Foreign Portfolio Investment and Economic Growth

Topics: Investment, Stock market, Macroeconomics Pages: 20 (6936 words) Published: June 24, 2013
IOSR Journal of Business and Management (IOSRJBM) ISSN: 2278-487X Volume 2, Issue 4 (July-Aug. 2012), PP 10-19 www.iosrjournals.org

The Impact of Stock Market Returns on Foreign Portfolio Investment in Nigeria Dr. OZURUMBA BENEDICT ANAYOCHUKWU
Lecturer, Department of Management Technology Federal University of Technology, P.M.B. 1526, Owerri, Imo State, Nigeria.

Abstract: This research work was designed to investigate the impact of stock market returns on foreign portfolio investment in Nigerian. The objectives of the research are: to identify the relationship between foreign portfolio investment and stock market return, inflation rate and stock market returns and to determine the direction of causality between foreign portfolio investment and stock market returns in Nigeria. The data were collected from Central Bank of Nigeria (CBN) statistical bulletin. The data were consequentially analyzed using E-views statistical package. The methodology used was multiple linear regression analysis to capture the impact of foreign portfolio investment and inflation rate on stock market returns, as well as Granger causality tests to determine the direction of causality between the variables. The results showed that foreign portfolio investment has a positive and significant impact on stock market returns while inflation rate has positive but insignificant impact on stock market returns. In the case of causality test, evidence of the result showed that there is a unidirectional causality running from stock market returns to foreign portfolio investment in the economy, which in turn will foster stock market returns in Nigeria. We therefore recommend that policies that will attract foreign portfolio investment should be pursued in order to enhance stock market returns. Keywords: Capital market, Economic Growth, Inflation, Interest rate, All Share Index, Market Capitalization, Equity, Nigerian Stock Exchange.

I.

Introduction

Nigeria in the last few years had clamored for foreign portfolio investment in the country. This is believed to be a facilitator of economic growth and development, which leads to industrialization of the economy in the long run (Adeleke et al, 2004). Foreign portfolio investment means the purchase of shares in a foreign country where the investing party does not seek control over the investment. A portfolio investment typically takes the form of the purchase of equity (preference share) or government debt in a foreign stock market, or loans made to a foreign company. Obviously the purchase of bonds issued by a company, which gives no voting rights, or of government debt, and making loans to foreign company do not give control (Bosodersten et al, 1996). Portfolio investment is a recent phenomenon in Nigeria. Up to the mid 1980’s, Nigeria did not record any figure on portfolio investment (inflow or outflow) in her balance of payment account. The nil return on the inflow column of the account is attributable to the absence of foreign portfolio investors in the Nigerian economy. This is largely because of the non-internalization of the country’s money and capital markets as well as the non-disclosure of information on the portfolio investments in foreign capital/money markets (Obadan, 2004). Following a careful review of the consequences of the Exchange Control Act of 1962 on the economy, after some thirty three years of its operation, Nigerian authorities came to the conclusion that the Act had not brought the economy any substantial benefits. The Act was judged inimical to a market driven economy, new policy government had pursued since 1986, with the deregulation of the economy. While equity investment trickled into Nigeria as a result of the Exchange Control Act of 1962, Portfolio Investments dried up, because portfolio investments required an investment climate, which guarantees speedy “free entry” and “free exit” of investment funds into and out of a country in a flash. The investment climate in...

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