This study examines the influence of the stock market on foreign direct investment in developing countries and how government effectiveness moderates this relationship.
The study involved four East African Community countries and a panel dataset from 1995 to 2020. The study utilized feasible generalized least squares (FGLS) as a primary model and panel-corrected standard errors (PCSE) for a robustness check.
The impact of the stock market on foreign direct investment (FDI) is mixed. While value traded, market capitalization and the number of listed companies positively affect FDI, stock turnover has a negative impact. Government effectiveness also positively influences FDI and significantly moderates the relationship with the stock market.
The sample is only limited to stock markets and East African Community countries, and due to the unavailability of data, only four countries were captured.
Stock markets and government effectiveness are crucial for attracting FDI by enhancing the attractiveness of host countries for investment. The policymakers should improve institutional quality, support stock market development, bolster investment appeal and provide an alternative capital source.
Policy formulation should encourage institutional quality practices and support the stock market development that serves as an alternative source of capital.
This paper examines how stock markets impact FDI inflows and investigates the moderating role of government effectiveness in this relationship. The findings reveal that both stock market development and government effectiveness enhance a host country’s attractiveness for inward FDI.
