The association between foreign direct investment (FDI) and stock market development (SMD) is very crucial given the role of liquidity in the SMD process. However, this association can be affected by regulatory quality. Through the Calderon-Rossell model, this article explored the direct and conditional effects of FDI on SMD in five sub-Saharan African countries (Ghana, Mauritius, Namibia, Nigeria and South Africa) from 1996 to 2020. Regulatory quality was used as a moderator of the association between FDI and SMD. The pooled mean group strategy of the panel Auto Regressive Distributed Lag was implemented and findings suggested that FDI is positively and significantly related to SMD in the long-run. Furthermore, the conditional effect of regulatory quality on the association between FDI and SMD could not be established. This article has policy implications and contributed to the Calderon-Rossell model theoretical debate that liquidity improves SMD.
AbekaM. J., AndohE., GatsiJ. G., & KaworS. (2021). Financial development and economic growth nexus in SSA economies: The moderating role of telecommunication development. Cogent Economics and Finance, 9, 87–102.
2.
AberaW. H., GouderS., SheikM., & BoothR. (2019). Impacts of stock market performance on firms’ growth: With reference to South Africa. Financial Markets, Institutions and Risks, 3(1), 50–62.
3.
AbuA. J., OlalekanA. U., & AdekunleB. O. (2019). Impact of institutional factors on stock markets: Evidence from Sub-Saharan African Countries. International Journal of Development Strategies in Humanities, Management, and Social Sciences, 9(4), 186–202.
4.
AdamA. M., & TweneboahG. (2008). Foreign direct investment (FDI) and stock market development: Ghana evidence. (MPRA Paper 11261). University Library of Munich. https://mpra.ub.uni-muenchen.de/11261/
5.
AdegboyeF. B., OsabohienR., OlokoyoF. O., MatthewO., & AdediranO. (2020). Institutional quality, foreign direct investment, and economic development in sub-Saharan Africa. Humanities and Social Sciences Communications, 7(38), 1–9. https://doi.org/10.1057/s41599-020-0529-x1-9
6.
AdeyemiP., OlalereS., & OluyemiB. (2021). The macroeconomic determinants of capital market development in Nigeria (1986–2016). Quantum Journal of Social Sciences and Humanities, 2(1), 64–71. https://doi.org/10.55197/qjssh.v2i1.55
7.
AgyapongD., & BedjabengK. O. (2020). External debt stock, foreign direct investment and financial development Evidence from African economies. Journal of Asian Business and Economic Studies, 27(1), 81–98. https://doi.org/10.1108/JABES-11-2018-0087
8.
AhmedS., & ZlateA. (2014). Capital flows to emerging market economies: A brave new world?Journal of International Money and Finance, 48, 221–248. https://doi.org/10.1016/j.jimonfin.2014.05.015
9.
AhnS. C., & SchmidtP. (1995). Efficient estimation of models for dynamic panel data. Journal of Econometrics, 68, 29–52.
10.
Al SammanH., & JamilS. A. (2018). The Impact of foreign direct investment (FDI) on stock market development in GCC countries. Pertanika Journal of Social Science and Humanities, 26(3), 2085–2100.
11.
AndersonT. W., & HsiaoC. (1982). Formulation and estimation of dynamic models using panel data. Journal of Econometrics, 18(1), 47–82.
12.
AnetorF. O. (2019). Economic growth effect of private capital inflows: A structural VAR approach for Nigeria. Journal of Economics and Development, 21(1), 18–29. https://doi.org/10.1108/JED-06-2019-0009
13.
Anthony-OrjiO. I., OrjirA., & OgbuaborJ. E. (2018). Analysis of stock market development, foreign private investment and economic growth in Nigeria. Journal of Infrastructure Development, 10(1–2), 1–17. https://doi.org/10.1177/0974930618773254
14.
ArayssiM., FakihA. & KassemM. (2018). Government and financial institutional determinants of development in MENA countries. Emerging Markets Finance and Trade, 1–24. https://doi.org/10.1080/1540496X.2018.1507907
15.
ArellanoM. (1989). A note on the Anderson-Hsiao estimator for panel data. Economics Letters, 31(4), 337–341.
16.
ArellanoM., & BoverO. (1995). Another look at the instrumental variable estimation of error components models. Journal of Econometrics, 68(1), 29–51.
17.
ArestisP., DemetriadesP. O., & LuintelK. B. (2001). Financial development and economic growth: The role of stock markets. Journal of Money, Credit and Banking, 33(1), 16–41.
18.
Azman-SainiW. N. W., LawS. H., & AhmadA. H. (2010). FDI and economic growth: New evidence on the role of financial markets. Economics Letters, 107, 211–213. https://doi.org/10.1016/j.econlet.2010.01.027
19.
BarajasA., ChamiR., & YousefS. R. (2013). The finance and growth nexus re-examined: Do all countries benefit equally? (IMF Working Paper WP/13/130).
20.
BarbieriL. (2006). Panel unit root tests: A review. Serie Rossa: Economia-Quaderno, 43, 1–53.
21.
BayarY. (2017). Foreign capital inflows and stock market development in Turkey. In ProcházkaD. (Ed.), New trends in finance and accounting (pp. 70–91). Springer Proceedings in Business and Economics. https://doi.org/10.1007/978-3-319-49559-0_7
22.
BayraktarN. (2014). Measuring relative development level of stock markets: capacity and effort of countries. Borsa Istanbul Review, 14(2), 74–95. http://dx.doi.org/10.1016/j.bir.2014.02.001
23.
BeckT., LevineR., & LoayzaN. (2000). Finance and the sources of growth. Journal of Financial Economics, 58(1–2), 261–300. https://doi.org/10.1016/S0304-405X(00)00072-6
24.
BelloU., ZubairuU., & IbrahimU. A. (2022). Impact of capital market performance on economic growth in developing nations: A qualitative approach. Journal of Service Science and Management, 15, 340–349. https://doi.org/10.4236/jssm.2022.153020
25.
BhattaraiJ. K., GautamR., & ChettriK. K. (2021). Stock market development and economic growth: Empirical evidence from Nepal. Global Business Review. https://doi.org/10.1177/09721509211016818
26.
BibiR., & SumairaK. (2022). The effect of foreign direct investment and financial development on economic growth: Evidence from global income countries. Journal of Environmental Science and Economics, 36–51. https://doi.org/10.56556/jescae.v1i1.5
27.
Brafu-InsaidooW. G., & BiekpeN. (2014). Determinants of foreign capital flows: The experience of selected sub-Saharan African countries. Journal of Applied Economics, 17(1), 63–88. https://doi.org/10.1016/S1514-0326(14)60003-9
28.
BreitungJ. (2001). The local power of some unit root tests for panel data. In Nonstationary panels, panel cointegration, and dynamic panels (pp. 161–177). Emerald Group Publishing Limited.
29.
BreitungJ., & DasS. (2005). Panel unit root tests under cross-sectional dependence. Statistica Neerlandica, 59(4), 414–433.
30.
BuchananB.G., LeQ.V., & RishiM. (2012). Foreign direct investment and institutional quality: Some empirical evidence. International Review of Financial Analysis, 21, 81–89. doi:10.1016/j.irfa.2011.10.001
31.
Calderon-RossellR. J. (1991). The determinants of stock market growth. In Ghon RheeS. & ChangRosita P. (Eds.), Pacific Basin Capital Markets Research Proceeding. Second Annual Pacific Basin Finance Conference, 4–6June1991.
32.
ChambersD., & MunemoJ. (2019). Regulations, institutional quality and entrepreneurship. Journal of Regulatory Economics, 55(1), 46–66. https://doi.org/10.1007/s11149-019-09377-w
33.
ChamiR., FullenkampC., & SharmaS. (2010). A framework for financial market development. Journal of Economic Policy Reform, 13(2), 107–135. http://dx.doi.org/10.1080/17487871003700804
34.
ChhimwalB., & BapatV. (2020). Impact of foreign and domestic investment in stock market volatility: Empirical evidence from India. Cogent Economics & Finance, 8, 1–14. https://doi.org/10.1080/23322039.2020.1754321
35.
ChoongC., BaharumshahA. Z., YusopZ., & HabibullahM. S. (2010). Private capital flows, stock market and economic growth in developed and developing countries: A comparative analysis. Japan and the World Economy, 22, 107–117. https://doi.org/10.1016/j.japwor.2009.07.001
36.
CihakM., Demirguc-KuntA., FeyenE., & LevineR. (2012). Benchmarking financial development around the world. (Working Paper No. 6175). World Bank.
37.
ClaessensS., Demirgüç-KuntA., & HuizingaH. (2001). How does foreign entry affect the domestic banking market?Journal of Banking & Finance, 25(5), 891–911. https://doi.org/10.1016/S0378-4266(00)00102-3
38.
Demirguc-KuntA., & LevineR. (1996). Stock market development and financial intermediaries: Stylized facts. World Bank Economic Review, 10(2), 291–321.
39.
DibalH. S., IyortsuunA. S., & HarunaH. A. (2021). Asymmetric impact of financial market development on entrepreneurship in Nigeria. In NgoV. D., NguyenD. K., & NguyenN. T. (Eds.) Entrepreneurial Finance, Innovation and Development (pp. 160–187). Routledge. http://dx.doi.org/10.4324/9781003134282-10
40.
El-WassalA. K. (2005). Understanding the growth in emerging stock markets. Journal of Emerging Market Finance, 4, 227–261.
41.
GarciaV. F., & LiuL. (1999). Macroeconomic determinants of stock market development. Journal of Applied Economics, II(1), 29–59.
42.
GebrehiwotA., EsfahaniN., & SayimM. (2016). The relationship between FDI and financial market development: The case of Sub-Saharan African Region. International Journal of Regional Development, 3(1), 64–80. https://doi.org/10.5296/ijrd.v3i1.8592
43.
GomezE., MurciabA., & ZamudioaN. (2014). Foreign debt flows and the credit market: A principal agent approach. Ensayos sobre Política Económica, 32(73), 87–103. http://zl.elsevier.es
44.
GreenwoodJ., & SmithB. D. (1997). Financial markets in development, and the development of financial markets. Journal of Economic Dynamics and Control, 21(1), 145–181. https://doi.org/10.1016/0165-1889(95)00928-0
45.
HarrisR. D. F., & TzavalisE. (1999). Inference for unit roots in dynamic panels where the time dimension is fixed. Journal of Econometrics, 91, 201–226.
46.
HausmanJ. A. (1978). Specification tests in Econometrics. Econometrica, 46, 1251–1271.
47.
HausmannR., & Fernandez-AriasE. (2000). Foreign direct investment: Good cholesterol?(Working Paper Series, 417). Inter-American Development Bank and Inter-American Investment Corporation.
48.
HoS. Y. (2018). The macroeconomic determinants of stock market development: Experience from two Asian countries. [Unpublished doctoral dissertation]. University of South Africa.
49.
HoS. Y. (2019). The macroeconomic determinants of stock market development in Malaysia: An empirical analysis. Global Business and Economic Review, 21(2), 174–193.
50.
HoS.Y., & IykeB.N. (2017). Determinants of stock market development: A review of the literature. Studies in Economics and Finance, 34(1), 143–164. https://doi.org/10.1108/SEF-05-2016-0111
51.
IganD., KutanA. M., & MirzaeiA. (2016). Real effects of capital inflows in emerging markets. (IMF Working Paper, WP/16/235).
52.
JoshuaU., BabatundeD., & SarkodieS. A. (2021). Sustaining economic growth in Sub-Saharan Africa: Do FDI inflows and external debt count?Journal of Risk and Financial Management, 14, 146. https://doi.org/10.3390/jrfm14040146
53.
KaufmannD., KraayA., & MastruzziM. (2010). The worldwide governance indicators: Methodology and analytical issues. (Policy Research Working Paper No. 5430). World Bank.
54.
KeaneM., & RunkleD. (1992). On the estimation of panel data models with serial correlation when instruments are not strictly exogenous. Journal of Business and Economic Statistics, 10, 1–9.
55.
KhatunR., & BistJ. P. (2019). Financial development, openness in financial services trade and economic growth. International Trade, Politics and Development, 3(2), 42–65.
56.
LeA. H., & KimT. (2021). The impact of institutional quality on FDI Inflows: The evidence from capital outflow of Asian Economies. Journal of Asian Finance, Economics and Business, 8(8), 0335–0343. http://dx.doi.org/10.13106/jafeb.2021.vol8.no8.0335
57.
LevinA., LinC. F., & ChuC. S. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1–24. https://doi.org/10.1016/S0304-4076(01)00098-7
58.
LevineR. (2004). Finance and growth: theory and evidence. National Bureau of Economic Research (NBER). (Working Paper 10766). http://www.nber.org/papers/w10766
59.
LevineR., & ZervosS. (1996). Stock market development and long-run growth. (The World Bank Policy Research Working Paper 1582).
60.
LiT. Y., Azman-SainiW. N. W., & HookL. S. (2014). FDI and growth: The role of institutional quality. Prosiding Persidangan Kebangsaan Ekonomi Malaysia, 9, 582–588.
61.
MakoniP. L. (2020). Foreign portfolio investments, exchange rates and capital openness: A panel data approach. International Journal of Economics and Business Administration, 8(2), 100–113.
62.
MatadeenS. J. (2017). The macroeconomic determinants of stock market development from an African perspective. Theoretical Economics Letters, 7, 1950–1964. https://doi.org/10.4236/tel.2017.77132
63.
MenegakiA. N., & TugcuC. T. (2017). Energy consumption and sustainable economic welfare in G7 countries; A comparison with the conventional nexus. Renewable and Sustainable Energy Review, 69, 892–901. https://doi.org/10.1016/j.rser.2016.11.133
64.
MilevaE. (2008). The impact of capital flows on domestic investment in transition economies. (ECB Working Papers Series No. 871). http://ssrn.com/abstract_id=1090546
65.
NaceurS. B., & GhazouaniS. (2007). Stock markets, banks, and economic growth: Empirical evidence from the MENA region. Research in International Business and Finance, 21(2), 297–315.
66.
NagarajP., & ZhangC. (2019). Regulatory quality, financial integration and equity cost of capital. Review of International Economics, 27(3), 916–935. https://doi.org/10.1111/roie.12403
67.
NaikP. K., & PadhiP. (2015). On the linkage between stock market development and economic growth in emerging market economies: dynamic panel evidence. Review of Accounting and Finance, 14(4), 363–381.
68.
NgongC. A., ThaddeusK. J., AsahL. T., IbeG. I., & OnwumereJ. U. J. (2022). Stock market development and agricultural growth of emerging economies in Africa. Journal of Capital Markets Studies, 6(2), 185–202. https://doi.org/10.1108/JCMS-12-2021-0038
69.
NguyenV. B. (2020). FDI and stock market development in developing countries: The role of governance environment. Chiang Mai University Journal of Economics, 24(2), 17–37.
70.
NxumaloI. S., & MakoniP. L. (2021). Analysis of international capital inflows and institutional quality in emerging markets. Economies, 9(179), 1–16. https://doi.org/10.3390/economies9040179
71.
ObadanM. I. (2004). Foreign capital flows and external debt: Perspectives on Nigeria and the LDCs Group. Broadway Press Ltd.
72.
OlugbengaA. A., & GraceO. O. (2015). Impact of foreign direct investment on Nigerian capital market development. International Journal of Academic Research in Accounting, Finance and Management Science, 5(1), 136–144. http://dx.doi.org/10.6007/IJARAFMS/v5-i1/1503
73.
PesaranM., & ShinY. (1998). An autoregressive distributed-lag modelling approach to cointegration analysis. In StromS. (Ed.), Econometrics and economic theory in the 20th century: The Ragnar Frisch Centennial (Econometric Society Monographs, pp. 371–413). Cambridge University Press.
74.
PesaranM. H., ShinY., & SmithR. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94, 621–634.
75.
PesaranM. H., ShinY., & SmithR. P. (2001). Bounds testing approaches to the analysis of level relationship. Journal of Applied Econometrics, 16, 289–326. https://doi.org/10.1002/jae.616
76.
PesaranM. H., & SmithR. (1995). Estimating long-run relationships from dynamic heterogeneous panels. Journal of Econometrics, 68, 79–113. https://doi.org/10.1016/0304-4076(94)01644-F
77.
RazaS. A., JawaidS. T., AfshanS., & AbdKarimM. Z. (2015). Is stock market sensitive to foreign capital inflows and economic growth? Evidence from Pakistan. Journal of Chinese Economic and Foreign Trade Studies, 8(3), 142–164. https://doi.org/10.1108/JCEFTS-03-2015-0012
78.
RoodmanD. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal, 9(1), 86–136.
79.
SehrawatM., & GiriA. K. (2017). A sectoral analysis of the role of stock market development on economic growth: Empirical evidence from Indian economy. Global Business Review, 18(4), 911–923. https://doi.org/10.1177/0972150917692242
80.
ShahbazM., LeanH. H., & KalimR. (2013). The impact of foreign direct investment on stock market development: Evidence from Pakistan. Economic Research-Ekonomska Istraživanja, 26(1), 17–32. https://doi.org/10.1080/1331677X.2013.11517588
81.
SharifS. (2019). How foreign investors influence stock markets? The Saudi Arabian experience. Middle East Development Journal, 1–19. https://doi.org/10.1080/17938120.2019.1583511
82.
SoumareI., & Tchana TchanaF. (2015). Causality between FDI and financial market development: Evidence from emerging markets. The World Bank Economic Review, 29(1), 205–216. https://doi.org/10.1093/wber/lhv015
83.
TodaroM. P., & SmithS. C. (2011). Economic Development (11th ed.). Addison-Wesley.
84.
TongH., & WeiS. (2011). The composition matters: Capital inflows and liquidity crunch during a global economic crisis. The Review of Financial Studies, 24(6), 2023–2052. https://doi.org/10.1093/rfs/hhq078
85.
TsagkanosA., SiriopoulosC., & VartholomatouK. (2017). Foreign direct investment and stock market development: Evidence from, a ‘new’ emerging market. Journal of Economic Studies, 46, 55–70. https://doi.org/10.1108/JES-06-2017-0154
86.
TugcuC. T. (2018). Panel data analysis in the energy-growth nexus (EGN). In MenegakiA. N. (Ed.), The economics and econometrics of the energy-growth nexus (pp. 255–271). Academic Press. https://doi.org/10.1016/B978-0-12-812746-9.00008-0
87.
WangM. L., NtimV. S., YangJ., ZengQ., & GengL. (2021). Effect of institutional quality and foreign direct investment on economic growth and environmental quality: Evidence from African countries. Economic Research-Ekonomska Istraživanja, 1–27. https://doi.org/10.1080/1331677X.2021.2010112
88.
WinfulE. C., SarpongD., & Agyei-NtiamoahJ. (2016). Relationship between institutional quality and stock market performance: Evidence from emerging economies. African Journal of Business Management, 10(19), 469–484.
89.
World Bank. (2020). World Bank Open Data. https://data.worldbank.org/
90.
YakubuI. N. (2020). Institutional quality and foreign direct investment in Ghana: A bounds-testing cointegration approach. Review of International Business and Strategy, 30(1), 109–122. https://doi.org/10.1108/RIBS-08-2019-0107
91.
YarteyC. A. (2010). The institutional and macroeconomic determinants of stock market development in emerging economies. Applied Financial Economics, 20(21), 1615–1625. http://dx.doi.org/10.1080/09603107.2010.522519
92.
ZhouJ., ZhaoH., BelingaT., & GaheZ. S. Y. (2015). Macroeconomic determinants of stock market development in Cameroon. International Journal of Scientific and Research Publications, 5(1), 1–11.
