Is foreign Portfolio Equity Investment Inspired Growth Hypothesis Relevant in Emerging Markets?

Using panel data of 14 Asian and European emerging markets, this study examined the impact of foreign portfolio equity investments on economic growth. Generalised Methods of Moments (GMM) was used in order to cater for the dynamic nature of economic growth data and the possible endogeneity problem that exists between foreign portfolio investments and economic growth. The study noted that foreign portfolio equity investments positively but non significantly influenced economic growth in the Asian and European emerging markets, consistent with findings by Durham (2004). From a theoretical point of view, this finding is understandable since the current study excluded bonds (stable form of foreign portfolio investments) and only focused on foreign portfolio equity investments, a volatile part of foreign portfolio investments. Initial GDP was found to have had a positive and significant impact on GDP in line with Levine et al. (2000)’s observations. The study therefore urges Asian and European emerging markets to speed up the implementation of foreign portfolio investment enhancements policies and initiatives in order to guarantee long term positive growth. They should not only target foreign portfolio equity investments but foreign portfolio bonds investments as well if they intend to foster long term and sustainable economic growth.