The determinants of private capital flow volatility in Sub-Saharan African countries

Opperman, Pieter; Adjasi, Charles K.D.

doi:10.1016/j.ribaf.2017.07.146

Cited by 12 publications

(12 citation statements)

References 27 publications

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“…Global liquidity can be an important determinant of capital inflows to developing economies. In a study of SSAn countries, Opperman and Adjasi (2017) found global liquidity to be a significant determinant of the volatility of capital inflows as it lowers FDI volatility while increasing portfolio equity volatility. Like Forbes and Warnock (2012), global liquidity is measured as the year-on-year growth in the global money supply, with global money supply being the sum of broad money in the United States, Euro-zone, Japan The stance of monetary policy in advanced economies versus that in the domestic recipient economy is generally captured through interest rate differentials.…”

Section: Factors Influencing Capital Flows To Middle-income Ssamentioning

confidence: 99%

Capital flows to low-income sub-Saharan Africa: an exploratory review

Braiton

Odhiambo

2022

ITPD

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PurposeThe purpose of the paper is to examine macroeconomic and institutional factors that influence capital flows to low-income sub-Saharan African (SSAn) countries. It analyzes capital flows in a disaggregated manner: foreign divert investment, portfolio equity and portfolio debt. There is a gap in the empirical literature in examining the factors that are important for various types of capital flows to low-income SSAn countries. Low-income SSAn countries attract very low levels of foreign investment compared to other developing economies in the SSAn region and other developing economies and this paper attempts to make a contribution in this area.Design/methodology/approachThis paper examines data on capital flows and that of various push and pull factors. Trends and dynamics of capital inflows and their macroeconomic and institutional drivers are analyzed for low-income sub-Saharan African countries. Such an analysis has not been fully explored for low-income SSAn countries.FindingsCapital inflows to low-income sub-Saharan Africa (SSA) have increased sevenfold since the 1990s, dominated by foreign direct investment (FDI). They overtook official development assistance and aid in the 2010s. Mozambique and Ethiopia attract the largest size of FDI compared to other low-income SSAn economies, with natural resources as key factors in the former. The largest share of FDI to low-income SSAn countries comes from other SSAn countries, mostly South Africa and Mauritius. Among macroeconomic push factors, capital inflows are more closely related to commodity prices, while the volatility index and global liquidity are also important. Among macroeconomic pull factors, trade openness and economic growth appear more closely related to capital inflows. The surge in capital inflows in the 2000s also followed the implementation of several regional trade and investment agreements in the region. The improvement in internal conflict in the 1990s and mid-2000s seems to have helped support the increase in capital inflows during that period. This institutional quality variable appears to more closely track capital inflows compared to other institutional quality indicators. There were also improvements in the investment profile, law and order, and government stability in the 1990s to early 2000s when capital inflows picked up.Research limitations/implicationsThis study focuses on low-income SSAn countries, which are less studied in the empirical literature and that face immense developmental needs that require foreign and domestic capital.Practical implicationsFindings of this paper can shed light to policy makers on the factors that are most important to help the region attract capital inflows and areas where further improvement is needed in the macroeconomic and institutional environment.Originality/valueThere is a gap in the empirical literature in examining the factors that are important for attracting capital flows to low-income SSAn countries. To our knowledge, this study may be the first to explore dynamics of capital flows against institional quality for low-income SSAn countries at a disaggregated level.

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Section: Factors Influencing Capital Flows To Middle-income Ssamentioning

confidence: 99%

Capital flows to low-income sub-Saharan Africa: an exploratory review

Braiton

Odhiambo

2022

ITPD

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“…While many studies have investigated the determinants of FDI inflows, in particular to developing countries, very few studies (Buchanan et al, 2012;Vadlamannati, 2009) have considered the determinants of the volatility of FDI inflows, even though the determinants of the volatility of capital flows (including FDI and non-FDI flows) have received much more attention in the literature (recent studies include, for example, Broto et al, 2011;Caglayan et al, 2020;Li and Rajan, 2015;Neumann et al, 2009;Opperman et al, 2017;Yun, 2019).…”

Section: Model Specificationmentioning

confidence: 99%

“…At the same time, while the inward foreign direct investment (FDI) effect of development aid has also been investigated in many studies (Beladi and Oladi, 2006;Blaise, 2005;Donaubauer et al, 2016;Lee and Ries, 2016;Ly-My and Lee, 2019;Selaya and Sunasen, 2012), less attention has been paid to the effect of development aid volatility on the volatility of FDI inflows. This is exemplified by the few studies devoted to the determinants of FDI volatility (Buchanan et al, 2012;Vadlamannati, 2009), although relatively abundant literature has investigated the macroeconomic factors underpinning the volatility of capital flows (including FDI and non-FDI flows; Broto et al, 2011;Caglayan et al, 2020;Opperman et al, 2017;Yun, 2019). On another note, an extensive strand of the international business literature has dealt with FDI flows issues [2] (Battisti et al, 2019;Fisch and Schmeisser, 2020).…”

Section: Introductionmentioning

confidence: 99%

Effect of volatility of development aid on volatility of foreign direct investment inflows

Gnangnon

2020

RIBS

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Purpose This paper aims to examine the effect of development aid volatility on foreign direct investment (FDI) volatility in aid recipient countries. Design/methodology/approach The empirical analysis has relied on a sample of 117 countries over the period 1981–2016 and used the two-step system generalized methods of moments (GMM) approach. Findings The findings indicate that development aid volatility exerts a positive and significant effect on FDI volatility, with the magnitude of this positive effect rising as countries’ real per capita income increases. Furthermore, development aid volatility is non-linearly related to FDI volatility, as additional rises in the degree of development aid volatility further amplify FDI volatility. Research limitations/implications These outcomes highlight that volatility of development aid inflows enhances the volatility of FDI inflows. Thus, the enhancement of the aid coordination system between donor-countries and recipient-countries would not only help mitigate the volatility of aid – which reduces the macroeconomic effectiveness of aid – but also stabilizes FDI inflows to developing countries. Practical implications A limitation of the present paper is its reliance on aggregate FDI inflows to perform the analysis. Availability of data on greenfield FDI inflows and cross-border mergers and acquisitions FDI inflows over a long-time-period would provide an opportunity to conduct an in-depth analysis of the volatility of development aid on FDI inflows volatility. Furthermore, it could be interesting to investigate in the future (if data is available) the extent to which aid coordination systems between donor-countries and recipient-countries versus recipient-countries’ domestic factors contribute to explaining the dynamics of FDI inflows volatility in recipient-countries of these two types of capital flows. Originality/value To the best of the authors’ knowledge, this topic has not been addressed in the literature.

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“…They concluded that in the case of China, the real exchange rate had a positive and highly significant relationship with FPI flows; attributable to that the country does not engage in the trade of primary goods, hence, there is minimal fluctuation of the Chinese Yen. For Sub-Saharan African countries, Opperman and Adjasi (2017) found that the pull factors of real exchange rates and financial openness, although positive and significant, resulted in volatility of FPI inflows.…”

Section: Introductionmentioning

confidence: 99%

“…Foreign portfolio investment (FPI) ranks lower than foreign direct investment (FDI) in the international capital flows hierarchy. This is attributable to what Hattari and Rajan (2008) and Opperman and Adjasi (2017) refer to as "hot money", due to the reversibility and liquidity of FPI flows that are invested on the stock market. The pursuit of higher returns for international investors demands a stable macroeconomic environment characterised by low inflation, a stable exchange rate, capital openness and an optimistic outlook on economic growth.…”

Section: Introductionmentioning

confidence: 99%

Foreign Portfolio Investments, Exchange Rates and Capital Openness: A Panel Data Approach

Patrícia¹

2020

IJEBA

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The aim of this paper is to examine the effect of real exchange rate and capital openness on foreign portfolio investments, using a panel of nine African countries, after the global financial crisis in the period 2009-2016. Design/Methodology/Approach: We adopted a panel data approach, and more specifically data was analysed using the Fixed Effects model. The economic data was sourced from the World Bank database of development indicators, while we used Chinn and Ito's database for capital openness. Findings: Building on from the international finance and portfolio behaviour theories, the results show that real exchange rates, capital openness and the rate of inflation have a negative relationship with FPI inflows. On the contrary, the lag of FPI, institutional quality, real economic growth rate and stock market development attract inward FPI, as portrayed in the positive relationship between the dependent and independent variables. Practical Implications: In accordance with these findings, we find that, host countries' governments that adopted fiscal and monetary policies can ensure macroeconomic stability, and a prudently managed exchange rate through incentivising exports and discouraging imports into the host country, to attract inward FPI flows. Originality/Value: The study confirms the theoretical and empirical underpinnings that there is a negative relationship between foreign portfolio investment, and real exchange rates and capital openness, respectively in most developing countries, and African economies are no different.

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The determinants of private capital flow volatility in Sub-Saharan African countries

Cited by 12 publications

References 27 publications

Capital flows to low-income sub-Saharan Africa: an exploratory review

Capital flows to low-income sub-Saharan Africa: an exploratory review

Effect of volatility of development aid on volatility of foreign direct investment inflows

Foreign Portfolio Investments, Exchange Rates and Capital Openness: A Panel Data Approach

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