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Contemporary Issues In Development Finance

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Discuss about the Contemporary Issues in Development Finance.



The current study examines empirically the specific role played by stock market in encouraging growth in a nation. The capital market essentially plays an important role in the process of attainment of growth of commerce as well as industry that finally affects the economy of the nation. Essentially, this is the basis that different industrial bodies, government advisors as well as the central bank of nations closely track all the activities of a stock market. The current paper essentially explores the nature of association between the development of the stock market and growth of the economy in different nations specifically 30 low income nations and 30 high income ones during the period 1970 to 2010. The current segment examines the stock market development and the economic growth association by utilising two different measures (Sekhri & Haque, 2015).  The ever increasing significance of financial markets across the world has essentially reinforced and the common conviction that finance is essentially an important component of the growth of an economy. In itself, the stress has always remained on the growth of an economy and development of the stock market. As such, the stock market is said to play a pivotal role in the process of growth of industry as well as commerce that ultimately affect the entire economy of the nation to a large extent. This essentially can be considered to be a rationale that the industrial bodies, government advisors (Soumaré & Tchana, 2015).

The stock market can be important from the point of view of the investors’ and the perspective of industry. The current study is essentially founded on critical categorization as well as enumeration of world economies founded on anticipated gross national income per capita for the earlier year. In this particular study, the reorganized and updated approximations of gross national income per capita can be utilized as the input in this current study for performing the functional classification of economies that assists in the process of determination of the lending capability of both the low as well as high income nations (Paramati et al., 2016). Particularly, the low income nations can be defined as the ones with the GNI per capita of $1025 or lower during the period 2015. On the other hand, the low income nations can be categorised as the nations that have the gross national income per capita equal to $12736. However, for the purpose of analysis of the nation, the nations have undertaken diverse studies that can again be categorised as per the composition of the income so as to ensure that the study can essentially facilitate in the process of indicating the economic scenario of the nation.

The gross national income per capita represents that the overall dollar value of the country, final income during a particular year that is again divided by the population. This helps in reflecting the fact that the earnings of the nation during a particular period that is divided by the entire population. This assists in the representing the overall mean income of the citizens of the nation. It is essentially worth mentioning the fact that the know-how regarding the gross national income per capita of the citizen can be considered to be primary phase that leads understanding of the strengths as well as weaknesses of the nation (Badr, 2015).  Again, the gross national income per capita of a nation can be considered to be closely associated to diverse other indicators that assists in enumerating the social, economic as well as environmental wellbeing of the countries as well as its people. For example, people residing in nations having high amount of the gross national income per capita essentially have elongated life expectations, higher literacy rate with improved access to safe water and lower rate of infant mortality. The data for the present study essentially ranges between the period 1970 and 2010 for both low income as well as high income countries. The current study essentially utilizes annual balanced data so as to examine the association between foreign direct investment and the growth of the economy that is essentially enumerated in terms of real gross domestic product (GDP) for 30 different nations encompassing the period between 1970 and 2010. Different econometrics mechanisms are taken into account for analysis of the growth of the FDI (Faruk, 2015). It is extensively commended by different development economists as well as policy makers that a well-developed stock market is crucial for the mobilization of financial resources for long term investment and thus constitutes one of the major pillars of economic growth (Lenka & Sharma, 2015).


Data Description and methodology

For the purpose of the present study, pecuniary data on 30 nations belonging to a low income group and 30 nations belonging to a high income group. However, current study includes data world development indicators and the foreign direct investment. Essentially, the main World Bank acquirement of development indicators, is essentially compiled from officially recognized worldwide sources. This indicator essentially represents the current as well as accurate worldwide development data available and comprises of national, regional as well as global approximations (Irandoust, 2016). Again, foreign direct investment can be considered to be investment that are essentially made by a corporation or else an individual in a nation in diverse business interests in another nation, in the structure of founding business functions or else acquiring business assets in other nation, namely, ownership or else controlling interests in a foreign nation. The data on low income nations essentially include data on Bangladesh, Bolivia, Cameron, Central African Republic, Sri Lanka, Chad, Comoros, Congo and many others. Again, the high-middle countries data are essentially on Argentina, Andorra, Algeria and many others. Data on world development indicators can be regarded as the compilation of different cross nation data on development. It is essentially a condensed presentation of main parameters. The indicators for operational as well as analytical purposes classifies nations according to GNI per capita. As the GNI per capita might alter over a period of time, the composition of different income groups might also change.  Data represented for economies indicate the fact that there exists a linkage between FDI, financial markets and the growth rate of the economy (Tan et al., 2016). Empirical evidence shows that the nations having well-structured financial markets acquire advantage from FDI. However, there are empirical evidences that suggests the fact that the foreign direct investment plays a significant role in particularly the contribution towards the economic growth of nation. It can be witnessed that there exists a causal association between the GDI and economic growth where FDI necessarily promotes growth through mainly the financial markets of the nation. Particularly, in case of Nigeria, there exists a weak indication of growth-directed finance where market size is regarded as main indicator of development of stock market (Zhu et al., 2016). According to the analysis of the findings, stock markets can assist in the process of promotion of growth particularly in Africa. Thus, the findings the study indicates the fact that there exists a linkage between development of stock market, overall financial development and the growth of the economy. Thus, it can be said that findings of prior studies substantiates the fact that the well-operative stock markets can help in promotion of economic development by way of fuelling the growth engine by means of quicker accumulation of capital accumulation, and thereafter by better allocation of resource. As rightly indicated by Mehic et al., (2013), development of stock market is said to be strongly correlated with overall rate of growth of real Gross Domestic Product per capita. However, the liquidity in the stock market as well as development of banking can also forecast the prospective growth rate of the entire  economy at the time both the aspect enter the regression of growth.

As rightly indicated by Flora & Agrawal (2014), most effectual process of allocation of capital is attained by liberalising specifically the financial markets and allowing the market to apportion the capital. However, in case if the financial markets is comprises of only banking sector, then in that case markets might fail to attain efficiency in allocation of capital owing to limitations of debt finance and that in the presence of information asymmetry. Therefore, development of nation’s stock markets is essential for achievement of full efficiency in the process of allocation of capital in case if the governing body of the nation decides to liberalise the entire financial system. Whilst banks funds are only well-conventional, harmless borrowers as well as stock markets can fund risky, useful and at the same innovative projects. However, the chief benefit of a definite stock market of a nation is that it comprises of a liquid trading as well as price determining system for a wide range of financial tools (Yalta, 2013). Essentially, this permits spreading of risk by different raisers of capital as well as financiers and this in turn leads to matching of different maturity preferences of raisers of capital that are commonly for long-term period and financiers of short-term period. Particularly, this boosts investment and at the same time lowers the overall cost of capital, leading to long term growth of the economy.


In particular, data are organized and arranged properly under different conventions of accounting that essentially contains the system of national accounts with government finances. As such, an advancement has been made in the process of unification of the theory of national accounts. Nevertheless, there are numerous categories of national variations for the proper execution of a standard. Again, under the corporate structure, it is imperative that ownership of minimum 10% of ordinary shares of voting stock forms the necessary criterion for the existence of direct investment association (Güngör et al., 2014). Foreign direct investment essentially comprises of mergers, acquisitions as well as new forms of investment. It also comprises of reinvestment of earnings as well as loans. A country can be considered as the host nation to different foreign direct investment projects. On the contrary, the external foreign direct investment comprises of investment programs that are necessarily owned out by the nation.

The current section takes into account the influence of inflow of foreign direct investment on the growth of economies. For example, Nigeria has a given amount of natural resources and a large sized market and qualifies as a major recipient of FDI. Nigeria has managed to attract large amount of FDI in the last decade. Nevertheless, the degree of FDI attracted by the nation can be regarded to be very less in comparison to the resource base. The results of the report revealed the fact enhancing the total aggregate investment by around 1% GDP augmented economic growth of different nations of Latin American by around 0.1% to 0.2% per year, however augmenting FDI by the identical amount enhanced growth by about 0.6% per year (Belloumi, 2014). Again, Flora & Agrawal (2017) submits that FDI has been significant in illustrating economic growth of China, whilst Li et al., (2014) represents a positive correlation for certain nations of Latin American. As such, Inflows of particularly foreign capital are presumed to enhance levels of investment. On the other hand, there are several neoclassical economists who argue that FDI exerts influence on the total amount of capital each person. Nevertheless, owing to diminishing returns to capital, it cannot exert influence on economic growth in the long run. In addition to this, Bertrand & Betschinger (2016) asserts that although FDI is positively correlated with growth in an economy, host nations have the need of least human capital, steadiness in the economy along with opened markets so as to gain benefit from long term inflows of FDI.



The current study examines the nature and extent of association between the FDI and the GDP of the two different groups of nations. The current section expounds in detail the mechanism that can be utilized for the purpose of undertaking the study. In this case, scatter plot is used that essentially represents a graph where the values of two different variables (that is the FDI and the GDP) are plotted against two different axes.

The scatter plotting can help in assignment of the pattern of the resultant points that reveal the nature of correlation that are existent between the variables. In the present case, with the help of the scatter plot the variation in GDP is measured with the help of FDI. Again, the line of best fit is essentially a straight line that reflects all the existent data on a scatter plot. Essentially, this line passes through some points, all of the above points as well as none of the points (Mackey & Gass, 2015). With the help of fit-line, the change in the relation between FDI and GDP can be predicted.   The correlation analysis is used to measure the strength, direction and change of the two-variables – FDI and GDP. Thus, use of the correlation analysis helps in ascertainment of the association or else connection between two or more items. In this study, the development of the entire stock market can be measured in terms of size as well as liquidity. In this case, size is essentially the market capitalization that can be presented as a percentage of GDP.

Data Analysis:

High and Middle Income Countries:

Figure 1: Scatter plot of FDI vs GDP of High and Middle Income Countries

Figure 1 above shows the scatter plot of FDI vs GDP of 30 Middle and High income countries. Visual inspection of the plot shows that most of the data is concentrated around value of -10 to 20 of GDP. Hence, it can be said the relation between the FDI and GDP of the 30 countries is very similar. Furthermore we find that countries like Antigua and Barbuda, Saudi Arabia, and Botswana are sometimes separated from the central portion. This can be interpreted as there was much change in FDI and GDP of these countries during those years.   The best fit line also known as the trend line that essentially passes through all the points (Mackey & Gass, 2015). The best fit is necessarily a straight line that can be considered to be best approximation of the provided set of data on FDI and GDP of the nations. This is a two dimensional case. From the graph it is also found that the fit-line does not have a high slope. Thus it can be said that there is not much change in FDI of the 30 middle and high income group countries. This can be attributed to the fact that these countries have a higher level of GDP. Thus, the potential to grow further is limited.

Figure 2: Correlation Analysis

The correlation analysis presented here is essentially a single numeric value that can be utilized for description of the nature of the association between two different variables. Necessarily, when two different variables have a positive correlation, the two different variables essentially move in the same direction. As rightly indicated by Mackey & Gass (2015), the closer the value of GDP is to 1, the stronger is the correlation. In this case, the correlation is found to be 0.1523. The correlation analysis of FDI vs GDP of middle and High Income countries is r = 0.1523. From the value of the correlation, it can be said that there is a weak, positive, linear correlation between the two variables. Moreover, the p-value

Low Income Countries:

Figure 3: Scatter plot of FDI vs GDP of Low Income Countries

Figure 3 above shows the scatter plot of FDI vs GDP of 30 low income countries. Visual inspection of the plot shows that most of the data is concentrated around value of 0 to 50 of GDP. Thus we can say that the relation between the FDI and GDP of the 30 countries is very similar. Moreover, we find that Liberia has a highly scattered data. Thus it can be said that there has been variation in the relation between FDI and GDP for Liberia. We can also find the names of countries like Chad, Rwanda, and Mauritania which are separate.

Figure 4: Correlation Analysis

The correlation analysis of FDI vs GDP of Low Income countries is r = 0.0714. From the value of the correlation, it can be said that there is a very weak, positive, linear correlation between the two variables. Moreover, the p-value =0.0154 (less than 0.05, level of significance), shows that the correlation value is statistically significant (Mackey & Gass, 2015). This positive correlation represents that both the variables that is the FDI and the WDI move in the same direction. However, since the value of r is very far from +1, the nature of association between the two variables is said to be weak. Thus, in low income countries, the FDI as a component of world development indicators exerts weak influence on the economic growth indicated by the GDP. However, the results indicate that the two variables the GDP and FDI move in the same direction, thereby substantiating the fact that the development of WDI exerts positive influence on the overall growth of low income economies although weakly.



The above mentioned study helps in gaining a comprehensive understanding regarding the role played by stock market in boosting growth in nations belonging to low income as well as high income groups. Analysis of the findings reveals the fact that there exists statistically significant association between the component of WDI that is FDI and the economic growth indicated by the GDP per capita. Graphical presentation of the scatter plotting reflects the fact that data is concentrated around value of -10 to 20 of GDP for middle and high income nations. It is also evident from the graph that the best fit line does not have a high slope indicating the fact that there does not occur much alteration of the FDI of nations having higher level of GDP. Thus, the potential for future growth can also be said to be restricted. On the other hand, the scatter plotting for the low income nations reflects the fact that the data concentrated around value of 0 to 50 of GDP. Thus we can say that the relation between the FDI and GDP of the 30 countries is very similar. However, the results of the correlation analysis for the high and middle income nations indicate that there exists a weak and positive correlation of r=0.15 between the two variables and the p value is less than 0.001 referring to the fact that value of correlation is statistically significant. On the other hand, the correlation value for the low income nations are calculated to be 0.07, that in turn represents a very weak, positive correlation between the values and the p value equal to 0.015 representing statistically significant correlation value. Thus, it can be hereby inferred that for both the categories of nations there exists positive correlation between FDI and GDP although weak in nature. However, comparatively correlation value is higher for the high and middle income nations indicating higher stronger association between FDI and GDP.



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