Equity Inflows Research Articles

Unravelling the complex interactions between sentiment of uncertainty and foreign capital flows: Evidence from Brazil and South Korea

Brazil and South Korea have both been known to implement capital controls during emerging market crises to address the complexity of foreign capital flows, which affects international investor behaviour. This research studies Brazil and South Korea bond and stock flows and sentiment of economic and political uncertainty (SEPU), a local news-based sentiment indicator, using a novel time-varying technique. Findings show multiple short-term occasions where increased SEPU strangely boosts equity flows, contrary to the assumption that uncertainty discourages equity investment. This paradoxical discovery is linked to a "behavioural arbitrage strategy" in which risk-seeking investors employ informational asymmetries to capitalize on increased uncertainty. Foreign investors prefer South Korean over Brazilian bonds due to the former country's stronger policy framework. The second significant finding is that equity inflows increase uncertainty (negative domestic sentiment in media) during acute crises. We conclude that inflation, recession, geopolitical risk, financial instability, and tight monetary policy amplify this feedback loop.

Impact of Pandemic on Foreign Direct Investment - A Study from Global Perspective

Abstract: The global economic landscape has been significantly influenced by health pandemics, leading to heightened uncertainties. Using data from past epidemics and economic downturns, this research paper examines the repercussions of these health crises on global economies. Prominent among these health crises is the 1918 influenza epidemic, which Garrett (2008) reveals had severe impacts on investment, human capital, and consumer behaviour. In more recent history, the SARS outbreak in 2003, as analysed by Lee and McKibbin (2004), cost the world an estimated USD 40 billion, highlighting the tangible economic costs of health pandemics. COVID-19, emerging at the end of 2019, has created another layer of global economic uncertainty. Containment measures such as lockdowns and social distancing have led to a ripple effect, causing a downturn in various economic sectors. To better understand the scale of this uncertainty, this study employs the newly developed World Pandemic UncertaintyIndex (WPUI) – a tool introduced in 2020 specifically to measure the economic and political uncertainties introduced by pandemics.A crucial focus of the research is the impact of health pandemics on Foreign Direct Investment (FDI). FDI, a major non-debt financial resource, plays an instrumental role in the economic development of nations. It introduces technical know- how, generates employment, and can be seen as a barometer of a country's economic health. Using the WPUI, the study investigates the consequences of health pandemics on FDI in 142 countries from 1996 to 2019. It identifies patterns in different regions and economic brackets,adding new insights to existing literature. The COVID-19 pandemic has significantly impacted global foreign direct investment (FDI), causing disruptions in both inflows and outflows across countries and regions. This study, drawing from quantitative data from the World Bank and UNCTAD and qualitative insights from FDI experts, examines the extent and nature of this impact from 2019-2023. Results indicate a pronounced decline in FDI flows in 2020 and 2021, with varying impacts based on regional development, economic structures, and exposure to the pandemic. Factors such as digitalisation, diversification, and cooperation have influenced these FDI trends. This researchoffers valuable insights for policymakers navigating the post-pandemic FDI landscape, emphasising the need for further studies on the long-term effects of the pandemic on FDI dynamics. The study further narrows down its focus to India, analysing the FDI trends before and after the advent of COVID-19. Secondary data sources, including RBI bulletins and economic survey reports, provide insights into FDI equity inflows during the pandemic. Preliminary results suggest a considerable dip in FDI equity inflows at the onset of the pandemic. However, there's a noticeable recovery in the second quarter of FY-20, aided in part by significant investments, such as Google's $10 billion injection into the Indian market.In light of these findings, the study offers several solutions to mitigate the impact of pandemics on FDI. These range from promoting investment stability, diversifying investment promotion, and supporting digital transformations, to ensuring global health preparedness and implementing robust economic recovery plans. Effective execution of these strategies, tailored to a country's specific needs, can create an environment more receptive to foreign investment

Nexus between economic factors and FDI equity inflows: a causality analysis in ARDL approach

Purpose Economic literature highlights both positive and negative impact of FDI on economic growth. The purpose of this study is to confirm the relationship between various economic factors and FDI equity inflows and find out deviations, if any. This is investigated using standard time-series econometric models. The long and short run relationship is inquired with respect to market size, inflation rate, level of infrastructure, domestic investment and openness to trade. The choice of variables for Indian economy is purely based on empirical observations obtained from scientific literature review. Design/methodology/approach The study involves application of autoregressive distributive lag (ARDL) model to investigate the relationship. The long run co-integration between FDI and economic growth is tested by Pesaran ARDL model. The stationarity of data is tested by augmented Dickey Fuller test and Phillip–Perron unit root test. Error correction model is applied to study the short run relationship using Johansen’s vector error correction model method besides other tests. Findings The results show that the domestic investment, inflation rate, level of infrastructure and trade openness influence inward FDI flows. These factors have both long and short-term relationship with FDI inflows. However, market size is insignificant in influencing the foreign investments inflows. There lies an inverse relation between FDI and inflation rate. Originality/value To the best of the authors’ knowledge, the study is original. The methodology and interpretation of results are distinct and different from other similar studies.

Are gross financial inflows expansionary or contractionary? Evidence from emerging economies

This paper put to the test two hypotheses. First, do gross financial inflows lead to an expansionary or contractionary effect in emerging economies? Second, do different financial inflows exhibit diverse impacts on domestic output and if there is any aggregation bias? However, our work ameliorates the existing literature by tackling the problem of slope heterogeneity and cross-correlated errors by adopting dynamic common-correlated predictors. The analysis further identify different regimes in the regression relationships, considering our sample includes significant global financial imbalances, global financial crisis, taper tantrum period, etc. We find that all types of gross financial inflows, except gross debt inflows, are expansionary. However, there is evidence of possible aggregation bias in using aggregated gross financial flows. Our findings imply that a distinction between different types of financial inflows is necessary to make informed policy recommendations since policies based on aggregate inflows may be ill-advised. Further, emerging markets should focus on encouraging direct and portfolio equity inflows and improving local financial markets’ absorptive capacities in borrower countries to improve welfare gains.

Impairment of monetary policy independence by global financial cycles and the mitigating role of macroprudential policies

ABSTRACT In this paper, we study the impairment in monetary policy caused by different forms of global financial cycles. We find that while both equity inflows and outflows cycles do exert influence over monetary policy, the bond inflows cycle does not have a significant impact. Further, we discuss the role of macroprudential policies in mitigating this impairment by using Difference-in-Difference with heterogeneous treatment effects which is robust to presence of heterogeneity across both time periods and groups. We find that FX-based policies such as Capital Restrictions on Foreign Exchange positions and Limits on Foreign Exposure alongside SIFIs and Loan Loss Provisioning are effective in reducing the impairment.

Regional Distribution of Foreign Direct Investment in India

The tremendous rise in Foreign Direct Investment (FDI) inflows following the economic reforms in 1991, has been one of the most prominent features shaping the behavior of the Indian economy in the past three decades. The present study is based on secondary data and the objective is to examine the trends in FDI inflows to India following the global financial crisis, for the period 2009-2010 to 2021-2022. Additionally, the distributional pattern of FDI among the regions and states of India is also analyzed, using the data for 30 states/territories. The results reveal that total FDI inflows have increased in substantial amounts over the period from US$ 37,745 million in 2009-2010 to US$ 84,835 million in 2021-2022. Maharashtra and Karnataka have surpassed all other states in FDI equity inflows over the period from October 2019 to September 2022. These two states have commanded 50 percent of the total FDI, whereas the regions in central, eastern, and northeast India have received less than 3 percent of the total FDI equity inflows. Thus, the regional disparities in the distribution of FDI are quite visible post-analysis. It is suggested that government should focus on making investor-friendly policies to tap the potential of regions neglected by foreign investors.

Do capital inflows affect domestic bank credit? Empirical evidence from India

This paper studies multivariate dynamic analysis of capital inflows in relation with domestic bank’s credit which has not been investigated earlier adequately in the context of Indian economy. Using autoregressive distributed lag (ARDL) model, we find the existence of co-integration over the period 1991 Q3 to 2022 Q1. The long-run ARDL regression model results show net equity inflows, i.e. net foreign direct investment, and net non-equity inflows, i.e. foreign loan, are significant to influence domestic bank credit. Result also reveals that depreciation of exchange rate and current account (trade) deficit increase bank credit. Outcome of this research contributes significantly to frame effective monetary policy in the Indian context.

How ETFs Amplify the Global Financial Cycle in Emerging Markets

Abstract We study how the growth of exchange-traded funds (ETFs) affects the sensitivity of international capital flows to the global financial cycle. Using comprehensive fund-level data on investor flows, we show that their sensitivity to global financial conditions for equity (bond) ETFs is 2.5 (2.25) times higher than for equity (bond) mutual funds. This higher sensitivity can be directly linked to ETFs underlying shorter-trading-horizon clientele that trades more often in response to shocks. Using country-level data, we find that where ETFs hold a larger share of financial assets, equity inflows and prices become more sensitive to global risk. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Advancing the Growth of Foreign Direct Investment Equity Inflow Amid Covid-19 Pandemic: An Exploratory Study of South Africa Context

The objective of this study was to investigate the challenges to FDI inflows and the enabling factors to accelerate the growth of FDI inflows to South Africa amid the Covid-19 pandemic. An exploratory literature review strategy was used to develop comprehensive logical ideas towards the growth of FDI inflows against the backdrop of the Covid-19 outbreak in the country. The study establishes a decline in economic activity due to lockdowns, decreased mergers and acquisitions, and a reduction in mineral export revenue as the challenges from Covid-19 to FDI inflow. South Africa’s sound legal framework, availability of high-quality infrastructure, financial system, involvement in strategic economic alliances with other countries coupled with availability of natural mineral resources were revealed as enabling factors for an inflow of FDI. The results intimate to South Africa the need to enhance the enabling factors of FDI and create an environment to attract more FDI inflows further, focusing on favourable tax levies, assurance of safe landing, and more simplified business registration processes for foreign investors. This study highlights the importance of refocusing on FDI’s significant contribution to South Africa’s economy to address the deleterious effects of the Covid-19 pandemic.
 
 Received: 12 August 2022 / Accepted: 25 October 2022 / Published: 5 November 2022

Is domestic uncertainty a local pull factor driving foreign capital inflows? New cross-country evidence

Foreign investors pay attention to economic and political developments in the recipient country and might decide to postpone or divert their investments when uncertainty increases. However, due to the limited availability of cross-country uncertainty data, empirical evidence on this channel is scarce. This paper provides a systematic analysis of how bank credit, portfolio debt, and portfolio equity capital inflows from 51 source countries into 143 recipient countries react to an increase in political and economic uncertainty in the recipient country, proxied using the World Uncertainty Index. Our results suggest that an increase in uncertainty induces a substantial and persistent decrease in bank credit and portfolio debt inflows, and (to a lesser extent) in equity inflows. We also uncover important heterogeneities in the response of portfolio inflows. First, the effects are larger for developing economies and those with more open capital markets. Second, inflows through actively managed mutual funds are similarly sensitive to changes in uncertainty that are country-specific (purely local uncertainty) and common across countries (global uncertainty), while inflows through passive ETFs are only sensitive to changes in global uncertainty.

Foreign capital inflows and poverty linkages in South Asia: Do the forms of capital inflows matter?

The relationship between foreign direct investment and poverty reduction has received modest attention in the empirical literature. However, little is known about the relative significant impact of different forms of capital inflows on poverty reduction. This study attempts to investigate the impact of different forms of capital inflows (foreign direct inflows, portfolio equity and portfolio debt inflows) on poverty reduction in major South Asian economies during the post-reform period. The capital inflows-poverty nexus is explored using panel econometric methods robust to cross-sectional dependence. Our empirical results show that while portfolio equity inflows exert a favorable impact on poverty reduction, foreign direct inflows and debt inflows fail to influence poverty. The panel causality results demonstrate that portfolio equity inflows also support poverty alleviation via stimulating economic growth and trade openness. The findings of our study highlight the importance of considering the differential welfare impacts of different forms of capital inflows while implementing capital account liberalization.

The dynamic effects of debt and equity inflows: Evidence from emerging and developing countries

This paper shows that inflows of foreign debt and equity have different (asymmetric) effects on consumption, investment, and GDP growth in emerging and developing economies. By using panel VAR analysis based on quarterly macroeconomic data from 1995Q1 to 2015Q4, my results indicate that debt inflows increase consumption, investment and GDP growth on impact, but decrease investment and GDP growth in later periods (i.e., after around a year) for several quarters. Equity inflows, on the other hand, do not have a significant impact on consumption, investment, and GDP growth in emerging and developing countries on average. I also account for cross-country heterogeneity by splitting my sample into two groups based on their (i) real GDP per capita and (ii) governance quality. I find that countries with lower governance quality benefit from debt inflows in terms of increased consumption, investment and GDP growth in the short run, but are hurt by reduction in all of these indicators in the medium run. The findings regarding equity inflows indicate that, although their effects are not so much destabilizing as those of debt inflows, policymakers in higher income emerging countries might still need to be attentive, since an equity inflow shock in these countries seems to have a somewhat negative effect on investment and GDP growth in later periods following a positive impact effect on consumption and GDP growth.

Wellbeing and Labour Conditions in Modern Construction Industry

In this paper, we empirically examine the conditions of labour and workers’ wellbeing in contemporary world of construction work in respect to United Nations Sustainable Development Goals. During the last three decades of neoliberal reforms, construction industry has completely reshaped and emerged as the second most priority destination of FDI equity inflow as well as 2nd largest employer of non-formal workforce in India. Thus, using descriptive analytics, the analysis is based on primary data collected by interviewing 400 construction workers at the sampled large construction worksites spread across Delhi National Capital Region of both public and private MNCs. The findings describes that more flexible hiring process has weakened the compliance on conditions of work, safety, and other welfare measures. Further, de-facto reinforcing the traditional non-standard norms of labour mobilization has not only trapped the workers in neo-bondage kind of labour relations, but growth without decent wellbeing of stakeholders is in complete contradiction to what neoliberal claims of ‘free the agency of labour’ and what most of the government committed to SDGs goals.

Cross-border portfolio flows and news media coverage

This paper investigates the dynamic linkages between portfolio flows and various news media indices (based on both “positive” and “negative” news headlines collected from Bloomberg), whilst also controlling for a comprehensive set of push and pull factors. The monthly panel examined comprises 49 developed, emerging and developing economies in addition to the US and covers the period from January 2007 to October 2017. The empirical results document the importance of the news variables as a determinant of cross-border portfolio flows. More specifically, US (worldwide) news appear to play a leading role in driving bond inflows into (outflows from) the US. By contrast, the impact of news on equity inflows towards the US is relatively weak, whilst equity outflows from the US are affected by both US and worldwide news. These results are shown to be relatively robust to dropping from the full sample the six financial centres considered.

Strategic Transactions around REIT Conversions

This article examines the conversion-related mergers and acquisitions (M&A) activity and post-conversion performance of 80 international Real Estate Operating Companies (REOCs) that adopted Real Estate Investment Trust (REIT) status. In the years prior to the conversion, we document an increased M&A deal activity that is in part driven to fulfill regulatory REIT requirements. We find that REOCs are willing to pay a premium above the market valuation to acquire desired portfolios. Moreover, we document that the REIT status enhances equity inflows, driving increased M&A transaction activities and deal volume. While converted REITs outperform their peers over the long run, we find that a lower (higher) level of restructuring activity is associated with even higher (risk-adjusted) performance.

Exploring the Growth of Indian’s Foreign Direct Investment Equity Inflow amid Covid-19 Outbreak

Purpose: The aim of this paper is to explore the growth of Indian’s Foreign Direct Investment (FDI) equity inflow amid Covid-19 outbreak. Design/methodology/approach: in-depth review of current and previous literatures from journals and periodic publications of legitimate organizations both local and international on the evolution and the trend of Covid-19 pandemic as well as it impacts on Indian’s FDI was conducted. Findings : The findings however revealed a major drop in net FDI flows globally, but on the contrary, a significant increase was recorded in India. Secondly, key sectors such as services sectors, computer software and hardware, telecommunications, trading, automobile, construction development, chemicals, and pharmaceuticals was revealed to have attracted the maximum FDI inflow to India amid the Covid-19 pandemic. Practical implications: The study recommended that a cohesive policy that further strengthens FDI by identifying and creating incentives for other main industrial sectors could further promote the continued attractiveness of FDI to India. Originality/value: The current study is an original contribution in the field of FDI inflow in India amid the COVID pandemic.

Country Wise Foreign Direct Investment Inflows Pattern In India

FDI equity inflows data from Mauritius, Singapore, Netherlands, Japan, USA, UK, Germany, Cyprus, France, Cayman Islands, UAE, and Switzerland for financial year 2000-01 to 2019-20 were analysed for growth pattern.

A STUDY ON FOREIGN DIRECT INVESTMENT IN SERVICE SECTOR IN INDIA

FDI offers a bundle of benefits such as financial and non-financial. FDI is one such source of long term international capital. Service sector is a largest sector of India economy. Since 1991, FDI inflows in India is on an increasing trend. The FDI Inflows in service sector increased from Rs.14803.91 crores during 1991-2000 to Rs.63909.44 crores in 2018-19. It showed positive response. The easiest and cheapest way to increase the capital is foreign direct investment. There is also increase in foreign currency resources. This paper discusses about the trends of FDI equity inflows in service sector in India, to study and analyze the trend of FDI equity inflows in sub-sector of service sector in India and to examine and analysis the relationship between total FDI equity inflows and FDI equity inflows in service sector in India during 2009-10 to 2018-19.

Unconventional monetary policy and international equity capital flows to emerging markets

AbstractThis paper examines the relationship between monetary policies pursued by three major central banks (U.S. Federal Reserve, European Central Bank and Bank of Japan) and net equity capital flows to emerging markets (EMs) by global investment funds. We focus on two aspects of central bank policy: The growth of central bank assets and the surprise element of asset growth. We find, first, positive, economically large and statistically significant spillovers from the U.S. Federal Reserve asset growth to EM equity inflows following the adoption of unconventional monetary policies. Second, U.S. Federal Reserve and (to a lesser extent) European Central Bank asset growth surprises are negatively related to EM capital flows.

Does Foreign Institutional Equity Participation Instigate Sustainable Corporate Investment Efficiency? Evidence from Emerging Economies

This study examines the impact of overall foreign institutional equity participation and its two types—foreign institutional pressure-resistant and pressure-sensitive—on firm sustainable investment efficiency for non-financial listed domestic firms of three emerging economies over the period of 2009–2018, using an unbalanced panel of 733 firms with 4468 firm-year observations. It also investigates the impact of varying levels of foreign equity participation on investment efficiency. We used the regression estimation technique with robust standard errors clustered at the firm level. We also used the second-stage instrumental variable (IV) method to control potential endogeneity. Empirical findings reveal that overall foreign institutional equity participation and foreign institutional pressure-resistant ownership have a positive and significant impact on corporate investment efficiency, whereas foreign institutional pressure-sensitive ownership has a positive but insignificant impact. When we divided the overall institutional foreign equity ownership and its two types into five levels, we found a positive and significant impact of overall foreign institutional ownership at all levels. The foreign institutional pressure-resistant ownership has a positive and significant impact on investment efficiency when it is greater than 10%. However, we found a weak relationship of foreign institutional pressure-sensitive equity ownership with investment efficiency at all varying levels of investments. These results are robust when we controlled for endogeneity. Our results have implications for policymakers, regulators, academicians, and potential foreign equity participants. These results can be generalized to those emerging economies that have the potentials for attracting foreign equity inflows.