An Empirical Investigation of Capital Flight and Domestic Investment in Nigeria (1980-2015)

Abstract

This paper empirically examined the relationship between capital flight and  domestic investment in Nigeria. The study made use of  secondary data collected from Central Bank of Nigeria’s Statistical Bulletin of various issues and National Bureau of Statistics. The empirical analysis covers the period 1980 and 2015. Augumented Dickey Fuller test, Phillip-Perron test, Johansen Cointegration test  and Ordinary Least Square estimating technique (OLS) via Microsoft 7.1 econometric software were employed to carry out a detailed analysis of the endogenous and exogenous variables of the model which include Gross Domestic Investment (GDINV), Capital Flight (CAPF), Exchange Rate (EXGR) and Inflation Rate (INFR). The overall results show that capital flight has a statistically significant positive relationship with gross domestic investment in Nigeria contrary to a priori theoretical expectation. The result further revealed that a one naira increase in capital flight would bring about 13.74 units rise in gross domestic investment. The results also show that there exists a statistically significant positive relationship between exchange rate and gross domestic investment. A one naira increase in exchange rate would bring about 4.84 units rise in gross domestic investment. Based on the results, government should intensify its efforts to ensure speedy recovery of looted funds by corrupt public office holders from foreign accounts to inject funds into the economy for  investment purposes; there should be significant improvement in governance and institutional quality to promote stable political environment necessary for capital inflow by foreign investors, and government at all levels should provide investment friendly environment through the availability of infrastructural facilities such as uninterrupted power supply, motorable roads network, regular supply of water and efficient communication network. In addition, there should be establishment of a stable exchange rate regime capable of reducing capital outflows and encouraging capital inflows inform of private foreign investment into the country, and there should be enactment of law regulating the percentage of local profit to be repatriated to parent companies abroad from their subsidiaries in Nigeria.

Keywords: Capital Flight, Gross Domestic Investment, Exchange Rate, Unit Root, Cointegration, Ordinary Least Square, Nigeria