Open AccessDeterminants of Foreign Capital Inflows in Emerging Markets: The Role of Institutional Quality
Author(s) -
Immaculate Simiso Nxumalo,
Patricia Lindelwa Makoni
Publication year - 2021
Publication title -
journal of accounting and finance in emerging economies
Language(s) - English
Resource type - Journals
eISSN - 2519-0318
pISSN - 2518-8488
DOI - 10.26710/jafee.v7i3.1881
Subject(s) - emerging markets , foreign direct investment , openness to experience , capital market , portfolio investment , corporate governance , portfolio , foreign portfolio investment , institutional investor , panel data , business , economics , monetary economics , financial market , international economics , generalized method of moments , macroeconomics , finance , return on investment , open ended investment company , psychology , social psychology , production (economics) , econometrics
Purpose: The purpose of the study was to examine the key determinants of foreign direct investment (FDI) and foreign portfolio investment (FPI) in emerging market economies, with greater emphasis placed on the impact of institutional quality.
Design/Methodology/Approach: The study applied a panel data system generalised method of moments (GMM) model using annual data spanning the period 2007 to 2017, in respect of 12 emerging market economies. To measure institutional quality, the study adopted the Worldwide Governance Indicators, and constructed a composite index for institutional quality using the Principal Components Analysis (PCA) method.
Findings: The results revealed that FDI in the selected emerging markets was attracted by institutional quality and economic growth. Capital account openness, institutional quality and economic growth were positive determinants of FPI. However, stock market development stood out as the key determinant factor for foreign capital inflows.
Implications/Originality/Value: The implications of these findings are that, in their pursuit of foreign capital inflows, these emerging markets should continue to liberalise their economies and develop their financial markets. Importantly, such developments must be coupled with the strengthening of the formal governance institutions. Robust institutions would not only curb institutional weaknesses that deter international capital inflows, but would also insulate emerging markets from unfavourable effects of volatile capital flows.