Foreign Direct Investment and Stock Market Development in Selected SSA Countries

Abstract

This study examined the extent to which FDI translates into stronger stock market outcomes in selected SSA countries. The focus of stock market performance was on the size, liquidity and stability dimensions of the stock markets. A panel of seven SSA countries was considered for the period of 2000 to 2023. Using the PMG estimation framework, the study was able to distinguish between long-run equilibrium effects and short-run dynamic adjustments. The findings from the study show that FDI has a positive and significant long-run effect on market capitalization and stock market liquidity while it has a negative and significant effect on stock market volatility. These results indicate that FDI enhances capital market performance in SSA by expanding market size, improving liquidity and reducing instability. The short-run coefficients of FDI were however found to be highly insignificant across the three models. The study therefore recommends that regulatory authorities need to encourage foreign firms and large domestic affiliates to list on local exchanges and also to standards that improve investor protection.

Keywords: FDI, Size, Liquidity, Stability Dimensions and Market Capitalization.