Foreign Investments and Market Capitalization in Nigeria: A VECM Analysis

Abstract

A healthy capital market promotes the overall economic wellbeing of a country. However, Nigeria’s capital market has witnessed both internal and external pressures leading to high rate of volatility. This study examines the impact of foreign investments on market capitalization in Nigeria’s capital market for the period 1981 to 2022. The study is anchored on the theoretical framework of capital movement across regions and seeks to explain why investors invest in foreign countries and the impacts of such investments on the host country’s capital market. We adopted a vector error correction model (VECM) as our analytical tool. The ontrol variables: exchange rate, infrastructure, interest rate, and the target variables: foreign direct investment (FDI) and foreign portfolio investment (FPI) were regressed on market capitalization. Results indicate that FDI and FPI had positive and significant impact on market capitalization in Nigeria’s capital market and that FDI and market capitalization are the major contributors to the variations in market capitalization in Nigeria’s capital market. We conclude that FDI and FPI play important roles in Nigeria’s capital market performance and recommend incentives such as tax reduction and fee waivers which are capable of encouraging foreign enterprises listing. These will make Nigeria’s capital market globally attractive to foreign investors and hence ensure a continuous and impactful inflow.