Foreign Portfolio Investment and Capital Formation in Nigeria

Abstract

The study examined the effect of foreign portfolio Investment on capital formation in using time series data, econometric techniques like ADF Unit Root Test, Granger Causality test and ARDL Bound test were employed. Capital formation was modeled as the function of foreign equity investment and bond investment. The unit root test indicates that two variables are stationary at difference while the remaining is stationary at level. The Granger causality test result shows that there is no causal relationship between foreign portfolio investment and economic growth. The cointegration bound test, for long run relationship, indicated that there is long run relationship between foreign portfolio investment and economic growth at 1%, 5% and 10% levels of statistical significance. The error correction term (ECM-1) was significant with correct negative sign. The long-run regression of the ARDL model shows that the coefficient of the previous value of foreign equity investment is positive and statistically significant implying that the present value of foreign equity investment depends positively on its immediate past state. In other words, what drives the present value of capital formation into the country is its value. The coefficients of bond investment and gross fixed capital formation are positive and statistically significant implying that increase in bond investment increases gross fixed capital formation. From the findings, the study concludes significant relationship between foreign portfolio investment and capital formation in Nigeria. The study therefore recommends that the need for government to continue attracting foreign bond investment as it stimulates the capital formation channel towards enhancing output growth. The financial sector most especially the apex bank, should ensure proper mobilization of investible fund in the economy through high saving deposit rates and accessibility of such fund by private investor

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