Portfolio investment outflow and the complementary role of direct investment

Abstract

Purpose – This paper aims to uncover potential contemporaneous relationship between foreign portfolio investment (FPI) and another popular type of cross-border investment outflow, namely, foreign direct investment (FDI). Design/methodology/approach – The relationship between FPI and FDI are modeled using simultaneous equations approach to take potential endogeneity in to account. In a panel of 45 countries over the period of 2001-2009, FPI and FDI are found to be strategically complimentary to each other. Findings – The two-stage least square estimates suggest existence of both statistically and economically significant relationship between these two types of outflows. In particular, the FDI outflow has empirically significant predictive power in explaining the FPI outflow. Similarly, the FPI outflow also has significant explanatory power for the observed level of FDI outflow. Second, the FPI has greater explanatory power for FDI outflow than the FDI for the FPI outflow. Originality/value – The authors believe that the paper would contribute to the relevant literature in terms of its originality and scope. The empirical findings of the paper have valuable policy implications.