Impact of Foreign Direct Investment on Development of Capital Market

Abstract

This research work examines the relationship between foreign direct investment and capital market development with specific reference to Nigeria; given the role of FDI in promoting economic growth in emerging economies of the world. The paper adopted the ADF unit root test and Johansen test co-integration test in assessing the secondary data obtained from the Central Bank of Nigeria statistical bulletin covering 1970 to 2019. The non existence of co-integration between FDI and market capitalization led to the OLS regression analysis which proved a significant relationship between FDI and market capitalization. Against this backdrop, it is an empirical precedent that FDI has a significant impact on capital market development. It is therefore suggested that deliberate and purposeful actions through government economic policies be taken to drive inflow of foreign direct investment into Nigeria. Nevertheless, over reliance on foreign direct investment as a way of stimulating economic growth, should be played down as it is not a viable option in the long run. This is revealed by the low beta weight and lack of co-integration of FDI. The study concludes that while inflow of FDI should be encouraged, through government policies, emphasis should be on the local investment in the long run.