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Foreign Portfolio Investment and Economic Growth Essay

The objectives of the research are: to identify the relationship between foreign portfolio investment and stock arrest return, inflation rate and stock market returns and to determine the direction of causality between foreign portfolio investment and stock market returns in Nigeria. The data were collected from Central Bank of Nigeria (CB) statistical bulletin. The data were consequentially analyzed using E-views statistical package.

The methodology used was multiple linear regression analysis to capture the impact of foreign portfolio investment and inflation rate on stock market returns, as well as Granger causality tests to determine the direction of causality between the variables. The results showed that foreign portfolio investment has a positive and significant impact on stock market returns while inflation rate has positive but insignificant impact on stock market returns.

In the case of causality test, evidence of the result showed that there is a unidirectional causality running from stock market returns to foreign portfolio investment in the economy, which in turn will foster stock market returns in Nigeria. We therefore recommend that policies that will attract foreign portfolio investment should be pursued in order to enhance stock market returns. Keywords: Capital market, Economic Growth, Inflation, Interest rate, All Share Index, Market Capitalization,

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Equity, Nigerian Stock Exchange.

Introduction Nigeria in the last few years had clamored for foreign portfolio investment in the country. This is believed to be a facilitator of economic growth and development, which leads to industrialization of the economy in the long run (Adele et al, 2004). Foreign portfolio investment means the purchase of shares in a foreign country where the investing party does not seek control over the investment. A portfolio investment typically takes the form of the purchase of equity (preference share) or overspent debt in a foreign stock market, or loans made to a foreign company.

Obviously the purchase of bonds issued by a company, which gives no voting rights, Foreign Portfolio Investment and Economic Growth By authentications (Boosters et al, 1996). Portfolio investment is a recent phenomenon in Nigeria. Up to the mid sass’s, Nigeria did not record any figure on portfolio investment (inflow or outflow) in her balance of payment account. The nil return on the inflow column of the account is attributable to the absence of foreign portfolio investors in the Nigerian economy.

This is largely because of the non-initialization of the country’s money and capital markets as well as the non-disclosure of information on the portfolio investments in foreign capital/money markets (Baden, 2004). Following a careful review of the consequences of the Exchange Control Act of 1962 on the economy, after some thirty three years of its operation, Nigerian authorities came to the conclusion that the Act had not brought the economy any substantial benefits.

The Act was Judged inimical to a market driven economy, new policy government had pursued since 1986, with the deregulation of the economy. While equity investment trickled into Nigeria as a result of the Exchange Control Act of 1962, Portfolio Investments dried up, because portfolio investments required an investment climate, which guarantees speedy “free entry’ and “free exit” of investment funds into and out of a country in a flash.

The investment climate in Nigeria engineered by the Exchange Control Act of 1962 did not guarantee the speedy mobility of funds across international borders. It took the authorities more than three decades to realize that protection of the economy in a world striving to dismantle economic frontiers had not aid off, and that the capital market being a major player in the manipulation of funds for investment has to be liberalized and modernized to enable it capture enough resources for the economy from within and from outside.

The Exchange Control Act of 1962 was identified as a major constraint on the growth of the Nigerian capital market. Accordingly the Act was blown away with gale force in 1995, by the strong wind of deregulation, which swept across the Nigerian Macro-economic policy arena, from the beginning of the last quarter of 1986 (Noon, 2002). The deregulation of securities pricing by SEC in 1993; the abolition in 1995 of both the Exchange Control Act of 1962 and the Nigerian Enterprises Promotion Decree (NYPD) of 1989, demanded the www. Sorts]urinals. Org 10 | Page The Impact Of Stock Market Returns On Foreign Portfolio Investment In Nigeria reorganization of the Nigerian Stock Exchange to make it more dynamic and mobile in the provision of adequate liquidity of investment bring up the operation of the exchange to international standard and attract foreign portfolio investors. Accordingly, Federal Government of Nigeria in March 1996 set up a panel on the

Nigerian Stock Exchange and , the panel’s term of reference include the reorganization of the Nigeria Stock Exchange to make it more dynamic, to recommend ways for modernizing the exchange to bring it up to international standard and to make other recommendations, which in the view of the panel, would strengthen the operation of the exchange, and position it to deal with the domestic and international capital market challenges to the coming millennium (Noon, 2002).

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