On the Causal Relationship between Stock Markets Valuation and Foreign Direct Investment: A Conceptual Case of India

Abstract

ABSTRACT International business research has predominantly focused on how foreign direct investment relates to the asset-side of non-financial firm’s balance sheet, the finance-specific factors have been ignored to a great extent while studying the foreign direct investment decision. But since these factors are not merely a by-product of a firm’s competitive strength or weakness, they deserve attention when investment patterns are to be interpreted. Financial specific strategies are important to all firms but are particularly important to MNEs in emerging capital markets where the assumption that MNEs have no problems raising capital to engage in international investments where the statement doesn’t hold true. The major objective of this paper is to provide a review of the literature regarding the financial aspects of foreign direct investment. This review allows us to distinguish between two streams of studies. The first stream deals with the stock markets valuation effect on firms’ international investment decision while the other addresses the stock market reactions to foreign direct investment announcements. The latter is important to form a complete picture about the relationship between stock markets and foreign direct investment. Using a qualitative analytical method with an exploratory nature, and building on the case of India which has recently joined the top ten developing and transition economies as a source of foreign direct investment, this paper intends to suggest a conceptual framework where a causal relationship between stock market valuation and foreign direct investment announcements can be drawn. Keywords: outward foreign direct investment, finance-specific factors, stock market valuation