The Link between Foreign Direct Investment and Stock Exchange Value
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.
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