International Financial Inflows and Economic Growth of Selected Emerging Markets: Panel Corrected Standard Error Approach

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ABSTRACT

International inflows of private capital consist majorly two components; Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). Myriads of studies especially in emerging markets have focused on either the determinants of FDI or its effect on economic growth thereby ignoring FPI which incidentally constitutes a larger share of total inflows to these economies. Therefore, this study aims to investigate the disaggregated effect of each component of inflows on economic growth. Using macro-level panel data from nine emerging markets selected from three regions; Africa, Asia, and Latin America, and the Caribbean (LAC). The Panel Corrected Standard Error (PCSE) model was utilized to estimate the data covering 1989 to 2018. The study found that both FDI and FPI had a positive coefficient but only FDI has a significant effect on the economic growth of the EMEs. Secondly, through the interaction of each component with the exchange rates, the study also found that the coefficients of the interacted terms turned out negative, indicating that the benefits accruable from the inflows can be eroded by poor macroeconomic policy design and implementation. It is therefore recommended that to achieve the much-needed growth expected from financial liberalization, policymakers of EME should, on one hand, encourage more inflow of FDI than FPI as currently experienced and other hand increase regulation on portfolio investors to prevent cyclical imbalance created when the massive exodus of their investment occurs.

KEYWORDS

Foreign Direct Investment, Foreign Portfolio Investment, Emerging Market Economies, Economic Growth, Volatility, Financial inflows

Cite this paper

Paulinus Ikechukwu Iyika, Alexander Ehimare Omankhanlen, Uwalomwa Uwuigbe. (2021) International Financial Inflows and Economic Growth of Selected Emerging Markets: Panel Corrected Standard Error Approach. International Journal of Environmental Science, 6, 293-308