THE MODERATING ROLE OF FINANCIAL INCLUSION ON THE RELATIONSHIP BETWEEN FOREIGN PORTFOLIO INVESTMENT AND FINANCIAL GROWTH OF FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE
Joseph Kiplangat Serem - Department of Accounting and Finance, School of Business and Economics, Kisii University, Kenya
F. N. Nyarombe - Department of Accounting and Finance, School of Business and Economics, Kisii University, Kenya
ABSTRACT
Foreign portfolio investment (FPI) is widely presumed to strengthen the financial growth of listed firms by expanding capital access, improving liquidity and lowering the cost of capital, yet firms listed at the Nairobi Securities Exchange (NSE) continue to record uneven growth outcomes despite rising foreign participation and Kenya's advances in financial inclusion. This paper isolates and tests the moderating role of financial inclusion in this relationship, drawing on panel data from a balanced sample of 40 NSE-listed firms observed over the 2019-2024 period (240 firm-year observations). Guided by the Efficient Market Hypothesis, Capital Flow Theory and Financial Intermediation Theory, moderated panel regressions were estimated separately for foreign equity investment, foreign debt security investment, foreign derivative investment and a composite FPI index, using Driscoll-Kraay standard errors where cross-sectional dependence was detected. Financial inclusion did not significantly moderate the foreign equity-growth relationship (β = 0.002, p = 0.449) or the foreign derivatives-growth relationship (β = -0.002, p = 0.548), but it significantly and negatively moderated the relationship between foreign debt security investment and financial growth (β = -0.026, p = 0.025) and between composite foreign portfolio investment and financial growth (β = -0.015, p = 0.029). These results indicate that financial inclusion functions less as a growth amplifier and more as a structural substitute for foreign capital: as domestic financial access deepens, NSE-listed firms appear to rely less on foreign debt and foreign portfolio capital to sustain growth. The paper contributes fresh frontier-market evidence to the capital-flows and financial-inclusion literature and offers policy and managerial implications for balancing foreign capital with domestic financial-inclusion strategies.