Net Foreign Investment Research Articles

The Impact of China’s Capital Account Liberalization on the Direction of Cross-border Capital Flows

Objective: This article aims to investigate the impact of China’s capital account openness (OPEN) on cross-border capital flows (CCF). Methods: The research utilizes the ARDL-ECM model for empirical analysis. It begins by summarizing existing literature on the topic and then proceeds to analyze the data spanning from 1998 to 2023. The study explores the long-term cointegration relationship between OPEN and CCF. Additionally, it investigates the correlation between the direction of openness and its effect on CCF. Notably, the research introduces the concept of the volatility of OPEN as an explanatory variable to understand its impact on various types of capital flows. Results: The findings reveal a significant long-term cointegration relationship between OPEN and CCF. This relationship is significantly influenced by the direction of openness. Moreover, the study identifies that the volatility of OPEN notably affects different categories of capital flows. Furthermore, it observes that structural changes in net foreign securities investment are comparatively higher than those in net foreign direct investment. Conclusion: This study underscores several recommendations for the ongoing process of capital account liberalization in China. Firstly, adjust OPEN flexibly to promote or restrict specific types of capital flows. Adopt elastic capital control measures for different types of capital flows to balance the stability of domestic capital markets and the activity of international capital flows. Secondly, careful adjust capital outflow openness to maintain economic environmental stability and prevent capital flight. Lastly, encourage long-term investment, particularly in the real economy and infrastructure sectors, and provide incentives for investors committed to long-term investment.

Parent firm dividend payouts and subsidiary earnings management: Evidence from mandatory dividend policy

Despite the increasing prevalence of business group structures, earnings management within these groups has not been thoroughly explored, particularly concerning the impact of internal decision-making processes. This study fills this gap by investigating the effect of parent firm dividends on the earnings management of subsidiaries within a group. Using the establishment of China’s State-owned Capital Operating Budget System as an exogenous shock, we find that parent firm dividends significantly reduce the earnings management of subsidiaries. A mechanism analysis reveals that the improved earnings quality is primarily driven by the increased financing demand due to net capital outflow at subsidiaries rather than the agency problem mechanism based on dividend agency cost theory. Parent firm dividends primarily reduce downward earnings management and have a stronger influence on subsidiaries with shorter control chains. Heterogeneity analysis shows that this mitigating effect is more pronounced in firms with weaker external financial support and higher information asymmetry. Overall, we analyze how dividends paid by state-owned parent firms affect earnings management among their subsidiaries, offering valuable insights to business groups and state-owned entity managers involved in corporate governance.

Capital flows and growth across developing countries

Foreign direct investment inflows are positively related to economic growth across developing countries—but so are savings in excess of investment. This paper develops an explanation for these known empirical findings by focusing on the limited availability of consumer credit in developing countries, together with general equilibrium effects. In the model, fast-growing developing countries scale up their holdings of debt assets, which creates net capital outflows—despite inflows of foreign direct investment—and reduces the world interest rate. Slow-growing developing countries reduce their holdings of debt assets in response, which creates net capital inflows despite outflows of foreign direct investment.

The Impact of the Fed's Rate Hike on the Japanese Gaming Company - Square Enix

The Fed's rate hike affects global stock markets in the short run. The volatility of Square Enix's earnings during the window period is analyzed by examining the net effect of Fed rate hikes on the stock price of Square Enix, a Japanese listed company, through VAR and GARCH model. The results show that the net capital outflow dominates the current period when the dollar appreciates relative to the yen in period t=0; Square Enix is the beneficiary of the current round of successive interest rate hikes under the change in cumulative effect. In addition, the impulse response shows that the change of return is basically in line with the "J-curve" effect. The capital outflow effect dominates in the first few periods of the exchange rate increase, and the export effect dominates over time. The coefficients of the logarithmic exchange rate and its lagged term show that the increase in the exchange rate has a significant effect on Square Enix volatility, and the effect is lagged. From the full model, the magnitude of the negative effect is smaller than the positive effect, and therefore, the exchange rate increase has a significant positive effect on the volatility of Square Enix returns. The study argues that Japan should maintain macro policy sustainability, avoid large fiscal deficits, and set aside sufficient policy space to address internal and external risk challenges.

Relationship between Selected Macroeconomic Factors and the Stock Market Prices: Evidence from Colombo Stock Exchange, Sri Lanka

The stock market plays a vital role in all economies. In 2010, the Colombo Stock Exchange became the second-highest performing stock market in the world as many domestic and foreign investors invested in the Sri Lankan stock market with the end of the war. However, it has created a market bubble and no significant improvements reported since mid-2011. Further, the determinants of share market performance remain unclear. It is generally apparent that macroeconomic factors cause a sound impact on stock market performance. Thus, this study attempts to identify the causal relationship between share prices and the four major macroeconomic factors in the Sri Lankan economy. The dependent variable was the All Share Price Index (ASPI). Real gross domestic product (RGDP), Money supply (M2b), Balance of trade (BOT) and Net foreign investment (NFI) were the independent variables. Monthly data was used for 10 years spanning from January 2009 to December 2018 for all variables. Monthly bulletins of the Central Bank of Sri Lanka and the Colombo Stock Exchange data library were used to get data. Stata13, the statistical software was utilized to analyze the data. Descriptive analysis, correlation analysis, regression analysis, Johansen co-integration test and Vector Error Correction Model (VECM) were employed to identify how macroeconomic factors impact share prices. There was a co-integration between the dependent and independent variables. The study revealed that there was a long-run causality between the performance of the capital equity market and macroeconomic variables and the long-run equilibrium could be reached at a speed of 13.90%. Empirical results disclose that M2b and BOT had a positive impact on the ASPI. However, NFI had a negative influence on the ASPI. All variables significantly impacted ASPI except RGDP. The results of the study may help policymakers, investors, and other professionals to make proper decisions.

Crash of COVID -19 on the Indian Foreign Investments

Corona viruses are Zoometric that means which are transmitted between animals and humans. Corona virus (COV) is a large family of viruses and COVID -19 is one of them that cause respiratory diseases arraign from the general cold to more stern diseases. COVID -19 that crippled the world economy in the terms of trade and commerce, employment, education and health. The only mechanism that drags out any sick economy from any crisis is its foreign investments. Foreign investments play an important role for the emerging and developing economies in booming their economies through the sources of international finance and portfolio investments. But this time FDI which is already seeing downcast with lower rate of returns will not act as a lubricant for the suffering economies. Uncertainties about the upcoming course and consequence of COVID-19 has made the financial market additional unpredictable, leading to huge collide and wealth wearing away which consecutively impacting consumption level. According to the Department for Promotion of Industry and Internal Trade, on 18th April 2020 the government of India had made certain changes in the foreign Investment policies to encourage opportunistic takeovers and acquisitions.
 This paper is entirely committed to bring out whether there is a significant impact of the COVID-19 on the Indian foreign investments. For such analyses, the monthly data have been taken for Net Foreign Direct Investments, Foreign Direct Investments by India, Net Portfolio Investments, FII, Portfolio Investments by India and Foreign Investment Inflows. The analysis is then extended in examining the impact of COVID -19 on Market Capitalization (BSE and NSE) and Market Turnover (BSE and NSE). For such analysis T- test and Mann-Whitney Test has been applied.

Why exchange rate pass-through matters in forward exchange markets

Persistent deviations from a covered interest rate parity (CIRP) have been observed between the United States (US) and the United Kingdom (UK) from January 2002 to August 2020. This study argues that the CIRP does not hold because even if income from domestic and foreign investments is equalized, foreign investment's utility could be higher than that of domestic investment depending on the exchange rate pass-through (ERPT) into import price. Theoretically, the deviations of observed forward exchange rates from CIRP conditions are attributed to changes in importable goods prices and ERPT. A change in net capital flow affects import price volatilities and deviations from the CIRP. Therefore, the forward exchange rate depends not only on the interest rate differential between countries but also on ERPT into the import price. Using a logarithmic utility function, this study derives a utility-equalizing forward rate (UEFR). An increase in net capital outflow and the ERPT into the import price reduces the UEFR. Our empirical evidence shows that from December 2011 to June 2020, the UEFR estimates trace the actual US−UK forward exchange rates better than CIRP.

SYMMETRIC IMPACT OF EXCHANGE RATE VOLATILITY ON FOREIGN DIRECT INVESTMENT IN PAKISTAN: DO THE GLOBAL FINANCIAL CRISES AND POLITICAL REGIMES MATTER?

Understanding currency fluctuations carries a high level of risk. A currency can slide or spike as a response of an economic indicators revelation or an unexpected political event, both of which are unforeseeable. As foreign investors become more optimistic about the country’s future, a healthier economy usually requires a strong currency. Therefore, it is necessary to assess the exchange rate volatility risk in the context of direct investment in order to develop preventive policy routes that would encourage foreign investors into the country. To this purpose, the autoregressive distributive least square (ARDL) technique has been employed to investigate the symmetric effect of exchange rate volatility on foreign direct investment (FDI) during global financial crises and political regimes from January 2000 to December 2018. In order to eliminate arbitrariness, the study uses the most accredited estimate of volatility, GARCH (1 1), as part of the re-estimation process. Besides this, the interaction has been studied under various regimes to see how the political environment affects foreign market participants’ expectations for future gains. The findings suggest that exchange rate volatility is adversely related to FDI and is a source of decreased net foreign investment in Pakistan. It also illustrates that during times of crises and apolitical regimes, Pakistan’s average FDI falls dramatically. The findings are extended to the context of Pakistan that has seen significant rupee volatility for the past few years. Our study recommends that policymakers should pursue exchange rate measures that promote exchange rate stability, which might assist to minimize risk of exchange rate volatility and so attract higher FDI. It is also crucial to formulate more sustainable investment methods that allow for efficient capital allocation during times of economic uncertainty.

International Liquidity Channel and Performance of Commercial Banks in Nigeria

This study examined the effect of international liquidity channels on the profitability of quoted commercial banks in Nigeria. The objective was to examine the direction which international liquidity channel affects commercial banks profitability. Return on equity was used as dependent variable while Monetary policy channels proxy by percentage of net foreign assets, financial market channel proxy by percentage of net foreign portfolio investment, international trade channel proxy by percentage of Nigeria terms of trade, capital mobility channel proxy by net foreign direct investment and currency channel proxy by variation of Nigeria naira to US dollar. Panel data of return on equity were sourced from financial reports of the commercial banks while international liquidity variables were sourced from Central banks of Nigeria statistical bulletin. Ordinary least square methods were used as data analysis methods. The study found that 50.3 percent of the variation in return on equity of the commercial banks is explained by the variables in the equation. Monetary policy channel, international trade channel and currency have negative effect on return on equity while financial market channel and capital mobility channel has positive and no significant effect on return on equity of the commercial banks. The study recommends that Central Bank of Nigeria should adopt an appropriate macro prudential framework to enable Nigeria banks become internationally active in terms of liquidity and solvency. The depreciating naira exchange rate should be integrated to the monetary and the macroeconomic policies to avert its negative effect on the economy and the banking industry. The regulatory authorities and the bank management should formulate policies to manage international monetary shocks, the international financial environment and global financial crises to enhance Nigerian banking system soundness.

The Balance of Payments in Q2 2021`

In Q2 2021, the current account balance amounted to $19.9 bn, vs $1.6 bn in Q2 of last year. Russia’s trade balance demonstrated a significant increase relative to Q2 2020. Net capital outflow from the private sector declined on the same period of last year, while the global economy was recovering, and the Bank of Russia was tightening its monetary policy. The regulator continued its foreign currency purchases within the framework of the fiscal rule, which produced an increase in reserve assets by $8.3 bn in Q2 2021. International reserves increased to $591.7 bn. According to the period-end results of Q2 2021, the ruble exchange rate against the US dollar gained 4.4%, rising to Rb72.4.

Capital flight: The travel channel

This paper provides evidence for a rarely studied channel for capital flight: traveling. During an unprecedented period of large net capital outflows in 2014–2016, China’s travel expenditure rose to a level that was abnormally high relative to China’s outbound departures data, counterparty statistics, or by the norm of other countries. I estimated a gravity equation model adapted to travel trade for a panel of countries and found that reported travel expenditure by China was significantly above that predicted by the model during this period. The unexplained travel imports, reaching about 1 percent of China’s GDP during this period, were inversely associated with domestic growth and positively associated with renminbi depreciation expectations against the dollar, suggesting that they were less likely to be consumption of goods and services abroad than domestic residents’ acquisition of foreign financial assets. These results suggest that Chinese households, through the travel channel, had exploited China’s more liberalized capital account in recent years to transfer wealth abroad during periods of elevated economic uncertainty.

Migrant inflows, capital outflows, growth and distribution: should we control capital rather than immigration?

Liberalization policies of international movements of capital and labour have represented a crucial feature of the so-called ‘globalization’ era. More recently, however, several restrictions on migratory movements have been adopted to face the alleged negative effects of immigration. On the contrary, free movement of capital has almost always been preserved. This paper aims to verify whether this current framework of international economic policy can be justified in economic terms. We propose an unprecedented direct comparison between the macroeconomic and distributive impacts of ‘extreme’ episodes of net capital outflows and net migrant inflows in OECD countries between 1970 and 2017. Applying a fixed-effects approach and an event-study approach, we show that GDP growth and functional income distribution have null or even positive statistical relationships with immigration, while they have largely negative statistical relationships with capital flights. More specifically, extreme migrant inflows are not related or in some cases are positively related to real GDP growth, real GDP per capita growth and the wage share, while extreme capital outflows are negatively related to real GDP growth and real GDP per capita growth. These results contrast with current policy agendas and seem to suggest that controls should concern capital movements rather than migratory flows of people.

THE MAIN DIRECTIONS OF MIGRATION PROCESSES AND ECONOMIC CRISES CORRELATION

The article makes an attempt to determine the primacy of the categories “migration process” and “economic crisis”. The paper analyses statistical data of the Federal State Statistic Service of the Russian Federation and the organization for Economic Cooperation and Development on migration processes in Russia. The authors study the possibility of considering the main economic directions of emigration as the reasons of economic crises. The study analyses the number of Russian citizens employed in the countries of the Organization for Economic Cooperation and Development. The article carries out a detailed study of the volume of net capital outflow by the private sector from Russia in 2019-2020. The authors make an attempt to substantiate the thesis about the root cause of migration processes in the system of global transformations. The paper justifies the need for a detailed analysis of macroeconomic indicators of development in order to build a retrospective view of the primacy of the studied processes.

IMPACT OF COUNTRY RISK AND RETURN ON FPI

This study measures the economic content of three different inductors of country risk: political, economic and financial risk indices, and fundamental attributes, such as earning-to-price ratios, and its impact on net foreign portfolio equity investment inflow in Egypt. We explore whether any of these measures contain information about net foreign portfolio equity investment inflow in Egypt. The study uses the autoregressive distributed lag (ARDL) bounds testing approach. Quantitative estimates based on the time series annual data from 2004 to 2018. The empirical results prove that there is a univariate cointegrated and stable long-run relationship among net foreign portfolio equity investment inflow and three different measures of country risk and E/P ratio. The results show that three measures of country risk have a significant effect on net foreign portfolio equity investment inflow in Egypt in the long and short run. But Political risk is a positive effect, While Economic and Financial risks are a negative effect. And E/P ratio has a positive significant effect on net foreign portfolio equity investment in Egypt in the short run only. The results confirm that after Procedure the CUSUM and CUSUMSQ tests, net foreign portfolio equity investment inflow function is stable.Keywords: Country Risk, Return, FPI, ARDL, EgyptJEL Classifications: C12, F21, G11, G15DOI: https://doi.org/10.32479/ijefi.10495

Does currency misalignment matter for economic growth? – Evidence from Turkey

PurposeThe study mainly aims to examine the currency misalignment of Turkish lira and evaluate if it has an impact on economic growth of Turkey.Design/methodology/approachIt relies on Johansen cointegration technique for measuring currency misalignment relying on single-equation approach and the autoregressive distributed lag (ARDL) approach to evaluate how misalignment affects economic growth. The sample period covers from 1980 to 2016.FindingsThe study identifies that terms of trade, relative productivity differences, net foreign asset, investment and trade openness determine the equilibrium REER of Turkey, and the degree of currency misalignment is observed at a substantial level. The outcome of the ARDL approach suggests that higher currency misalignment reduces economic growth. Turning to the separate impacts of undervaluation and overvaluation, while the former falters economic growth, the later promotes it, a finding contrary to the conventional expectation. Therefore, the use of exchange rate as a policy variable is a critical concern to avoid misalignment for sustained economic growth.Practical implicationsThe anti-growth effect of undervaluation and misalignment is an indication of redistribution of income which could be verified by examining the aggregate consumption behavior of the economy in response to RER movements.Originality/valueThe impacts of currency undervaluation and overvaluation on economic growth of Turkey have been studied in a number of time-series studies. But there is no documented study on the role of currency misalignment on Turkish economic growth. This study is the first that examines how the economic growth of Turkey is influenced by currency misalignment together with the impact of undervaluation and overvaluation.

Modelling short-run and long-run predictors of foreign portfolio investment volatility in low-income Southern African Development Community countries

Orientation: This study examined the main predictors of net foreign portfolio investment volatility in low-income Southern African Development Community (SADC) countries. Based on the World Bank data (July 2014), the selected countries are Zimbabwe, Zambia, Malawi, Lesotho, Madagascar, Mozambique, DRC, Swaziland and Tanzania. Research purpose: The purpose of this study is to establish the main drivers of net foreign portfolio investment volatility in low-income SADC countries. Motivation for the study: This study is also motivated by mixed findings in foreign portfolio investment debate on why capital flows are more volatile and difficult to manage in developing than in advanced economies. Although it is acknowledge that developing markets are characterised by the poor quality of financial institutions in economies with weak macroeconomic fundamentals, which ultimately pose a greater risk of sudden stops or reversal of foreign portfolio flows, findings remain inconclusive on what actually drives net foreign portfolio investment volatility in low-income countries. Research approach/design and method: The Panel Autoregressive Distributed Lag (P-ARDL) model is employed to determine the short- and long-run drivers of such investment volatility in these countries. The study uses quarterly data for the period spanning 2000 to 2015. Main findings: The findings reveal that all the variables in the model, namely money supply, world output, general prices, real gross domestic product, domestic interest rates and international interest rates, are significant predictors of net foreign portfolio investment volatility. However, positive long-run effects are observed from world gross domestic product, real gross domestic product, prices and money supply, whilst domestic interest rates and international interest rates displayed a negative association in the long run. These findings are consistent with both the economic literature and the empirical literature, which suggest that an increase in interest rates or higher interest rates affects foreign portfolio investment. Similarly, in the short run, all the variables employed in the model are the main predictors of net foreign portfolio investment volatility in low-income SADC countries. Practical/managerial implications: Policy-makers should embark on policies and programs that promote economic performance in order to attract stable foreign portfolio flows that will lead to stable markets and reduce volatility in the economy. Policy consistency is thus, recommended to attract investors to the region and ensure that stock and bond markets are viable and stable. Contribution/value-add: Unlike other existing studies, the measure of volatility employed in this is considered superior as it is based on net portfolio flows which reflect changes in an economy’s overall current account position. The study informs and advances the current discourse on the causes of capital flow volatility in the field of investment theory and practice.

Does the Indian Financial Market Nosedive because of the COVID-19 Outbreak, in Comparison to after Demonetisation and the GST?

ABSTRACT We investigate the impact of COVID-19 on the Indian financial market and compare it with the outcomes of two recent structural changes of the Indian economy: demonetization and implementation of the Goods and Services Tax (GST). Using daily stock return, net foreign institutional investment, and exchange rate data from January 3, 2003 to April 20, 2020, we find negative stock returns for all the indices during the COVID-19 outbreak, unlike during the post-demonetization and GST phases. Markov switching vector autoregression shows the impact of COVID-19 on stock returns is severe in comparison to that of demonetization and the GST.

Russia's Balance of Payments in Q1 2020

The first quarter of 2020 saw the positive Russia’s balance of trade to plunge on the back of contraction of exports value amid plummeting crude oil prices with stabilized imports volumes. Due to the decline in foreign liabilities and growth of assets in foreign banks and enterprises, net capital outflow was observed in the private sector. In the contexts of negative external shocks, ruble’s exchange rate against dollar plunged by more than 20%.

The Effects of Feedback Between International Trade and FDI

Purpose– This study examines the interrelationships between foreign direct investment, international trade, and economic growth, with a particular focus on expanded global value chains since the 1990s. Design/methodology/approach– This study investigates the feedback effects between foreign direct investment and international trade on economic growth in G7 countries and South Korea by using the annual time series data between 1990 and 2018. Empirically, we perform the tests of unit roots, causal relation and cointegration. Findings–Foreign direct investment is a causal factor affecting international trade in G7 countries and Korea while trade is a causal factor influencing foreign direct investment in the US, France, Canada, and Korea, indicating a feedback relationship between net foreign direct investments and net exports. In particular, we find that a negative feedback increases the real income in the US and Korea, while a positive feedback increases the real income in France and Canada. Research implications or Originality– The results confirm that economic growth could be driven by the feedback effects between foreign direct investment and international trade.

Asymmetric Effects of Exchange Rate and Its Relationship with Foreign Investments: A Case of Indian Stock Market

Emerging markets, including India, are witnessing an influx of foreign capital. The article investigates the role of exchange rate which influences both the net foreign institutional investments (FIIs) and the stock markets, using monthly data, from January 2008 to May 2018. The effects of real effective exchange rate are studied through non-linear ARDL co-integration. The long-run relationship is found in all the three models constructed. The results highlight the nature of FII flows in relation to exchange rate asymmetry. Real rupee depreciation has a long-run effect on their debt flows. The ‘adjustment asymmetry effect’ of exchange rate is found for equity flows in the long run. The similar effect is observed for the Nifty 50 model. Due to high volatility, even positive stock returns do not attract equity FII flows. In the short run, rupee depreciation in real terms negatively influences Nifty returns. The S&P 500 returns explain FII flows indicating information asymmetry. These outcomes serve a vital input for key stakeholders such as potential FIIs, domestic traders, regulators and policymakers.