Background to the study

flight reduces domestically available investible capital. Domestic
investment is expected to have a negative correlation with capital
flight. Given that inflows of Foreign Direct Investment (FDI) should
complement domestic capital, capital flight has constituted a problem.
Domestic investment of either autonomous or induced type was not
considered in earlier studies in relation to capital flight. In spite of
governments’ continuous campaigns for foreign investors to invest in
the domestic economy, capital flight has continued unabated. This raises
a concern on the effect of capital flight on domestic investment. Where
previous studies were done on capital flight, they were not specific on
Nigeria. Investments that lead to increase in capital formation for the
economy and act as the foundation for infrastructure or framework for
the development of the country cannot be made in the face of inadequate
Capital flight being a challenge to domestic investment
is exacerbated by the process of financial globalisation that enables
capital to move freely between countries. Since capital seeks the best
avenue where it can earn the highest return given a level of assumed
risks, the domestic investment environment has not been clement enough
for investment. Financial globalisation, in some cases, has rendered
some national governments’ monetary policies ineffective. Since
financial globalisation connotes the liberalisation of the capital
account, it enables capital to move in and out of the domestic economy
with reduced level of restrictions. Emerging economies that have been
forced to open up their economies have faced episodes of capital flight
as results of financial globalisation induced crises. Countries that
that liberalise their capital accounts are more prone to financial
crashes or at least financial volatility because of the multifarious
impacts of unrestricted capital flows involving them. Studies of
financial globalisation induced volatility and flights of capital have
generally left Nigeria out even where less prominent countries like
Namibia were empirically investigated. Financial globalisation is
expected to impact negatively against capital flight as a result of
inflow of capital into the economy. This is expected to boost domestic
income and lead to financial and real development. But its effects in
those countries have not been so productive but have rather brought
market failures.

Capital flight has been caused partly
by lack of confidence by domestic investors in the economy and has
encouraged domestically generated capital to flee from the economy.
While foreign capital that has been invested in the economy can leave
after some time if the investors’ objectives are achieved, domestically
generated capital flowing offshore should generate and report returns.
However, a situation that encourages domestically generated capital to
find solace and investment grounds abroad leave much to be desired. The
concern here is that the level of autonomous investment that should be
undertaken suffers because capital has relocated out of the economy.
Given the level of infrastructural deficit (the main situate of
autonomous investment) facing the country, the required capital to
construct, replace and rehabilitate infrastructure is either not
domestically available or would be sourced at some expense. A second
issue on resident capital is that per capita income goes down as capital
flees. This reduces per capita income productivity. The scenarios
generate macroeconomic challenges for policymakers as to how to retain
resident capital in the economy in the face of competing real rates of
return in developed and mature financial markets.

study of capital flight and aggregated financial savings in the
investment process is important since a cycle has been established
between income, savings and investment. The loss of investment that
happens when capital flight occurs means equally that some savings are
lost to the economy. Research on capital flight seems not have reached
this point of discourse. Since income is also a strong determinant of
savings, the impacts of this scenario on financial savings under the
golden rule level of capital in conditions of capital outflows and
flight is also a financial concern. The golden rule level of capital is
defined as a steady state with the highest level of consumption that
benevolent policymakers should achieve for individual’s well being. With
this, the rate of investment is detrimentally affected especially under
increased domestic consumption propelled by population increases. This
ultimately affects further capital formation. The role and the impact of
the exchange rate is in the process is exemplified by the understanding
that capital in the domestic economy has alternative uses in capital

1.3          Objectives of the Study
major objective of this study is to analyse the impact of capital
flight on the Nigerian domestic investment in a financially globalising
world, with the aim of finding out if capital flight can increase
through financial globalisation and thereby reduce domestic investment
in the process. The specific objectives are:

  1. To examine the
    relationship between capital flight and domestic investment, and sum up
    the challenges posed by capital flight to domestic investment during the
    period of financial globalization in Nigeria.
  2. To evaluate the impact of capital flight on financial savings since it is the primary source of financing investment.
  3. To find out the type of capital flight and estimates that is more significant and therefore relevant to Nigeria.
  4. To
    investigate the role of the nominal exchange rate and its impact in
    encouraging capital outflows and domestic investment in the economy.

1.4          Research Questions
To achieve the earlier stated objectives, the following research questions become pertinent:

  1. What is the existing relationship between domestic investment and capital flight in Nigeria?
  2. Given
    that capital flight and outflows have continued as proved by earlier
    studies, how has this affected domestic savings that drive investment
  3. With
    the export performance in the period from 2000 to 2007, especially of
    the petroleum sector and prices of other commodities that resulted in a
    seemingly buoyant accumulation of external reserves. What has happened
    to capital fight?
  4. What is the impact of the incidence of capital
    flight in the era of financial globalisation indicated by a high level
    of openness and capital account liberalisation?
  5. With the uneven
    level of development between the different countries of the world, and
    especially the developed countries and Nigeria, how can Nigeria limit
    further capital leakage out of the economy when the return-risk
    dimensions in investment paradigm are taken into account?
  6. What
    is the role of the exchange rate in the capital flight process, given
    that the flotation of the currency has been on since 1986 when the
    currency has been on managed float?
  7. With continuous flights of
    domestic capital from the economy, how has domestic investment in
    Nigeria fared within the current financial globalisation period?

1.5       Statement of Hypotheses

  1. H0: Capital flight has not significantly affected domestic financial savings in Nigeria.

  1. H0:
    Risk in the macroeconomic conditions of the country does not have a
    long run relationship with capital flight out of the economy.

  1. H0: There is no significant relationship between the process of financial globalization and capital flight out of the country.

  1. H0: Capital flight in the Nigerian economy does not have a significant relationship with domestic investment.




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