Foreign Direct Investment Trends and Their Effect on Local Stock Markets

Abstract

This study investigates the trends in foreign direct investment (FDI) and their effect on local stock markets during the period 2020–2023, a time characterized by global volatility, pandemic-induced contractions, and shifting economic dynamics. Using a mixed-method approach that combines panel econometric models, Granger causality, and ARDL analysis with qualitative content evaluation of policy and market reports, the research identifies both the opportunities and risks that FDI presents for host-country stock markets. The findings reveal that sustained FDI inflows positively contribute to market capitalization, trading activity, and investor confidence, particularly in emerging economies where institutional frameworks are developing. Evidence also suggests that sectoral distribution matters, with technology-driven investments producing stronger long-term stability compared to resource-based FDI, which is more prone to external price shocks. However, the study also highlights vulnerabilities: abrupt reversals of foreign capital exacerbate market volatility, while macroeconomic instability—particularly inflation and exchange rate fluctuations—dampens the beneficial spillovers of FDI. Regional divergence is notable, as BRICS economies demonstrate stronger growth responses to FDI than advanced G7 markets, where institutional maturity moderates dependency on foreign inflows. Overall, the study concludes that FDI remains a double-edged driver of financial development: it strengthens stock markets when embedded in stable institutions and long-term policies but introduces fragility in the presence of global shocks and short-term capital flows. The results carry significant policy implications, emphasizing the need for strategies that attract sustainable, sectorally diversified investment while enhancing macroeconomic stability and institutional credibility to maximize long-term benefits.