Foreign Portfolio Investments, Exchange Rates and Capital Openness: A Panel Data Approach

Abstract

The aim of this paper is to examine the effect of real exchange rate and capital openness on foreign portfolio investments, using a panel of nine African countries, after the global financial crisis in the period 2009-2016. Design/Methodology/Approach: We adopted a panel data approach, and more specifically data was analysed using the Fixed Effects model. The economic data was sourced from the World Bank database of development indicators, while we used Chinn and Ito's database for capital openness. Findings: Building on from the international finance and portfolio behaviour theories, the results show that real exchange rates, capital openness and the rate of inflation have a negative relationship with FPI inflows. On the contrary, the lag of FPI, institutional quality, real economic growth rate and stock market development attract inward FPI, as portrayed in the positive relationship between the dependent and independent variables. Practical Implications: In accordance with these findings, we find that, host countries' governments that adopted fiscal and monetary policies can ensure macroeconomic stability, and a prudently managed exchange rate through incentivising exports and discouraging imports into the host country, to attract inward FPI flows. Originality/Value: The study confirms the theoretical and empirical underpinnings that there is a negative relationship between foreign portfolio investment, and real exchange rates and capital openness, respectively in most developing countries, and African economies are no different.

Impact of Macroeconomic Determinants on Foreign Portfolio Investment in Nigeria

“…Foreign capital inflows play a crucial role in stimulating growth in developing economies like Nigeria, serving not only as a source of capital formation but also as a catalyst for technological development through the transfer of productive technology, innovation, skills development, and organizational improvement. The study acknowledges the importance of foreign capital inflows in Nigeria, with previous research by Makoni (2020), and Karimo (2020) highlighting key determinants, including the exchange rate. However, there remains a controversial and unresolved aspect concerning the impact of exchange rate fluctuations on foreign capital inflows.…”