IDEAS home Printed from https://ideas.repec.org/a/ers/ijebaa/vviiiy2020i2p100-113.html
   My bibliography  Save this article

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

Author

Listed:
  • Patricia Lindelwa Makoni

Abstract

Purpose: 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.

Suggested Citation

  • Patricia Lindelwa Makoni, 2020. "Foreign Portfolio Investments, Exchange Rates and Capital Openness: A Panel Data Approach," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 100-113.
    • Handle: RePEc:ers:ijebaa:v:viii:y:2020:i:2:p:100-113
    as

    Download full text from publisher

    File URL: https://www.ijeba.com/journal/458/download
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 123-139, Spring.
    2. Daude, Christian & Fratzscher, Marcel, 2008. "The pecking order of cross-border investment," Journal of International Economics, Elsevier, vol. 74(1), pages 94-119, January.
    3. R. N. Agarwal, 1997. "Foreign Portfolio Investment In Some Developing Countries: A Study of Determinants and Macroeconomic Impact," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 32(2), pages 217-229, July.
    4. E. Thalassinos, 2007. "Trade Regionalization, Exchange Rate Policies and EU-US Economic Cooperation," European Research Studies Journal, European Research Studies Journal, vol. 0(1-2), pages 111-118.
    5. Hausman, Jerry, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    6. Fratzscher, Marcel, 2012. "Capital flows, push versus pull factors and the global financial crisis," Journal of International Economics, Elsevier, vol. 88(2), pages 341-356.
    7. Pami Dua & Partha Sen, 2006. "Capital Flow Volatility And Exchange Rates-- The Case Of India," Working papers 144, Centre for Development Economics, Delhi School of Economics.
    8. Irena Jindrichovska & Erginbay Ugurlu & Eleftherios I. Thalassinos, 2020. "Exploring the Trend of Czech FDIs and their Effect to Institutional Environment," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 94-108.
    9. Christophe Hurlin, 2004. "Testing Granger causality in Heterogeneous panel data models with fixed coefficients," Post-Print halshs-00257395, HAL.
    10. Garg, Reetika & Dua, Pami, 2014. "Foreign Portfolio Investment Flows to India: Determinants and Analysis," World Development, Elsevier, vol. 59(C), pages 16-28.
    11. Muhammad Afaq Haider & Muhammad Asif Khan & Shamila Saddique & Shujahat Haider Hashmi, 2017. "The Impact of Stock Market Performance on Foreign Portfolio Investment in China," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 460-468.
    12. Kiviet, Jan F., 1995. "On bias, inconsistency, and efficiency of various estimators in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 68(1), pages 53-78, July.
    13. Chee-Keong Choong, 2012. "Does domestic financial development enhance the linkages between foreign direct investment and economic growth?," Empirical Economics, Springer, vol. 42(3), pages 819-834, June.
    14. Anthony Orji & Peter N. Mba, 2010. "Testing for Simultaneity," Journal of Infrastructure Development, India Development Foundation, vol. 2(2), pages 105-120, December.
    15. Andrew J. Abbott & Glauco De Vita, 2011. "Evidence on the impact of exchange rate regimes on bilateral FDI flows," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 38(3), pages 253-274, August.
    16. Agbloyor, Elikplimi Komla & Abor, Joshua Yindenaba & Adjasi, Charles Komla Delali & Yawson, Alfred, 2014. "Private capital flows and economic growth in Africa: The role of domestic financial markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 30(C), pages 137-152.
    17. P. Srinivasan & M. Kalaivani, 2015. "Determinants of Foreign Institutional Investment in India: An Empirical Analysis," Global Business Review, International Management Institute, vol. 16(3), pages 364-376, June.
    18. Nabeel N. Sawalha & Mohammad I. Elian & Adil H. Suliman, 2016. "Foreign capital inflows and economic growth in developed and emerging economies: A comparative analysis," Journal of Developing Areas, Tennessee State University, College of Business, vol. 50(1), pages 237-256, January-M.
    19. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(2), pages 127-151, June.
    20. DS Allen & L Ndikumana, 2000. "Financial intermediation and economic growth in Southern Africa," Journal of African Economies, Centre for the Study of African Economies, vol. 9(2), pages 132-160.
    21. Issouf Soumaré & Fulbert Tchana Tchana, 2015. "Causality between FDI and Financial Market Development: Evidence from Emerging Markets," The World Bank Economic Review, World Bank, vol. 29(suppl_1), pages 205-216.
    22. Poshakwale, Sunil S. & Thapa, Chandra, 2011. "Investor protection and international equity portfolio investments," Global Finance Journal, Elsevier, vol. 22(2), pages 116-129.
    23. Azman-Saini, W.N.W. & Law, Siong Hook & Ahmad, Abd Halim, 2010. "FDI and economic growth: New evidence on the role of financial markets," Economics Letters, Elsevier, vol. 107(2), pages 211-213, May.
    24. Vo, Xuan Vinh & Nguyen, Dong Phong & Ho, Viet Tien & Nguyen, Trung Thong, 2017. "Where do the advanced countries invest? An investigation of capital flows from advanced countries to emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 51(C), pages 142-154.
    25. Goldstein, Itay & Razin, Assaf, 2006. "An information-based trade off between foreign direct investment and foreign portfolio investment," Journal of International Economics, Elsevier, vol. 70(1), pages 271-295, September.
    26. Kodongo, Odongo & Ojah, Kalu, 2012. "The dynamic relation between foreign exchange rates and international portfolio flows: Evidence from Africa's capital markets," International Review of Economics & Finance, Elsevier, vol. 24(C), pages 71-87.
    27. Rogelio V. Mercado & Cyn-Young Park, 2011. "What Drives Different Types of Capital Flows and their Volatilities in Developing Asia?," International Economic Journal, Taylor & Francis Journals, vol. 25(4), pages 655-680, December.
    28. De Santis, Roberto A. & Lührmann, Melanie, 2009. "On the determinants of net international portfolio flows: A global perspective," Journal of International Money and Finance, Elsevier, vol. 28(5), pages 880-901, September.
    29. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc.
    30. Roberto Meurer, 2016. "Portfolio Investment Flows, GDP, and Investment in Brazil," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(12), pages 1-9, December.
    31. Sarno, Lucio & Tsiakas, Ilias & Ulloa, Barbara, 2016. "What drives international portfolio flows?," Journal of International Money and Finance, Elsevier, vol. 60(C), pages 53-72.
    32. Opperman, Pieter & Adjasi, Charles Komla Delali, 2017. "The determinants of private capital flow volatility in Sub-Saharan African countries," Research in International Business and Finance, Elsevier, vol. 42(C), pages 312-320.
    33. El. Thalassinos & Th. Kiriazidis, 2003. "Degrees Of Integration In International Portfolio Diversification: Effective Systemic Risk," European Research Studies Journal, European Research Studies Journal, vol. 0(1-2), pages 119-130, January -.
    34. Virender Kumar, 2018. "Dynamics Of Private Capital Flows To India: A Structural VAR Approach," Journal of Developing Areas, Tennessee State University, College of Business, vol. 52(4), pages 129-149, October-D.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Godfrey Marozva & Patricia Lindelwa Makoni, 2021. "The nexus between bond liquidity, stock liquidity and foreign portfolio investment," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 10(3), pages 92-103, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Monica Singhania & Neha Saini, 2018. "Determinants of FPI in Developed and Developing Countries," Global Business Review, International Management Institute, vol. 19(1), pages 187-213, February.
    2. Boonman, Tjeerd, 2023. "Have drivers of portfolio capital flows changed since the Global Financial Crisis?," MPRA Paper 116507, University Library of Munich, Germany.
    3. Boonman, Tjeerd M., 2023. "Portfolio capital flows before and after the Global Financial Crisis," Economic Modelling, Elsevier, vol. 127(C).
    4. Förster, Marcel & Jorra, Markus & Tillmann, Peter, 2014. "The dynamics of international capital flows: Results from a dynamic hierarchical factor model," Journal of International Money and Finance, Elsevier, vol. 48(PA), pages 101-124.
    5. Mina, Wasseem, 2012. "Beyond FDI: The Influence of Bilateral Investment Treaties on Debt," MPRA Paper 51920, University Library of Munich, Germany.
    6. Rogelio V. Mercado, 2023. "Bilateral capital flows: Gravity, push and pull," International Finance, Wiley Blackwell, vol. 26(1), pages 36-63, April.
    7. Hattari, Rabin & S. Rajan, Ramkishen, 2011. "How Different are FDI and FPI Flows?: Distance and Capital Market Integration," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 26, pages 499-525.
    8. Mina, Wasseem, 2015. "Political risk guarantees and capital flows: The role of bilateral investment treaties," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 9, pages 1-38.
    9. Akisik, Orhan, 2020. "The impact of financial development, IFRS, and rule of LAW on foreign investments: A cross-country analysis," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 815-838.
    10. Caporale, Guglielmo Maria & Menla Ali, Faek & Spagnolo, Fabio & Spagnolo, Nicola, 2022. "Cross-border portfolio flows and news media coverage," Journal of International Money and Finance, Elsevier, vol. 126(C).
    11. Patricia Lindelwa Makoni, 2018. "FDI and FPI Determinants in Developing African Countries," Journal of Economics and Behavioral Studies, AMH International, vol. 9(6), pages 252-263.
    12. Muhammad Afaq Haider & Muhammad Asif Khan & Shamila Saddique & Shujahat Haider Hashmi, 2017. "The Impact of Stock Market Performance on Foreign Portfolio Investment in China," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 460-468.
    13. Kunofiwa Tsaurai & Daniel Makina, 2018. "The Impact of Financial Sector Development on Foreign Direct Investment: An Empirical Study on Minimum Threshold Levels," Journal of Economics and Behavioral Studies, AMH International, vol. 10(5), pages 244-254.
    14. Rabin Hattari & Ramkishen S. Rajan, 2011. "How Different are FDI and FPI Flows?: Does Distance Alter the Composition of Capital Flows?," Working Papers 092011, Hong Kong Institute for Monetary Research.
    15. Yamamoto, Shugo, 2020. "Banking Network Multiplier effects on cross-border bank inflows," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 493-507.
    16. Tricia Mangal & Day-Yang Liu, 2020. "The impact of economic freedom on foreign portfolio investments: The case of the Caricom single market and economy," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 9(2), pages 213-222, March.
    17. Pham Ngoc-Tham & Pham Trung-Kien & Cao Viet Hieu & Tran Ha Giang & Vo Xuan Vinh, 2020. "The Impact of International Trade on Environmental Quality: Implications for Law," Asian Journal of Law and Economics, De Gruyter, vol. 11(1), pages 1-12, April.
    18. Jorge Lorca, 2021. "Capital Flows and Emerging Markets Fluctuations," Working Papers Central Bank of Chile 898, Central Bank of Chile.
    19. Eller, Markus & Huber, Florian & Schuberth, Helene, 2020. "How important are global factors for understanding the dynamics of international capital flows?," Journal of International Money and Finance, Elsevier, vol. 109(C).
    20. Jithin P & Suresh Babu M, 2022. "Does foreign direct investments in financial services induce financial development? Lessons from emerging economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4399-4411, October.

    More about this item

    Keywords

    FPI; real exchange rate; capital openness; panel data.;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ers:ijebaa:v:viii:y:2020:i:2:p:100-113. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Marios Agiomavritis (email available below). General contact details of provider: https://ijeba.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.