The Link between Foreign Direct Investment and Stock Exchange Value
Keywords:
foreign direct investment; all share index; economic growth; stock market; monetary policyAbstract
Foreign direct investment is said to play a vital role in local economic growth, but research about its effect on stock market is scarce. Objective: The objective of this paper is to analyze the link between foreign direct investment and the Malaysian stock index value. Prior Work: The paper relies on the capital market theory and eclectic theory of foreign direct investment. Approach: the paper used a case of Malaysian stock market and captured secondary data from the Malaysian stock market archives. The paper applied a quantitative analysis and used the Augmented Dickey Fuller test and Granger causality tests in data analysis. Results: Findings from the statistical analysis showed that the stock market performance (measured by all share index) Granger cause FDI, but FDI did not prove to Granger cause all share index. Implications: The findings of this paper holds some economic policy implication for developing countries; policy makers should strengthen economic policies that favor the growth and positive performance of local stock exchange market as their performance would serve as a catalyst for attracting foreign direct investments. Value: the paper provides first empirical analysis to apply the Granger Causality tests to show that local stock market performance is key to foreign direct investment growth with a focus on Malaysian stock market; the paper recommends that future research should replicate this study in other emerging markets with more time series data with the inclusion of country differences.
References
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Magombeyi, M.T., & Odhiambo, N.M. (2017). Foreign Direct Investment and Poverty Reduction. Comparative Economic Research, 20(2), 74-89.
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Makoni, P.L. (2016). The role of financial market development in foreign direct investment and foreign portfolio investment in selected African economies. Doctoral thesis, Wits Business School, South Africa.
Masron, T. A., & Hassan, M. K. H. (2016). US foreign direct investment (FDI) and manufacturing sector in Malaysia. Asian Academy of Management Journal, 21(1), 89-110.
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Onyinyechi, O. C., & Ekwe, M. C. (2016). Impact of Foreign Direct Investment (FDI) On the Stock Market Performances in Nigeria (1985-2014). Applied Finance and Accounting, 3(1), 36-48.
Rahman, A. (2015). Impact of foreign direct investment on economic growth: Empirical evidence from Bangladesh. International Journal of Economics and Finance, 7(2), 178-185.
Rogmans, T., & Ebbers, H. (2013). The determinants of foreign direct investment in the Middle East North Africa region. International Journal of Emerging Markets, 8(3), 240-257.
Shahbaz, M., Hooi, L.H., & Kalim, R. (2013). The impact of foreign direct investment on stock market development: evidence from Pakistan. Economic research-Ekonomska istraživanja, 26(1), 17-32.
Soumaré, I., & Tchana,T.F. (2015). Causality between FDI and financial market development: Evidence from emerging markets. The World Bank Economic Review, 29(1), S205-S216.
Sulaiman M.U., & Ibrahim, M. (2010). Stock Market Development, Foreign Direct Investment and Macroeconomic Stability: Evidence from Nigeria. World, 62, 5-279.
United Nations Conference on Trade and Development (2016). World investment report 2016: Investor nationality: Policy challenges. New York, NY: United Nations. Retrieved from unctad.org/en/PublicationsLibrary/wir2016_en.pdf.
United Nations Conference on Trade and Development (2017). World investment report 2017. Retrieved from http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1782.
Vernon, R. (1966). "International Investment and International Trade in the Product Cycle." Quarterly Journal of Economics, 80, 190-207.
Zekarias, S. M. (2016). The Impact of Foreign Direct Investment (FDI) on Economic Growth in Eastern Africa: Evidence from Panel Data Analysis. Applied Economics and Finance, 3(1), 145-160.
Bhargava, A. (1986). "On the theory of testing for unit roots in observed time series". The Review of Economic Studies. 53 (3): 369–384.
Adegboye, F. B., Ojo, J. A., & Ogunrinola, I. I. (2016). Foreign Direct Investment and Industrial Performance in Africa. The Social Sciences, 11(24), 5830-5837.
Adejumo, A.V. (2013). Foreign direct investments and manufacturing sector performance in Nigeria,(1970-2009). Australian Journal of Business and Management Research, 3(4), 39-56.
Agu, O.C., & Okoli, T. T. (2015). Foreign direct investment flow and manufacturing sector performance in Nigeria. International Journal of Economics and Commerce Management, 3(7), 412-428.
Alege, P., & Ogundipe, A. (2014). Foreign direct investment and economic growth in ECOWAS: A system-GMM approach. Covenant Journal of Business and Social Sciences, 5(2), 1-22.
Ali, I. (2014). Impact of foreign direct investment on volatility of stock market (An Evidence from Pakistani Market). Journal of Business and Management, 16(1), 77-80.
Aliber, R.Z. (1970). A theory of direct foreign investment in Kindlebenger CP, (ed). Cambridge, MA, United States,The International Cooperation MT Press.
Alzaidy, G., Ahmad, M. N. B. N., & Lacheheb, Z. (2017). The Impact of Foreign-direct Investment on Economic Growth in Malaysia: The Role of Financial Development. International Journal of Economics and Financial Issues, 7(3), 382-388.
Arčabić, V., Globan, T., & Raguž, I. (2013). The relationship between the stock market and foreign direct investment in Croatia: evidence from VAR and cointegration analysis. Financial Theory and Practice, 37(1), 109-126.
Azam, M., & Ibrahim, Y. (2014). Foreign direct investment and Malaysia’s stock market: using ARDL bounds testing approach. Journal of Applied Economic Sciences, 4(30), 591-601.
Buckley, P.J. & Casson, M.C. (1976). The Future of the Multinational Enterprise. London, Homes & Meier.
Chia, R. C. J., Liew, V. K. S., Wafa, S. K., & Wafa, S. A. (2007). Day-of-the-week effects in Selected East Asian stock markets. Retrieved from: https://mpra.ub.uni-muenchen.de/7299/
Department of Statistics. (2015). Index of industrial production, Malaysia. Retrieved from https://www.dosm.gov.my/v1/index.php?r=column/cthemeByCat&cat=91&bul_id=UXBqd1ZoK3p6QkgyQVZobm1zMVdSZz09&menu_id=SjgwNXdiM0JlT3Q2TDBlWXdKdUVldz09.
Doytch, N. (2013). Foreign Capital and Stock Market Development--Do the Macro-and Microeconomic Studies Agree. Journal of Applied Economics & Business Research, 3(4), 222-231.
Dunning, J.H. (1979) ‘Explaining changing patterns of international production: In support of the eclectic theory’, Oxford Bulletin of Economics and Statistics, 41(4), 269-95.
Fadhil, M. A., & Almsafir, M. K. (2015). The role of FDI inflows in economic growth in Malaysia (time series: 1975-2010). Procedia Economics and Finance, 23, 1558-1566.
Global Competitiveness Report, (2017-2018). Retrieved from http://www3.weforum.org/docs/GCR20172018/05FullReport/TheGlobalCompetitivenessReport2017%E2%80%932018.pdf.
Handley, H. (2017). Malaysia’s FDI Outlook for 2017: Trends and Opportunities. Retrieved from https://www.aseanbriefing.com/news/2017/02/24/malaysia-fdi-2017.html.
Harris, R. S., & Ravenscraft, D. (1991). The role of acquisitions in foreign direct investment: Evidence from the US stock market. The Journal of Finance, 46(3), 825-844.
Hoque, M.E., & Yakob, N.A. (2017). Revisiting stock market development and economic growth nexus: The moderating role of foreign capital inflows and exchange rates. Cogent Economics & Finance, 5(1), 1-17.
Hymer, S.H. (1976). The international operations of national firms: A study of direct foreign investment. MA, MIT press Cambridge.
Ibrahim, M. I., Omar, Z. M., & Ali, Y. S. (2017). The Determinants of Foreign Direct Investment in Somalia. International Journal of Economics and Financial Issues, 7(3), 713-720.
Idenyi, O. S., Ifeyinwa, A. C., Obinna, N. J., & Promise, E. A. (2016). Impact of Foreign Direct Investment on Stock Market Growth in Nigeria. Asian Research Journal of Arts & Social Sciences, 1(2), 1-14.
Khalikov, U. (2016). Effect of Stock Market Performance in Investment Attraction and Capital Accumulation. European Journal of Business and Management, 8(11), 182-185.
Kumari, R., & Sharma, A.K. (2017). Determinants of foreign direct investment in developing countries: a panel data study. International Journal of Emerging Markets, 12(4), 658-682.
Kunal, K., & Phani, B.V. (2017). FDI Inflow, Stock Market Performance and Exchange Rate: Indian Scenario. International Journal of Accounting and Financial Reporting, 7(2), 148-171.
Magombeyi, M.T., & Odhiambo, N.M. (2017). Foreign Direct Investment and Poverty Reduction. Comparative Economic Research, 20(2), 74-89.
Makoni, P.L. (2015). An extensive exploration of theories of foreign direct investment. Risk Governance & Control: Financial Markets and Institutions, 5(2), 77-83.
Makoni, P.L. (2016). The role of financial market development in foreign direct investment and foreign portfolio investment in selected African economies. Doctoral thesis, Wits Business School, South Africa.
Masron, T. A., & Hassan, M. K. H. (2016). US foreign direct investment (FDI) and manufacturing sector in Malaysia. Asian Academy of Management Journal, 21(1), 89-110.
Msweli, P. (2015). The effect of foreign direct investment on inequality: The case of South Africa: Doctoral dissertation, Stellenbosch: Stellenbosch University.
Mundell, R.A. (1957). International trade and factor mobility. The American Economic Review, 47(3), 321-335.
Nayak, D., & Choudhury, R.N. (2014). A selective review of foreign direct investment theories, (No. 143), ARTNeT Working Paper Series. Retrieved from https://www.econstor.eu/bitstream/10419/103862/1/782793517.pdf.
Onyinyechi, O. C., & Ekwe, M. C. (2016). Impact of Foreign Direct Investment (FDI) On the Stock Market Performances in Nigeria (1985-2014). Applied Finance and Accounting, 3(1), 36-48.
Rahman, A. (2015). Impact of foreign direct investment on economic growth: Empirical evidence from Bangladesh. International Journal of Economics and Finance, 7(2), 178-185.
Rogmans, T., & Ebbers, H. (2013). The determinants of foreign direct investment in the Middle East North Africa region. International Journal of Emerging Markets, 8(3), 240-257.
Shahbaz, M., Hooi, L.H., & Kalim, R. (2013). The impact of foreign direct investment on stock market development: evidence from Pakistan. Economic research-Ekonomska istraživanja, 26(1), 17-32.
Soumaré, I., & Tchana,T.F. (2015). Causality between FDI and financial market development: Evidence from emerging markets. The World Bank Economic Review, 29(1), S205-S216.
Sulaiman M.U., & Ibrahim, M. (2010). Stock Market Development, Foreign Direct Investment and Macroeconomic Stability: Evidence from Nigeria. World, 62, 5-279.
United Nations Conference on Trade and Development (2016). World investment report 2016: Investor nationality: Policy challenges. New York, NY: United Nations. Retrieved from unctad.org/en/PublicationsLibrary/wir2016_en.pdf.
United Nations Conference on Trade and Development (2017). World investment report 2017. Retrieved from http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1782.
Vernon, R. (1966). "International Investment and International Trade in the Product Cycle." Quarterly Journal of Economics, 80, 190-207.
Zekarias, S. M. (2016). The Impact of Foreign Direct Investment (FDI) on Economic Growth in Eastern Africa: Evidence from Panel Data Analysis. Applied Economics and Finance, 3(1), 145-160.
Published
2020-09-21
How to Cite
Dzomonda, O., & Ngwakwe, C. (2020). The Link between Foreign Direct Investment and Stock Exchange Value : Array. EuroEconomica, 39(3). Retrieved from https://dj.univ-danubius.ro/index.php/EE/article/view/229
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