Stock Market Development, Foreign Direct Investment and Macroeconomic Stability: Evidence from Nigeria

Abstract

Stock market development is not only important in economic development of a nation, it is also an important indicator of future economic activity and a nation’s economic strength. This paper employs the Johensen co-integration and the error correction mechanism (ECM) techniques to examine the impact of foreign direct investment and macroeconomic stability (exchange rate and inflation rate) on the level of development of the Nigerian stock market over the peiod 1981-2010. The results reveal that a long run relationship exists between the variables and FDI was found to have a positive but insignificant impact on stock market development. The results also demonstrate that inflation rate has a negative insignificant effect but exchange rate has a significant and negative relationship with stock market development. The paper recommends that foreign firms operating in the Nigeria’s oil and gas and telecommunication sectors should be encouraged to be listed to promote the development of the market. This should be complemeted with policies that will promote macroeconomic stability to attract more foreign direct investment and making the contribution of the foreign direct investment meaningful to the economy.

Keywords: Stock market development, FDI, macroeconomic stability, error correction model, Nigeria