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IMPACT OF FOREIGN DIRECT INVESTMENT ON STOCK MARKET GROWTH

CHAPTER ONE

INTRODUCTION

1.1    Background of the Study

The impact of foreign direct investment (FDI) on economic growth is a well-investigated issue by many economists over around the world especially in the developed countries, while it is less-studied especially in African countries. Foreign direct investment plays an important role in the performance of the economy as a whole. The FDI is expected to have spillover effects among all sectors in the economy of the host country, such as increasing the export of goods and services, importing advance technology, adopting new advanced production processes, decreasing the rate of unemployment by the job creation and increasing the fund and finance for the local investors. These spillover effects could be much higher in a particular business environment such as improved infrastructure stock, high level of human capital and developed financial sector.

The essence of foreign investment into an economy has generated interest among development experts on its desirability or otherwise. While some stress that though economic activities of a nation is a stimulator of growth and development, they believe that opening an economy to sudden inflow and outflow can destabilize sound economies and compel them to adopt fiscal policy measures capable of creating problems in the operations of their security market. Yet, others believe that foreign investment inflows have helped emerging economies to benefit from research and development from advanced economies which had assisted their industrialization efforts as well as boosting their stock market activities, just as the gains from the development in the stock market has also encouraged the inflow of foreign investment. These issues are important for the efficient management of policy, as one can observe that embedded in any form of foreign investment is the potential gains through R&D and potential dangers which developing nations most often lack the capacity to manage. Foreign investment can come either as foreign direct investment or foreign portfolio investment.

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