The Effect of Foreign Direct Investment (FDI) on the Stock Market Development: Tanzania's Evidence

Abstract

This study examined the effect of Foreign Direct Investment in the stock market development in Tanzania from 1998 to 2008. In order to achieve intended objective the study used equation model and multiple regression analysis. The results show that there exists a relationship between, FDI, nominal exchange rate, financial Intermediary development, real income and stock market development. With exception of real income, other variables, which are; FDI, nominal exchange rate and financial intermediary development have shown the positive correlations with stock market development in Tanzania. While the variables that are positively correlated with stock market development are statistically significant, real income is statistically insignificant than zero. One thing worth discussing is the relevance of the data that have tested the hypothesis in this study. The study has followed a measure and determinants of stock market development recommended by (Garcia and Liu 1999). Despite of various measures of stock market development, it has been suggested that a good proxy measure of stock market development is market capitalization. Among other things, the results of this study reveal that FDI plays an important role in boosting the market capitalization. The policy implication of this finding is that, Tanzania should attract more FDI inflows to enhance the stock market development which in turn will develop further the financial market and economic growth of the country.