Dynamics of capital flight components and domestic investment in Nigeria

Abstract

Capital flight can cause challenges regarding the domestic availability of financial resources in sustaining domestic investment in Nigeria. The purpose of this study is to examine the connection between capital flight components and domestic investment in Nigeria. The study employed the autoregressive distributive lag model (ARDL) to analyze the time series data for Nigeria spanning from 1981 to 2018. The study found that changes in external debt, current account balance, and foreign direct investments have a negative effect on domestic investments in the short run and long run. Furthermore, the results obtained show that the intercept has a positive effect on domestic investment. The long-run coefficient of current account balance has a positive effect, while the other components of capital flight – foreign direct investment, external reserves and external debt – have a negative effect on domestic investment. The error correction coefficient is significant and conforms to the a priori expectation. Hence, the study concludes that growth in domestic investment can be achieved by regulating the components of capital flight within the desirable limits. The study recommends that emphasis should be placed on the components of capital flight to stimulate domestic investment for economic growth.