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Determinants of Foreign Capital Inflows in Emerging Markets: The Role of Institutional Quality

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  • Nxumalo, Immaculate Simiso
  • Makoni, Patricia Lindelwa

Abstract

Purpose: The purpose of the study was to examine the key determinants of foreign direct investment (FDI) and foreign portfolio investment (FPI) in emerging market economies, with greater emphasis placed on the impact of institutional quality.Design/Methodology/Approach: The study applied a panel data system generalised method of moments (GMM) model using annual data spanning the period 2007 to 2017, in respect of 12 emerging market economies. To measure institutional quality, the study adopted the Worldwide Governance Indicators, and constructed a composite index for institutional quality using the Principal Components Analysis (PCA) method.Findings: The results revealed that FDI in the selected emerging markets was attracted by institutional quality and economic growth. Capital account openness, institutional quality and economic growth were positive determinants of FPI. However, stock market development stood out as the key determinant factor for foreign capital inflows.Implications/Originality/Value: The implications of these findings are that, in their pursuit of foreign capital inflows, these emerging markets should continue to liberalise their economies and develop their financial markets. Importantly, such developments must be coupled with the strengthening of the formal governance institutions. Robust institutions would not only curb institutional weaknesses that deter international capital inflows, but would also insulate emerging markets from unfavourable effects of volatile capital flows.&&&&& &&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&&

Suggested Citation

  • Nxumalo, Immaculate Simiso & Makoni, Patricia Lindelwa, 2021. "Determinants of Foreign Capital Inflows in Emerging Markets: The Role of Institutional Quality," Journal of Accounting and Finance in Emerging Economies, CSRC Publishing, Center for Sustainability Research and Consultancy Pakistan, vol. 7(3), pages 683-696, December.
    • Handle: RePEc:src:jafeec:v:7:y:2021:i:3:p:683-696
    DOI: http://doi.org/10.26710/jafee.v7i3.1881
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    Cited by:

    1. Francois Cornelius Wehncke & Patricia Lindelwa Makoni & Godfrey Marozva, 2022. "Nexus Between FDI, ODA and Economic Growth in Developing African Countries: A Systems Approach," Economic Research Guardian, Weissberg Publishing, vol. 12(2), pages 97-114, December.

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