FDI and FPI Determinants in Developing African Countries
Keywords:
Foreign direct investment (FDI), foreign portfolio investment (FPI), financial market development (FMD), GMM
Abstract
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.
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References
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Bokpin, G. A., Mensah, L. & Asamoah, M. E. (2015). Foreign direct investment and natural resources in Africa. Journal of Economic Studies, 42(4), 608-621. doi: http://dx.doi.org/10.1108/JES-01-20140023. Calvet, A. L. (1981). A synthesis of foreign direct investment theories and theories of the multinational firm. Journal of International Business Studies, 12(1), 43-59. Calvo, G. A., Leiderman, L.& Reinhart, C. M. (1996). Inflows of capital to developing countries in the 1990s. The Journal of Economic Perspectives, 10(2), 123-139. Casson, M. (1979). Alternatives to the multinational enterprise. London: MacMillan Chinn, M. D.& Ito, H. (2008). A new measure of financial openness. Journal of Comparative Policy Analysis: Research and Practice, 10(3), 309-322. doi: http://dx.doi.org/10.1080/13876980802231123 Chinn, M. D.& Ito, H. (2006). What Matters for Financial Development? Capital Controls, Institutions, and Interactions. Journal of Development Economics, 81(1), 163-192. doi:10.1016/j.jdeveco.2005.05.010 Chinn, M. D. & Ito, H. (2002). Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence, NBER Working Paper No. 8967. Available from http://econpapers.repec.org/RePEc:nbr:nberwo:8967 Chuhan, P., Claessens, S. & Mamingi, N. (1998). Equity and bond flows to Latin America and Asia: The role of global and country factors. Journal of Development Economics, 55(2), 439-463. doi: http://dx.doi.org/10.1016/S0304-3878(98)00044-3 Daude, C. & Fratzscher, M. (2008). The pecking order of cross-border investment. Journal of International Economics, 74(1), 94-119. doi: http://dx.doi.org/10.1016/j.jinteco.2007.05.010. De Santis, R. A. & Ehling, P. (2007). Do international portfolio investors follow firms' foreign investment decisions? ECB Working Paper No. 815. Available at SSRN: http://ssrn.com/abstract=1015266 Demirgüç-Kunt, A. & Levine, R. (1996). Stock market development and financial intermediaries: Stylized facts. The World Bank Economic Review, 10(2), 291-321. Demirgüç-Kunt, A.& Detragiache, E. (1998). Financial liberalization and financial fragility. (IMF Working Paper No. 98/83). IMF. Dunning, J. H. & Dilyard, J. R. (1999). Towards a general paradigm of foreign direct and foreign portfolio investment. Editorial Statement, 8(1), 1. Dunning, J. H. (2000). The eclectic paradigm as an envelope for economic and business theories of MNE activity. International Business Review, 9(2), 163-190. Ekeocha, P. C., Ekeocha, C. S., Victor, M. & Oduh, M. O. (2012). Modeling the long run determinants of foreign portfolio investment in Nigeria. Journal of Economics and Sustainable Development, 3(8), 194-205. Eryigit, S. B., Eryigit, K. Y. & Dülgeroglu, E. (2015). Local financial development and capital accumulations: Evidence from Turkey. Panoeconomicus, 62(3), 339. Fernandez-Arias, E. (1996). The new wave of private capital inflows: Push or pull? Journal of Development Economics, 48(2), 389-418. doi: http://dx.doi.org/10.1016/0304-3878(95)00041-0. Forssbaeck, J. & Oxelheim, L. (2011). FDI and the role of financial market quality. In Ravi Ramamurti, Niron Hashai (ed.) The Future of Foreign Direct Investment and the Multinational Enterprise (Research in Global Strategic Management, Volume 15) Emerald Group Publishing Limited, (pp.85 – 109). http://dx.doi.org/10.1108/S1064-4857(2011)0000015010. Grosse, R. (1985). An imperfect competition theory of the MNE. Journal of International Business Studies, 16(1), 57-80. Gumus, G. K., Duru, A. & Gungor, B. (2013). The relationship between foreign portfolio investment and macroeconomic variables. European Scientific Journal, 9(34), online. Available from http://search.proquest.com/docview/1524879745?accountid=14648. Hansen, B. E. (2000). Econometrics. 1st Ed. Madison, WI. Hearn, B., Piesse, J. & Strange, R. (2010). Market liquidity and stock size premia in emerging financial markets: The implications for foreign investment. International Business Review, 19(5), 489-501. doi: http://dx.doi.org/10.1016/j.ibusrev.2009.02.009. Kindelberger, C. P. (1969). American business abroad: Six lectures on direct investment.The International Executive, 11(2), 11-12.New Haven, CT: Yale UP. King, R. G. & Levine, R. (1993). Finance and growth: Schumpeter might be right. The Quarterly Journal of Economics, 108(3), 717-737. doi: http://dx.doi.org/10.2307/2118406.
Kirabaeva, K. & Razin, A. (2013). Composition of international capital flows. In Gerard Caprio (Ed.), The evidence and impact of financial globalization (3, 105-119). Oxford: Elsevier Inc. doi: http://dx.doi.org/10.1016/B978-0-12-397874-5.00019-1. Knickerbocker, F. T. (1973). Oligopolistic reaction and multinational enterprise. The International Executive, 15(2), 7-9. doi: http://dx.doi.org/10.1002/tie.5060150205. Kojima, K. & Ozawa, T. (1984). Micro- and macro-economic models of direct foreign investment: Toward a synthesis. Hitotsubashi Journal of Economics, 25(1), 1-20. Kuncic, A. (2014). Institutional Quality Dataset. Journal of Institutional Economics, 10(1), 135-161. Law, S. H. & Habibullah, M. S. (2009). The determinants of financial development: Institutions, openness and financial liberalisation. South African Journal of Economics, 77(1), 45-58. Leitão, N. C. (2010). Localization factors and inward foreign direct investment in Greece. Theoretical and Applied Economics, 2, 17-26. Makoni, P. L. (2014). Factors influencing the attraction of foreign direct investment and foreign portfolio investment into African economies. Corporate Ownership & Control, 11(4), 203-213. Mundell, R. A. (1957). International trade and factor mobility. The American Economic Review, 47(3), 321-335. Mundlak, Y. (1978). On the pooling of time series and cross section data. Econometrica, 46(1), 69-85. doi: http:dx.doi.org/10.2307/1913646. Otchere, I., Soumaré, I. & Yourougou, P. (2015). FDI and financial market development in Africa. The World Economy, online, 1-28. doi:10.1111/twec.12277 Popovici, O. C. & Călin, A. C. (2014). FDI theories. A location-based approach. Romanian Economic Journal, 17(53), 3-24. Ricardo, D. (1817). On foreign trade. Principles of Political Economy and Taxation. London. Rugman, A. M. (1980). Internalization as a general theory of foreign direct investment: A re-appraisal of the literature. Review of World Economics, 116(2), 365-379. Sarno, L., Tsiakas, I. & Ulloa, B. (2016). What drives international portfolio flows? Journal of International Money and Finance, 60, 53-72. doi: http://dx.doi.org/10.1016/j.jimonfin.2015.03.006 Sawalha, N. N., Elian, M. I. & Suliman, A. H. (2016). Foreign capital inflows and economic growth in developed and emerging economies: A comparative analysis. The Journal of Developing Areas, 50(1), 237-256. Smith, A. (1937). The wealth of nations [1776] Soumaré, I. & Tchana, F. T. (2015). Causality between FDI and financial market development: Evidence from emerging markets. The World Bank Economic Review, Online, lhv015. doi: http://dx.doi.org/10.1093/wber/lhv015. Vernon, R. (1966). International investment and international trade in the product cycle. The Quarterly Journal of Economics, 80(2), 190-207. World Bank Group. (2015). World development indicators (WDI) 2015. World Bank Publications. Zakaria, Z. (2007). The causality relationship between financial development and foreign direct investment. Jurnal Kemanusiaan, 10, 1-23. Zheng, P. (2009). A comparison of FDI determinants in China and India. Thunderbird International Business Review, 51(3), 263-279. doi: http://dx.doi.org/10.1002/tie.20264.
Published
2018-01-15
How to Cite
Makoni, P. L. (2018). FDI and FPI Determinants in Developing African Countries. Journal of Economics and Behavioral Studies, 9(6(J), 252-263. https://doi.org/10.22610/jebs.v9i6(J).2021
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