The impact of international portfolio investment on economic growth: the case of selected African states

Abstract

The main aim of this study was to investigate the impact of foreign portfolio investment on economic growth in Africa.  The motivation to explore the effects of portfolio investment and growth stemmed from the fact that Africa has recorded large capital inflows since the global financial crisis. These capital flows can have positive or negative consequences. The effects of foreign portfolio investment on the African economy is an area of interest because very little has been done on the subject area. The study used quarterly panel from 1995 to 2014. The study used only five African countries; South Africa, Botswana, Kenya, Mauritius and Nigeria. These countries were chosen because they are in the top five of the African financial markets index. A GMM model was adopted to test the effects of portfolio flows on economic growth in the selected African states. Results showed that there is a weak relationship between portfolio investment and economic growth and that there is a positive relationship between INT and GDP. Results also show a positive relationship between EXCH and GDP in the long run.  A depreciation in the rand exchange rate is seen to be depressing economic growth. The study recommended that the Central Banks in African countries develop better strategies to enhance capital flows' benefits. This can be done by establishing and improving financial institutions which are still developing.