The Impact of Foreign Direct Investment on the Stock Market Development in Sweden

Abstract

Previous research has found a significant relationship between FDI inflow and the domestic stock market development. However, the research mainly examines emerging economies that might benefit from foreign capital to a higher extent than a developed country. The purpose of this paper is to study FDI as a determinant of the stock market development in Sweden. To measure the relationship, OMX Affärsvärlden General Index (AFGX) is used as proxy for stock market development and net FDI inflow is used as proxy for FDI. A time series regression analysis is conducted to examine the role of FDI on the stock market development and various macroeconomic control variables is also included in the model. Data used are the Swedish quarterly data observed between 1982 and 2017. The result suggests no strong contemporaneous relationship between FDIs and the stock market development, while the FDI during the previous quarter significantly and negatively affect the stock market implying that FDI might be considered as a short-term substitute to the stock market. The results are robust with respect to several checks. This thesis discusses the implication of these results.