The impact of FDI on market efficiency : A study about adaptive market efficiency in African frontier markets

Sammanfattning: This paper examines the impact of Foreign Direct Investment (FDI) on the level of market efficiency over time in six African frontier stock markets. The countries examined are Botswana, Kenya, Mauritius, Morocco, Nigeria and Tunisia. The purpose of this study is to investigate what impact foreign investors’ capital contributions have on the level of market efficiency in six major frontier stock markets in Africa. To be able to identify periods of market efficiency and inefficiency we will analyze the results in the light of the Adaptive Market Hypothesis. To be able to answer the research question and fulfil the intended purpose three statistical tests will be conducted. Two Variance Ratio tests, namely the Chow Denning test (CD) and the multiple version of Wright’s sign test (JS) have been conducted to obtain measures of time-varying market efficiency. These measures of time-varying market efficiency have then been used separately as the dependent variables in a set of 6 different multiple panel regression analyses. Based on previous research we chose a set of six macroeconomic factors that could have an impact on market efficiency. These were then used as independent variables in the panel regression analysis. We found that FDI has no impact on the level of market efficiency when including all six countries in the regression model. However, re-performing the analysis on a reduced sample including only Kenya, Mauritius, Morocco and Tunisia we found that FDI is significant at the 5% level, i.e. higher FDI implies higher market efficiency. Considering this result, we strongly recommend African countries to relax FDI regulations.