth of that country. The Islamic Republic of Pakistan is a country situated at an intersection of three major counties of Asia. It is a developing, lower middle-income country with GDP per capita $2500, and have a population of 187 million. According to a report released in 2011 by the World Bank the market capitalization of listed companies in Pakistan increased to $38168586546 in 2010.Given the importance of Stock markets and its downward trend over the last few years this study attempts to examine the factors that affects stock market capitalization in Pakistan
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