Challenges in the Era of Globalization - iaabd

Challenges in the Era of Globalization
Edited by Emmanuel Obuah
M2 0.0868 0.0993 0.1854 0.1833 0.0602 -0.0255
(0.46) (0.51) (0.95) (0.92) (0.33) (-0.08)
Privcr 0.1117 0.0611 0.0651 0.0782 -0.3602 0.1384
(0.96) (0.40) (0.96) (0.81) (-1.22) (1.01)
Mktcapgdp -0.0177 -0.1148 -0.0955 -0.0296
(-0.39) (-0.61) (-1.53) (-0.54)
Stmkturn -0.0003 0.0005
(-0.44) (0.12)
FPI * Finance 0.0041 -0.00004 0.0237 0.0049
(0.53) (-0.20) (1.72) (0.41)
Obs 34 34 30 30 34 34
No. of Countries 12 12 12 12 12 12
Wald chi2 1009*** 962*** 801*** 755*** 1137*** 948***
Sargan Test 14.69 13.73 10.66 10.01 13.56 13.65
Sargan p value 0.7419 0.7465 0.7765 0.7612 0.7571 0.7518
Notes: Z values are in parenthesis. ***, **, * indicate significant at 1%, 5%, and 10% respectively. FPI stands for
portfolio investment, Popsize stands for population size, Govexp stands for government expenditure, Prieduc stands
for primary education, Gfcf stands for gross fixed capital formation, Gdsgdp stands for the gross domestic savings
ratio to GDP, Goveff stands for government effectiveness, infras stands for infrastructure proxied by the number of
telephone lines per 1000 of the population, Open stands for trade openness, Kaopen is Chinn and Ito’s measure of
capital account openness, Privcr stands for private credit, Mktcapgdp is the market capitalization ratio, and Stmkturn
represents stock market turnover.
Some interesting results emerge from the empirical estimations. We do not find evidence that FPIs
contribute to economic growth on the African continent. This result still holds regardless of the
information conditioning set that we use as controls for economic growth. Therefore, we find that FPI on
its own does not autonomously influence economic growth. These results may be due to the fact that FPI
and good financial markets are needed for the growth impact of FPI to be felt. We therefore interacted
FPI with financial markets to confirm this hypothesis. Our results suggest that even when interacted with
financial markets, FPI does not significantly drive economic growth. One possible explanation for these
results is that even though FPI flows have increased, they are not sufficient to independently drive
economic growth. Further it seems that African financial markets have not been able to intermediate FPI
flows effectively and efficiently. This may account for the joint insignificance of FPI and financial market
indicators. The results also suggest that the link between financial markets especially the stock market and
the real economy may be weak. This may explain why financial markets are not able to transform the
insignificant effect of FPI into growth.
We performed several other experiments to explore whether other absorptive capacities are needed for the
positive growth impact of FPI to materialize. We do not report these results but they are available upon
request. We therefore follow the idea in Durham (2004) and interact FPI with capital account openness
and trade openness. We interact FPI with capital account openness since it is reasonable to expect that
countries with more open capital accounts will benefit more from FPI flows. However, like Durham
(2004) we admit that these concepts are less germane to FPI. Our findings from the empirical estimations
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