Challenges in the Era of Globalization - iaabd

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Proceedings of the 12th Annual Conference © 2011 IAABD capital flows (mainly foreign direct investments and foreign portfolio investments). Their model explains why developing countries tend to attract FDIs whilst developed countries attract more FPIs, as well as why FPIs are subject to sharper reversals compared to FDIs amongst others. The literature identifies both push and pull factors that determine the quantities of portfolio investments. The pull factors are the factors that exist in the host country that make it conducive and attractive for foreign portfolio investors to invest in that country. The push factors are factors external to the host country that entice foreign investors to invest outside of their home countries. The host country therefore has control over the pull factors as it can develop policies to either encourage or discourage foreign portfolio investments provided it knows the determinants of such inflows. Host governments have less control over the push factors since these usually are not related to conditions in the host country. According to Singh and Weisse (1998) the push factors include low interest rates in the United States, lower growth prospects in developed countries and the increasing desire of institutional investors to diversify their portfolios. The pull factors on the other hand include the economic, legal, political and regulatory environments in the host country. Baek (2008) studies the determinants of portfolio investments in Latin America and Asia. Their study explores the role of both pull and push factors in explaining portfolio investments in these two regions. The results of their study suggest that the determinants of portfolio investments in Latin America are based more on pull factors. Portfolio investments in Latin America were found to be driven mainly by strong domestic economic growth and is pushed by global financial factors but not changes in market sentiment. Portfolio investments into Asia however were based on external or push factors including investors’ appetite for risk suggesting the existence of ‘hot money’. Stock markets are important for several reasons. They enable companies to raise funds and allow investors to invest in projects which may have a longer horizon than their investment horizon. This is because the stock market provides liquidity to such investors therefore promoting savings, investment and ultimately economic growth. Apart from the role of supplying capital to an economy, stock markets have an important role of transmitting information that is useful for creditors (Abor and Biekpe, 2006). Theoretically therefore stock markets at least in the long-run should promote economic growth. Portfolio investments in theory can lead to the development of the domestic stock market. Some proponents in the finance-growth literature debate argue that stock market development can lead to economic growth. If this is the case, then portfolio investments can lead to more stock market development and therefore more economic growth. According to Pal (2006), one of the most important benefits of FPI is that it gives an upward thrust to domestic stock market prices which increases the P/E ratios of firms and therefore lowers the cost of finance. The beneficial effects of FPI are crucially dependent on the assumptions that well functioning stock markets promote economic development and that international portfolio investors are guided by economic fundamentals (Pal, 2006). Due to the fact that opening up and liberalizing an economy used to be viewed negatively in the past, several governments put in measures to deter capital flows especially portfolio investments. Some of these factors include a differential treatment of foreign investors compared to resident investors. Others include a higher level of taxation on capital gains and dividends, restriction on taking out invested funds, restrictions as to how much a single foreign investor and the aggregate of foreign investors can invest in a single company, restrictions as to the kind of instruments that foreign investors can invest in amongst others. According to Demirguc-Kunt and Huizinga (1995) restrictions on portfolio investments such as foreign ownership restrictions and restrictions on dividend and capital returns have generally been reduced. Demirguc-Kunt and Huizinga find that such restrictions in the form of higher capital gains tax tend to increase the cost of equity capital for domestic firms and therefore may hurt domestic companies. Therefore portfolio investments can reduce the cost of capital for domestic firms whilst restrictions on portfolio investments can serve to increase the cost for domestic companies. 808
Methodology Challenges in the Era of Globalization Edited by Emmanuel Obuah Data The definitions of the variables used and their sources are presented in Appendix One. We use an unbalanced data set covering the period 1990 – 2007. Our sample consists of 13 countries due to the availability and sufficiency of data Empirical Model The basic model which we employ in our empirical estimations is specified as follows 8 ; ........................................................................................................ (1) where which is the dependent variable represents the log of foreign equity portfolio investment flows. is a vector of independent variables. represents the composite error term. In this paper, we model the pull factors that are likely to determine the quantum of portfolio investments that a country receives. These are economic stability, political stability, income and savings levels, institutional quality, capital account openness and exchange rate volatility. Empirical Results and Discussion In this section we present and discuss our empirical results. Regression Results We now present and discuss the results from our empirical estimations. The results are presented in Table 1. Models 1 -3 are estimated using a robust panel random effects regression which controls for crosssectional heteroskedasticity and within panel serial correlation. The only significant variables in all three estimations are the stock market development indicators. Specifically, we find that the market capitalization ratio, stock market turnover and the number of listed firms are positive and significant in explaining the level of foreign equity investment flows. Of the stock market development indicators, the strongest predictor of foreign equity portfolio investment flows is the market capitalization ratio. Due to the potential endogeneity between our stock market indicators and portfolio investments, we also estimate an instrumental variable model.. The results from the instrumental variable random effects panel regression is presented in Model 4. Again the only significant determinant of foreign equity portfolio investment flows in this model is the stock market capitalization ratio. The magnitude of the coefficient of the market capitalization ratio is similar to that obtained in the panel regression estimation. We use the first lag of the market capitalization ratio as an instrument in this estimation. The first stage regression results which we do not report suggest the instrument employed is valid. Table 1 – Determinants of Foreign Equity Portfolio Investment Flows Xtreg(1) Xtreg(2) Xtreg(3) Xtivreg(4) Marketcapgdp 3.5189 3.8463 (7.97)*** (6.20)*** 8 To check for the robustness of our results we also estimate a panel instrumental variable model, and a stepwise regression 809
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Table of Contents Challenges in the
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Lennart Bangens, Goteborg, Sweden C
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Local Steering Committee Jacob Musi
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Track 1: Accounting, Finance, and I
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Abstract Challenges in the Era of G
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Abstract Determinants of Bank Lendi
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Empirical Results Challenges in the
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Table 3 Determinants of Competitive
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Research Findings Challenges in the
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Abstract: Study on Africa Governmen
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Abstract Challenges of Oil Revenue
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Abstract On the Mitigation of Rever
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Assessment of pollutants in nigeria
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Conclusion Challenges in the Era of
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37. Provision of sound education fo
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Variable Coefficient Std. Error t-S
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Abstract The Changing Requirements
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The Model, Data and Variable Defini
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Abstract Gender, poverty and sustai
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Figure 1.1: Spread of directorships
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Single 18.1 Masters and above 35.3
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Source: Field survey, 2010 Table 3:
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Abstract Exploring Organisational R
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Table 1: A Summary of Operating Ban
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Discussion and Conclusion Challenge
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Relationship Commitment Total 1264.
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