FOREIGN INDIRECT INVESTMENT AND THE PERFORMANCE OF THE STOCK MARKET
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FOREIGN INDIRECT INVESTMENT AND THE PERFORMANCE OF THE STOCK MARKET
CHAPTER ONE INTRODUCTION
1.1 Background of the Study
Foreign Direct Investment (FDI), defined as an investment made to acquire a long-term interest in firms operating outside of the investor’s economy, has long piqued the interest of international development experts.
In an era of turbulent global capital flows, FDI’s stability and emergence as a key source of foreign capital for developing economies has reignited interest in its links to long-term economic growth.
FDI inflows helped to enhance the balance of payments in some African countries. Foreign reserves in the area as a whole increased by 30% in 2006, and even more in some big oil-exporting countries like Nigeria and Libya (World Investment Report, 2007).
Indeed, for developing nations as a whole, net inflows of FDI surged about fivefold, from an average of 0.44% of GNP in 1970-74 to 2.18% of GNP in 1993-97 (World Bank 1999).
FDI is currently a large component of domestic investment activity in developing nations, accounting for more than 8% of Gross Domestic Investment (GDI) in the mid-1990s, compared to 2% in the early 1970s.
Finally, FDI is now the dominant source of capital flows into developing countries, accounting for around 36% of overall capital flows in the mid-1990s, up from 18% in the 1970-74 period (World Bank, 1999).
In the 1980s, average annual inflows of foreign direct investment (FDI) into Africa more than doubled those of the 1970s. It also increased dramatically in the 1990s and from 2000 to 2018.
However, comparisons with global and regional flows may be more instructive. Africa’s proportion of global FDI was at 6% in the mid-1970s, but it has since declined to 2-3%. Africa received around 28% of FDI among developing nations in 1976; it today receives less than 9% (United Nations Conference on Trade and Development, 2005).
Furthermore, in compared to all other emerging regions, Africa has remained aid-dependent, with FDI behind Official Development Assistance (ODA).
From 1970 to 2018, FDI contributed for only one-fifth of all capital flows to Africa. It is well acknowledged that FDI is one of the most active international resource flows to
Developing countries. FDI is especially essential since it consists of both tangible and intangible assets, and the enterprises that deploy them are major players in the global economy.
There is strong evidence that FDI can boost growth and development by supplementing domestic investment and promoting trade and knowledge and technology transfer (Holger and Greenaway, 2004).
The New Partnership for Africa’s Development (NEPAD) recognises the importance of FDI as a critical resource for bringing NEPAD’s vision of growth and development to fruition.
This is because Africa, like many other developing countries around the world, requires a significant inflow of external resources to close savings and foreign exchange gaps and leapfrog itself to sustainable growth levels in order to eliminate its current pervasive poverty (Ajayi, 1999, 2000, 2003).
The research on the FDI-growth relationship is extensive, including both developed and developing nations. The majority of empirical research relies on neoclassical and endogenous growth models.
It is frequently said that FDI is an important source of capital, that it supplements domestic investment, generates new job possibilities, and, in most circumstances, is linked to improved knowledge transfer, which, of course, increases economic growth.
While the positive FDI-growth relationship is not universally acknowledged, macroeconomic research do show a favourable effect for FDI, particularly in certain conditions. Existing literature suggests three major avenues through which FDI can drive economic growth.
The first is the freedom it provides from the binding limitation on domestic savings. In this situation, foreign direct investment boosts domestic savings during the capital accumulation process. Second, foreign direct investment (FDI) is the primary means of technology transfer.
Technology transfer and spillover boost factor productivity and resource utilisation efficiency, resulting in growth. Third, FDI boosts exports by increasing domestic manufacturing capacity and competitiveness.
Empirical examination of the positive link is frequently said to depend on another element known as “absorptive capacity,” which includes the level of human capital development, the type of trade regimes, and the degree of openness (Borensztein et al., 1995, 1998).
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