Date of Award

5-2018

Document Type

Honors Thesis

Degree Name

Bachelor of Arts

Department

Finance

Abstract

Foreign Direct Investment (FDI) flows have grown rapidly in size and importance in recent decades. They are an important source of capital in emerging markets and make up a significant proportion of GDP in many countries around the world. The international investment literature provides an extensive list of the impact of such capital flows, ranging from an increase in technological spillovers to a reduction in the market capitalization of the destination country’s stock market. This paper looks at one aspect of this broader research question. It examines the impact of FDI inflows on the size and liquidity of 14 developing country stock markets over the period 2007-2016. Using panel regressions, there is no significant impact of FDI inflows on the size and liquidity of the emerging stock markets but there is statistically negative contemporaneous impact of FDI inflows on market index returns. However, the possibility of a feedback effect or two-way causality between FDI inflows and stock market development suggest that an alternate methodology (VAR analysis or Granger Causality) may have been more appropriate.

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