Author(s): Patricia Lindelwa Makoni, Godfrey Marozva
We examine the relationship between Foreign Portfolio Investment (FPI) and Financial Market Development (FMD), as a macro-economic strategy by Mauritius during the period 1989 to 2016. We employed ARDL, VECM and granger causality to assess these relationships. The results show cointegrating relationships between FPI and Foreign Direct Investment (FDI), FMD and real economic growth (RGDPG). The vector error correction model further confirmed the existence of long run relationships between the variables under observation. Short run causality was found to emanate from FPI, FDI and RGDPG to FMD. Granger-causality results confirmed that FMD causes both FPI and FDI, while FPI causes FDI. Moreover, jointly FDI, FMD and GDP growth collectively cause FPI. We however find no causality running from FPI, FDI and RGDPG to FMD, implying that financial market development in Mauritius is internally catalysed. Findings are consistent with underlying economic theories and earlier empirical studies. This paper contributes to the global debate of whether foreign investments drive financial market development in a developing country; or it is financial market development that drives foreign investment. A further significant contribution of this paper is that this study applied a PCA-constructed composite index to proxy financial market development in Mauritius. The empirical findings provide useful information for strategy formulation of economic policy makers in Mauritius, and other emerging markets.