Determinants of Foreign Portfolio Investment: Evidence From Sub-Saharan Africa

Abstract

Motivated by the need to analyse the factors behind portfolio inflows of developing countries, this study aims to investigate the determinants of portfolio inflows (PI) of Sub-Saharan Africa (SSA). The study uses a panel data on 17 SSA countries over the period, 2005-2013. Net portfolio equity inflows as a percentage of Gross Domestic Product (GDP) is the dependant variable. The study employed a panel regression with domestic factors like market size, level of financial development, current account balance and trade openness. The explanatory variables like international interest rate and the growth rate of industrialised countries are also included as the external factors. By employing the Generalized Methods of Moment (GMM) dynamic panel estimation framework, the study finds that current account balance and financial development have negative relationship with portfolio inflows. The results also suggest that market size, past portfolio inflows and the growth rate of industrialised countries positively affect portfolio flows to SSA. We however found no significant impact of trade openness and international interest rate on portfolio flows to the sub-region. The study also investigates the impact of portfolio inflows on economic growth of SSA. Using the Vector Error Correction Model (VECM) over the period 2005-2013, finding revealed that, there is a long-run negative relationship running from portfolio inflows to economic growth. We also find no short-run relationship running from economic growth to portfolio inflows, but the reverse is true.