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Archives of Business Review – Vol. 8, No.10

Publication Date: October 25, 2020

DOI: 10.14738/abr.810.9193.

James, I. E., & Emmanuel, A. O. (2020). Foreign Portfolio Investment And Human Capital Development In Nigeria 2005-2019. Archives

of Business Research, 8(10). 83-101.

Foreign Portfolio Investment And Human Capital Development In

Nigeria 2005-2019

Ighoroje Ese James

Department of Banking and Finance

School of Business Studies

Delta State Polytechnic, Ozoro

Akpokerere Othuke Emmanuel

Department of Banking and Finance

School of Business Studies

Delta State Polytechnic, Ozoro

ABSTRACT

Following the saving – investment gap resulting from shortfalls of

savings suffered by developing economies it has become fashionable to

embrace foreign capital inflow as an essential complementing

alternative supply of funds for domestic investment. This study

investigates the effect of foreign portfolio investment on human capital

development in Nigeria covering the period 2005-2019. Foreign

portfolio investment, the explanatory variable is disaggregated

intoforeign portfolio equity (FPIE) and foreign portfolio bonds (FPIB),

while exchange rate is included as the control variable. The Human

Capital Development – the dependent variable is represented by the

Human Development Index (HDI). Econometric techniques, including

Descriptive Statistics, Augmented Dickey Fuller tests for unit roots,

Error Correction Model (ECM), and Ordinary Least Square (OLS)

Regression analysis were used. The study showed foreign portfolio

investment in equity has positive and significant effect on human

capital development while foreign portfolio investment in bonds has

positive but insignificant effect. The study thus concluded that foreign

portfolio investment has positive effect on human capital development

and has helped to improve human capacity necessary for economic

development in Nigeria. The study reiterated the need for eye-catching

polices that will attract greater foreign portfolio investment in both

equity and bonds in the stock market which could be achieved by

greater openness.

Key Words: Foreign Portfolio Investment, Human Capitals Development

and Exchange Rate.

INTRODUCTION

Foreign portfolio investment (FBI) includes investments by residents of one country in the equity

and debt securities of an enterprise in a foreign country which seeks primarily capital gains and do

not reflect any lasting interest in the enterprise (Elekwa, Aniebo, & Ogu, 2016). This category

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URL: http://dx.doi.org/10.14738/abr.810.9194 84

James, I. E., & Emmanuel, A. O. (2020). Foreign Portfolio Investment And Human Capital Development In Nigeria 2005-2019. Archives of Business

Research, 8(10). 83-101.

consists of investments in bonds, notes, short term debts otherwise called money market

instruments and financial derivatives, but not including those registered under direct investment.

In another connotation, they are investments which are not up to the 10% required under FDI

qualification and also do not involve affiliated enterprises. In addition to securities issued by

enterprises, foreigners can also purchase sovereign bonds issued by governments (Okafor, Hillary

& Grace, 2015). There is every necessity to mobilize human capital considering that it is one of the

most valuable asset, Awopegba (2003) stated. In economic parlance, Todaro and Smith (2003)

posited that Human capital encompasses health, education and other human capacities that

contribute to raise productivity (Todaro& Smith, 2003).

Capital and natural resources are passive factors of production while human resources are active

factors of production. Human capital constitutes the most valuable resource of a country; in its

absence there will be the non performance of physical capital (tools, machinery, and equipment)

which will impede economic growth (Ekeocha, Victor & Moses (2012). Portfolio Investments find

special relevance in the development of financial markets, whose role in the growth and

development of national economies is well recognized in literature. It is also common knowledge

and from the perspective of Monetarists, it is clear that money exert pressure on economic

outcomes in its own peculiar manner.

In a similar vein, Portfolio Investment via financial markets has brought about remarkable

contributions to the growth and development of many economies. Due to the paucity of the much

needed capital for human capital development in the less developed economies, there is the need

for foreign portfolio to complement domestic resources, in the wake of growing mismatch between

domestic capital stock and capital requirements in these countries. This is why Omisakin (2009)

stated that following the saving – investment gap resulting from shortfalls of savings suffered by

developing economies it has become fashionable to embrace foreign capital inflow as an essential

complementing alternative supply of funds for domestic investment.

In another note, Ngowi (2001) argues that if African countries as well as other developing countries

must realize a rapid rate of capital accumulation and growth needed to overcome the widespread

problems of human capital development in their economies, then a substantial inflow of foreign

capital needed to fill the saving and foreign exchange deficits usually experienced by these nations

is required.

Although Portfolio Investment has gained popularity, Ajit (2004) stated that it is usually not as

favored by receiving economies preferring foreign direct investment, which is generally

considered most beneficial to them in terms of meeting up with their needs of filing the savings –

investment pitfalls. For Ajit, so long as the flows do not supplant domestic investment, they could

supplement domestic savings, in so doing increasing production possibilities and enhancing

employment growth. This explains why Nigeria as an import-dependent economy requires foreign

investment in order to augment her investment needs.

It equally justifies why from the time when democratic governance emerged in May 1999, Nigeria

has taken some concrete measures necessary to encourage cross-border investors to invest in the

domestic economy. Some of these enticing measures are viz; the repeal of laws that inhibit increase

in foreign portfolio investment, promulgation of investment laws, introduction of favorable

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policies which lead to a conducive atmosphere for doing business (ease of doing business), speedy

export and import processing methods, fight against advanced fee frauds, institution of economic

and financial crimes commission to fight corruption and financial crimes. These definite measures

seem to have been making positive impact on Nigeria’s foreign portfolio inflows. This is reiterated

from the results of a few studies that have been conducted on the subject. For instance, Elekwa,

Aniebo and Ogu (2016) found that foreign portfolio investments have a positive effect on

employment and human capital development in Nigeria. Mark (2015) examined the relationship

between foreign portfolio investments, exchange rate, interest rate and human capital

development in Nigeria. The result of the study indicates that foreign portfolio investments,

exchange rate, interest rate had negative relationship with human capital development in Nigeria

within the period reviewed.

In another study, Musa, (2016) that foreign portfolio investment had positive effect on human

capital development in Nigeria. The literature reviewed tends to suggest that very few studies were

carried out on the effect of foreign portfolio investment on human capital development in Nigeria,

the few studies reviewed had mixed results. Following also the need to improve on human

development index - the country went from HDI of 0.467 in 2005 to 0.534 in 2018 and ranked 158

out of 189 countries - because of the vital role knowledge, a long and healthy life as well as a decent

standard of living play on productivity, growth, and development, this study sought to investigate

the effect of disaggregated foreign portfolio investment on human capital development in Nigeria

from 2005 to 2019.

This objective was achieved by examining the effect of foreign portfolio investment in equity, the

effect of foreign portfolio investment in bonds, and the effect of official exchange rate each as an

independent variables on human capital development index as the dependent variable in Nigeria.

The work is structured as follows; part I is the introduction, part II is Review of related literature,

III is the methodology, part IV is data presentation, analysis, and discussion, part V is summary,

conclusion and recommendations.

REVIEW OF RELATED LITERATURE

Conceptual Review

Foreign Portfolio Investment

Foreign portfolio investment (FPI) is a cross-border investment in securities with the motivating

factor being profit-making and not management nor legal control. It is defined by IMF (1993) as

equity and debt issuances which include country funds, depository receipts and direct purchases

by foreign investors of less than 10% control. Capital impacts positively on the economy by

providing financial resources for investment in key areas like infrastructure, agriculture, solid

minerals, manufacturing, banking and other financial services and other real sector areas.

The projects could be promoted by government or private sector institutions. It is conceptualized

that foreign portfolio investment could offer the much needed resources to the government and

private corporations in Nigeria for infrastructural and industrial productivity. According to

Anyanwale (2007) foreign portfolio investment is a component of foreign investment (FI) and

involves the commitment of funds on domestic securities by a foreign nation, institutions, and vice

versa.