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This study investigated the determinants of capital flows to Nigeria for the period 1980 to 2020. The determinants of capital flows were categorized into push, that is, global factors such as international liquidity, global real gross domestic product (GDP) growth rate, global risk aversion, and global interest rate and pull factors, that is, domestic factors such as Nigeria's real GDP growth rate, Naira-Dollar exchange rate, monetary policy rate, and inflation. Capital flows were measured by foreign direct investments (% of GDP), foreign portfolio investments (% of GDP), and growth rate of international banks' credit flows. Using the Augmented Dickey-Fuller unit root test approach, the data collated for the study were found to be of mixed integration, (that is at levels and first difference) which necessitated the application of the Autoregressive Distributed Lag (ARDL) for the long and short run relationship among the variables. The ARDL bounds tests showed that capital flows and its components were cointegrated with the push and pull factors that were used as the independent variables. In the long run, it was found that aggregate capital flows was negatively and significantly affected by push factors such as global real GDP growth rate, volatility index and global interest rate and pull factors such as domestic real GDP growth rate, exchange rate and domestic inflation rate were found to be negative and significant determinants of capital flows. In the short run, all the push factors all had a significant and negative effect on capital flows except the global interest rate which turned out with a positive coefficient. For the disaggregated capital flows, it was observed that the push and pull factors had a time varying effects on foreign direct, foreign portfolio and international banks’ credit flows but the effects were more significant in the short run probably due to the boom and burst of both global and domestic business cycle. Overall, the interactions between push and pull factors were found to be more dominant in capital flows determination following the high coefficient of determination observed in the error correction mechanism. The error correction mechanisms for the models showed a significant adjustment of aggregate capital flows from short run shocks to long run equilibrium following the dynamics and interactions of the push – pull factors. These results suggested that efforts geared towards attracting capital flows to Nigeria, policymakers should take cognizance of both push and pull factors in policy formulation.



Title Page                                                                                                                    i

Certification                                                                                                               ii

Declaration                                                                                                                 iii

Dedication                                                                                                                  iv

Acknowledgements                                                                                                    v

List of Tables                                                                                                              vi

List of Figures                                                                                                             vii

Abstract                                                                                                                      x



1.1       Background to the Study                                                                                1

1.2       Statement of the Problem                                                                               11

1.3       Objectives of the Study                                                                                  13

1.4       Research Questions                                                                                        13

1.5       Hypotheses                                                                                                     14

1.6       Scope of the Study                                                                                          14

1.7       Significance of the Study                                                                               15

1.8       Limitation of the Study                                                                                   16

1.9       Operational Definition of Terms                                                                    16



2.1           Conceptual Framework                                                                       18

2.1.1    Concept of capital flows and its components                                                 23

2.1.2    Determinants of capital flows                                                                         27

2.1.3    Historical perspective of international capital flows                                      38

2.1.4    Potential benefits of capital flows                                                                  40

2.1.5    Potential costs and concerns for international capital flows                          42

2.1.6    Capital flows: the Nigerian experience                                                          44

2.1.7    International capital flows and the global financial crisis                              51

2.2       Theoretical Framework                                                                                  52

2.2.1    Neoclassical theory                                                                                         53

2.2.2    Lucas paradox                                                                                                 55

2.2.3    Mundell-Fleming trilemma                                                                            57

2.2.4    Dunning's eclectic paradigm                                                                          60

2.2.5    Markowitz portfolio theory                                                                            62

2.2.6    Post-Keynesian monetary theory                                                                   63

2.2.7    Purchasing power parity (PPP)                                                                       64

2.2.8    Interest rate parity (IRP)                                                                                 65

2.3       Empirical Framework of Related Literature                                                  66

2.3.1    Foreign empirical studies on determinants of capital flows                        66

2.3.2    Empirical studies on determinants of capital flows to Nigeria            137

2.4       Summary of Empirical Literature                                                                   153

2.5       Research Gap                                                                                                  155


3.1       Research Design                                                                                             157

3.2       Nature and Sources of Data                                                                            157

3.3       Model Specification                                                                                       157

3.4       Description of Model Variables                                                                     161

3.5       Technique of Data Analysis                                                                           165



4.1       Presentation of Data                                                                                       168

4.1.1    Data for capital flows                                                                                     168

4.1.2    Data for the push factors                                                                                175

4.1.3    Data for the pull factors                                                                                  180

4.2       Descriptive Statistic                                                                                       189

4.3       Test for Stationarity of Data                                                                           193

4.4       Diagnostic Tests of the Models                                                                      191

4.5       ARDL Bounds Test                                                                                        198

4.6       Analysis of Determinants of Aggregate Capital Flows                                  199

4.6.1    Long run estimates of the ARDL model                                                        199

4.6.2    Error correction model (ECM) and short run model                          200

4.7       Analysis of Determinants of Aggregate FDI                                                 201

4.7.1    Long run estimates of the ARDL model                                                        201

4.7.2    Error correction model (ECM) and short-run model                                     203

4.8       Analysis of Determinants of FPI                                                                   205

4.8.1    Long run estimates of the ARDL model                                                        205

4.8.2    Error correction model (ECM) and short-run model                                     206

4.9       Analysis of Determinants of International Banks                                          208

4.9.1    Long run estimates of the ARDL model                                                        209

4.9.2    Error correction model (ECM) and short-run model                                     210

4.10     Hypotheses Testing                                                                                        212

4.11     Discussion of Results                                                                                     214



5.1       Summary                                                                                                         224

5.2       Conclusion                                                                                                      226

5.3       Recommendations                                                                                          227

5.4       Contribution to Knowledge                                                                            229








2.1       Breakdown of Nigeria’s capital importation (2016 - 2018)                           47

2.2       Breakdown of Nigeria’s capital importation (2019 – 2020)                          48

2.3       Summary of empirical literature                                                                    153

3.1       Summary of a priori expectation of the independent variables       160

4.1(A)  Data for capital flows                                                                                     168

4.1(B)  Data for push factors                                                              175

4.1(C)  Data for the pull factors                                                          181

4.2       Descriptive statistic                                                                189

4.3       Augmented Dickey-Fuller (ADF) unit root test                     194

4.4       Diagnostic tests                                                                       196

4.5       Variance inflation factor (VIF)                                               197

4.6       Bound test results                                                                                           198

4.7       Long run estimates of the CIF model                                                             199

4.8       Error correction mechanism and short run dynamics for CID model              200

4.9       Long-run estimates for FDI model                                                                 202

4.10     Error correction model and short-run dynamics for FDI model                  203

4.11     Long-run estimates for FPI model                                                                 205

4.1.2    Error correction model and short-run dynamics for FPI model                   207

4.1.3    Long-run estimates for IBC model                                                                 209

4.1.4    Error correction model and short-run dynamics for IBC model                  210

4.15(A) Summarized results for the ARDL long-run estimates        216

4.15(B) Summarized results for the ARDL short-run estimates        217







1.1       Capital importation composition                                                                    8

2.1       Conceptual framework                                                                                   22

2.2       U.S. monetary system as a global determinant of capital flows                        34

2.3       Sectorial distribution of capital flows to Nigeria                                           50

2.4       Currency composition of capital flows to Nigeria                                         51

2.5       Theoretical framework                                                                                   53

2.5       Diagrammatic representation of Mundell-Fleming theory                             59

4.1       Trend of aggregate capital flows                                                                    169

4.2       Foreign direct investment (FDI)                                                                     171

4.3       Trend of foreign portfolio investment (FPI)                                                   172

4.4       Trend of international banks’ credit flows (IBC)                                           174

4.5       Trend of Global liquidity (GLIQ) and global interest rate (GITR)                        176

4.6       Trend of global real GDP growth rate (GGRT)                                             179

4.7       Trend of global volatility index (GVIX)                                                        180

4.8       Trend of domestic real GDP growth rate (DGRT)                                         182

4.9       Trend of exchange rate (EXCR)                                                                     183

4.10     Trend of monetary policy rate (MPR)                                                            184

4.11     Trend of inflation rate (INFR)                                                                        187

4.12     CUSUM and CUSUMSQ test for capital flows model                                  196

4.13     CUSUM and CUSUMSQ test for FDI model                                                196

4.14     CUSUM and CUSUMSQ test for FPI model                                                 197

4.15     CUSUM and CUSUMSQ test for IBC model                                                197













1.1       BACKGROUND TO THE STUDY                                             

Over the years, countries across the globe have been competing for cross-border investment inflows based on the premise that increases in such inflows drive domestic capital formation, especially in a resource-scarce economy (Baier, 2020). This initiative, triggered by financial globalization leaves no one in doubt that foreign capital flows are fundamental factors shaping the global economy. Myriads of prior studies had affirmed, among other things, that foreign capital flows (through foreign direct investments, foreign portfolio investments, credit flows from globally active banks, etc.) stimulated technology transfer, deepened the links with foreign markets, facilitated competition in the domestic market, encouraged the development of human capital through employee training, accelerated export earnings, and contributed to government revenue which in turn, enhanced overall economic growth (Tellez-Leon and Ibarra, 2019; Al-Smadi, 2018; Aytekin, 2017; Abdul-Karim, Ramli and Khalid, 2016; Obiechina and Ukeje, 2013). Unfortunately, most resource-scarce and developing countries, Nigeria inclusive, have been unable to attract sufficient foreign capital capable of bridging their savings-investment gap. Consequently, the determinants of capital flows have come under the spotlight in economic research. In this light, Lee and Sami (2019), in consonance with IMF (2016), succinctly stated that;

“…the pursuit of economic growth has been at the front burner of economic policy in the developing countries. This is often hindered by a lack of domestic capital… As a result, the need for foreign capital triggered when desired investments exceed actual savings; growing government expenditures amidst declining revenue …”

The need for international capital flows was earlier emphasized by Harrod-Domar’s two-gap model under the post-Keynesian framework that growth in savings and investments is necessary for sustained growth of domestic productivity (Jhingan, 2005). Unfortunately, most developing economies like Nigeria are entrapped by the vicious circle of low productivity due to a lack of domestic capital coupled with the low-income level of the citizenry. As a result, due to low income, the savings ratio remained low, resulting in low aggregate investments. At the same time, due to low income, the taxable capacity of Nigeria dropped as government revenue decreased which resulted in a huge fiscal deficit, public debt, and loss of government control over the economy. It is based on this scenario that the Harrod-Domar two-gap model suggested that developing countries should depend on foreign capital flows to fill their savings-investment gap as well as foreign exchange gaps (Ghulam, 2007). It then implied that closing the savings-investment gap and the foreign exchange gap (inadequate foreign exchange arising from the inability to export vis-à-vis high importation) would require inflows of foreign private capital investments.

Historically, the study of international capital flows stemmed from the dismantled barriers to capital movement across national boundaries (IMF, 2016). Global capital flows were greatly influenced by the removal of capital controls in the United States, Germany, Canada, Switzerland, and the Netherlands after 1973; the movement of surpluses to developing countries through the Euromarkets in the 1970s; removal of capital controls in the United Kingdom and Japan in 1979; financial integration among European Community Countries, including France and Italy, in preparation for 1992; efforts towards financial liberalization in many developing countries in the mid-1980s; and the steady process of technical and institutional innovation that has proceeded around the world through globalization (Kaneez, 2013; Frankel, 1992). It then implies that, in a financially globalized system, diminishing national savings in one country should be easily augmented by attracting external finance from another country (Dygas, 2020; Kamber and Wong, 2020; Mistura and Roulet, 2019; Tembo, 2018; Uremadu, Onyele and Ariwa, 2016).

All things being equal, it is reasonable to allow lump sums to financial flows from resource-abundant economies to resource-scarce economies where they would be utilized most efficiently. However, a closer look at the pattern of global capital movements reveals a puzzle. For instance, based on the assumption of free capital markets and diminishing returns, the standard neoclassical theory asserted that capital should flow from resource-rich economies to resource-scarce economies (Al-Smadi, 2018). Contrarily, Lucas (1990), observed that the direction of capital flows based on the neoclassical theory was impeded by macroeconomic instability occasioned by inadequate human capital, capital market imperfection, and political risk in less developed and developing economies. Similarly, Joffe (2017); Dahlhaus and Vasishtha (2014), affirmed that capital flows to developing countries could be hindered due to swings in major macroeconomic variables amidst global economic imbalances and divergences in monetary policy across countries, especially the United States monetary policy. Addressing the neoclassical and Lucas controversy, amidst imbalances associated with the global economy, Prasad (2008), clearly stated that;

“… while poor and middle-income countries are receiving large sums of private capital inflows, they are exporting more capital than they are getting such that these poor countries that are integrated into the global economy are faced with capital scarcity over a long time.”

Building on the Lucas paradox, earlier studies like Fernandez-Arias (1996); Calvo, Leiderman and Reinhart (1993), had provided evidence that though, domestic macroeconomic fundamentals (pull factors) mattered, global factors (push factors) like changes in U.S. monetary policy, recession in the U.S., sharp swings in the U.S. balance of payments, and regulation changes in international financial markets were basic determinants of capital flows to developing countries. It is worthy of note that push factors are exogenous to countries receiving the flows, while pull factors are endogenous to the recipient countries. Though, the distinction between the pull and push factors was popularized by Fernandez-Arias (1996); Calvo, Leiderman and Reinhart (1993), recent studies have continued to provide empirical evidence that international capital flows are driven by both pull and push factors (Tellez-Leon and Ibarra, 2019; Lipovina-Božović and Ivanovic, 2018). On this ground, Pagliari and Hannan (2017), echoed the importance of pull and push factors in capital flows determination as follows:

“…understanding the determinants of capital flows is crucial in implementing proper economic policies. However, these policies should depend on whether such determinants of capital flows are endogenous or exogenous… As a result, policies in both source and recipient countries are important in driving cross-border capital flows …”

Recent studies such as Belke and Volz (2018); Singhania and Saini (2017); Abdul-Karim, Ramli and Khalid (2016); Andreou, Matsi and Savvides (2015); Erduman and Kaya (2014); Fratzscher (2011), revealed that push factors such as global liquidity, global economic uncertainty and other risk components, like the U.S. monetary policy and yield spread (defined as the gap between longer-dated and shorter-dated U.S. Treasury yields), U.S. real GDP growth rate, and financial crisis emanating from developed countries explained a significant proportion of foreign capital flows to developing countries. Likewise, David and Ampah (2018); Bonga-Bonga and Gnagne (2017); Nwokoye and Oniore (2017); Dembo and Nyambe (2016); Acharya and Bengui (2016); Zoega (2016); Makoni (2014), identified pull factors such as domestic real growth rate, interest rate differentials, exchange rate, political risk, government control, economic liberalization, availability of labour, financial development, natural resource endowment, etc. as significant factors influencing foreign capital flows. More recently, Tellez-Leon & Ibarra (2019); Lipovina-Božović and Ivanovic (2018), revealed that global factors - especially, global risk aversion caused extreme episodes of foreign capital flows more than macroeconomic features of capital importing countries.

The foremost interpretation to push factors was that, if low U.S. yield on investments suggested a volatile economic environment in the U.S., it would be expected that a lower rate of returns would push capital from the United States to developing and emerging economies of the world where higher returns could be attained (Siddiqui, 2020; Baier, 2020). Also, the poor economic outlook in the United States would be viewed by investors as a signal of an unstable world economy, that is, evidence of rising global risk, hence the massive flow of capital from the U.S. to developing and emerging economies; a situation known as global risk aversion (Tellez-Leon and Ibarra, 2019). Also, increased liquidity in the U.S. due to quantitative easing (expansionary monetary policy) would cause the interest rate to fall in the United States; hence investors would channel their investments to developing countries experiencing capital scarcity for higher returns (Yiu and Sahminan, 2017). This scenario implies that shocks to the push effects could propagate spillovers or contagion of financial crisis across economies that are interconnected or integrated. For instance, a financial shock could begin with a foreign bank which is then transmitted to other economies through global bank lending as experienced in 2008 when banks in industrialized countries pulled back from lending to developing economies after sustaining huge losses from the U.S. real estate bubble burst in 2007 (Cheung, Tam and Szeto, 2009). Similarly, global investment funds might be highly leveraged such that financial losses in one country could result in a loss in the country where investment funds were borrowed (Mollah, Zafirov and Quoreshi, 2014). On this premise, Korean economists, Kang, Kim, Kim and Wang (2002), opined that:

“…large shift in capital flows to one or two large economies in a region might generate externalities for the smaller neighbouring countries, which is called contagion. A vulnerable recipient economy is exposed to such externalities and contagion effects in the process of capital flows.”

Even though push factors could influence the direction of international capital flows, the attraction of such flows by domestic economies is, to a large extent dependent on the degree of economic and financial stability in the recipient economies. Consequently, the macroeconomic environment of the recipient economy must be less volatile to attract foreign capital. As such, pull factors, that is, domestic macroeconomic variables such as, exchange rate, inflation rate, monetary policy, vulnerability to external shocks, low economic growth rate, etc. has been identified as core determinants of foreign capital flows (Ogawa and Shimizu, 2019; Belke and Volz, 2018). For instance, interest rate differences could influence foreign capital inflow as investors are always in search of investment opportunities in countries with higher returns. This shows that if a country desires to lower its policy rate, it should be prepared to experience exchange rate depreciation, if not, demand for assets denominated in the local currency would fall (Munene, 2016). Generally, however, if the expected uncertainty on the domestic macroeconomic environment is high, foreign investors are discouraged from taking up investment opportunities in such countries. As such, countries must be conscious of both pull-push factors in formulating policies that will boost foreign capital inflow.

In reality, the emergence of the global financial crisis has been linked to volatile capital flows (Tyson and Beck, 2018). For instance, in the aftermath of the global financial crisis of 2007-2008, there were low-interest rates in advanced economies and increased liquidity in the international market due to quantitative easing (expansionary monetary policy) in the U.S., which in turn, spurred capital flows to emerging market economies such as, Brazil, Russia, India, and China as international investors were searching for high yields in those capital-scarce economies (Tellez-Leon and Ibarra, 2019; Asongu, Akpan and Ishihak, 2018). However, the global financial crisis remarkably changed the capital flow landscape of Nigeria as FDI and FPI declined due to negative responses of foreign investors to unstable macroeconomic environment occasioned by the vulnerability of the Nigerian economy to vagaries arising from foreign economies (Arawamo and Apanisile, 2018). As a result, there was a surge in inflation, the exchange rate depreciated, ineffective monetary policy, and growth in foreign investment inflow persistently dropped from 37.78 per cent in 2008 to -29.56 per cent in 2010. Similarly, the economic recession and currency crisis that occurred in the second quarter of 2016 discouraged foreign private investment inflows to Nigeria (Emefiele, 2017). Again, against the 5-6 per cent benchmark prescribed by the World Bank, the FDI (% of GDP) ratio for Nigeria fell below 5%, as net FPI and international banks’ credit also declined (OECD, 2019 and IMF, 2016).

The National Bureau of Statistics (NBS) report shows the trend of capital flows to Nigeria for 2018 and 2020 as summarized in Fig. 1.1:

Fig. 1.1: Capital Importation Composition (in million $)

Source: National Bureau of Statistics (various issues).

Fig. 1.1 shows that the National Bureau of Statistics is categorized into three (3) main investment types: Foreign Direct Investment (FDI), Foreign Portfolio Investment, and Other Investments. A close look at the trend of capital flows to Nigeria indicated that whenever FDI or FPI or both FDI and FPI dropped, other forms of capital inflows (such as foreign debt, credits, etc.) increased, indicating that attracting FDI and FPI could relieve Nigeria of the high debt burden that characterizes other forms of capital inflows. Although, FPI has been expanding faster than FDI and other forms of capital flows to Nigeria in recent years, especially in 2018 and 2021 it has not been sustainable. In the year 2018, FPI was the largest component of capital flows to Nigeria with a contribution of $4,565.09 million while FDI and other investments (majorly foreign loans and credits) contributed $246.62 million and $1,491.93 million, respectively. In the year 2019, there was an improvement in FDI inflows to $934.34 million; FPI declined to $6690.25 million, and other forms of capital inflows (majorly foreign loans and credits) rose to $16,365.46 million. Also, there was a significant decline in capital flows to Nigeria in 2020 due to the COVID-19 pandemic that resulted in lockdown restrictions. After the COVID-19 economic disruption had reduced, it can be seen that FDI inflows had remained low while FPIs inflows improved significantly in 2021Q1 and 2021Q2, respectively. Consequently, given fluctuations in different components of capital flows in recent years, a natural question that arises is; are all types of capital flow to Nigeria driven by the same factors?  

Most recently, OECD (2019), reported that domestic macroeconomic fluctuations accounted for the considerable slump in foreign capital flows to Nigeria. For instance, Nigeria recorded a significant increase in capital inflows when aggregate capital inflows reached $20.75 billion and then dropped to $11.11 billion due to political tension emanating from the February 2015 presidential election and fluctuations in crude oil price as well as macroeconomic volatility. However, before the 2015 political tension and 2016 economic recession, capital flows to Nigeria were dominated by FDI and FPI, though FPI had declined due to the global financial crisis of 2008, though FPI peaked in 2018 (NBS, 2018). The crash in international crude oil price had worsened Nigeria's economy and global competitiveness which eventually resulted in recession with a real GDP growth rate of -1.62% in the first quarter of 2016 and -2.34% by the third quarter, and foreign reserves dropping to $37.33billion in June 2014 (below $40 billion) and $23.81 billion in September 2016 (NBS, 2018). As a result, inflation skyrocketed to 18.5% in December 2016 from 9.2% in June 2015 (CBN, 2019). The observed slide in the Nigerian economy was deepened due to exchange rate volatility as the Naira lost its value in the parallel market, depreciating to ₦520/U.S.D amidst the COVID-19 pandemic.

In all, it is glaring that Nigeria embraces foreign capital inflows as a factor for economic growth. The Nigerian economy is open to the global investment environment and this is yet to enhance better resource allocation, greater competition, innovation, and the transfer of technology (Ogbechie and Anetor, 2016). However, integration of the Nigerian economy into the global system has attracted foreign capital to the country, but these capital resources are withdrawn by foreign investors when domestic macroeconomic conditions become volatile and better investment opportunities are found in other countries as witnessed during the economic recession of 2016. Due to economic uncertainties in Nigeria, foreign investors are discouraged since they are faced with high exchange rate risks and low investment returns. However, analysis of determinants of capital flows to an extent of disaggregation is of great significance because different components of capital flows might be driven by different factors (Tellez-Leon and Ibarra, 2019; Belke and Volz, 2018; Sarno, Tsiakas and Ulloa, 2014; Shirota, 2013). Hence, capital flow is usually decomposed into portfolio investments, foreign direct investments, international banks' credit, and other investments.  For instance, Belke and Volz (2018), revealed that FPI tended to be more liquid than FDI, as such the former responded rapidly to fluctuations in domestic and foreign economic fundamentals. On the other hand, Shirota (2013), stated that global banks were driven by both domestic, regional and global factors in international lending. Based on this premise, this study analyzed the determinants of disaggregated capital flows to Nigeria.



Capital flow presents developing economies with both opportunities and challenges. As experienced during the 2007-2008 global financial crises, financial shocks and growth-related problems in developed countries were transmitted to developing countries through international investment activities, a process known as contagion effect or crisis infection. This entails that capital flows from risk or crisis-prone economies could inhibit financial stability in the recipient country. For instance, in periods of heightened global risk, the sharp decline in capital flows to Nigeria and other developing countries alike were attributed to a severe liquidity squeeze in the U.S. and U.K. credit markets which gave rise to a massive withdrawal of foreign capital from Nigeria (Ogbechie and Anetor, 2016). Unfortunately, Nigeria's external reserves meant to cushion such undesirable occurrences have drastically depleted as a result of the U.S. interest rate hike. This is because, when the U.S. interest rate increased, investors looking for higher returns disposed of their assets denominated in Naira and purchased assets denominated in Dollar (Emiefule, 2017). Consequently, a wider spread between U.S. and Nigeria interest rates propelled investors to divert from Naira-denominated to Dollar-denominated assets, a process known as global risk aversion (Caporale, Ali, Spagnolo and Spagnolo, 2017; Yildirim, 2016; Alberola, Erce and Serena, 2013). Therefore, investors in Nigeria exchanged the Naira for Dollar, and their increased demand for Dollar raised the Naira-Dollar exchange rate which automatically weighed down the foreign reserves amidst increasing external debt servicing and declining crude oil prices (Enisan, 2017; Soludo, 2008; IMF, 2003). As the foreign reserves depleted, foreign investors envisaged future risk exposure, hence they were not attracted to Nigeria. It is based on this platform that Carney (2015), raised the following questions:

“… are central banks still masters of their domestic monetary destinies? Or have they become slaves to the global factors?”

It is a well-known fact that developing countries, Nigeria inclusive, have experienced greater macroeconomic downturn than industrial economies, and this problem is widely perceived to have worsened in recent years. Countries with macroeconomic stability and favourable investment climate attract more foreign capital than those with an unstable macroeconomic environment (Kamber and Wong, 2020; Kandil and Trabelsi, 2015). For instance, the growing integration of global capital markets has created major changes in monetary policy, broadening the range of policies that need to be considered in the decision concerning the choice of exchange rate regime, thus making international policy co-ordination more complex and important (Nwokoye and Oniore, 2017). Similarly, the real value of domestic assets in Nigeria has been drastically eroded by rising inflation and depreciating exchange rate (₦/USD) of Nigeria which discouraged foreigners from holding assets denominated in Naira (₦), hence low capital flows to Nigeria (Emefiele, 2017). Again, deficits incurred by the Nigerian government have resulted in increased public debts which might have impeded capital flows as foreign investors are aware of risks arising from exchange rate devaluation, foreign reserves depletion, and fiscal crisis arising from such debt burden (Arawamo and Apanisile, 2018).

Indeed, capital flows to Nigeria have met some roadblocks due to fluctuations of both domestic and global booms and bust cycles, leading to a loss of monetary control in Nigeria. However, there have been no specific factor(s) identified in the literature as being the most important determinant of capital flow as these factors varied for different countries. For instance, most Nigerian studies like Enisan (2017); Nwosa and Adeleke (2017); Ogbechie and Anetor (2016), had identified pull factors such as exchange rate, inflation, interest rates, economic instability, political instability, among others, as core determinants of capital flows to Nigeria, but only one of the studies had considered the possible effects of push factors such as global risk aversion, global real GDP growth rate, foreign interest rate and global liquidity on capital flows to Nigeria. However, there are still controversies in the literature regarding the core determinants of capital flows. Since studies such as Tellez-Leon and Ibarra (2019); Mudyazvivi (2016); Andreou, Matsi and Savvides (2015), had earlier trumpeted the significance of push factors in capital flow determination for diverse developing countries,  the present study considered both pull and push factors in explaining the direction of international capital flows to Nigeria.


The broad objective of the study is to empirically investigate the determinants of capital flows to Nigeria. The specific objectives are to:

1)         analyze effect of global liquidity on capital flows to Nigeria;

2)         estimate effect of global real GDP growth rate on capital flows to Nigeria;

3)         ascertain effect of global risk aversion on capital flows to Nigeria;

4)         analyze effect of foreign interest rate on capital flows to Nigeria;

5)         ascertain effect of domestic real GDP growth rate on capital flows to Nigeria;

6)         determine effect of the exchange rate (Naira-US Dollar) on capital flows to Nigeria;

7)         investigate how monetary policy rate affect capital flows to Nigeria, and;

8)         ascertain effect of domestic inflation rate on capital flows to Nigeria.


This study proffered answers to the following research questions:

1)         To what extent does global liquidity affect capital flows to Nigeria?

2)         In what way does the global real GDP growth rate affect capital flows to Nigeria?

3)         How does global risk aversion affect capital flows to Nigeria?

4)         In what way does the foreign interest rate (measured by U.S. Federal Fund Rate) affect capital flows to Nigeria?

5)         To what extent does the domestic real GDP growth rate affect capital flows to Nigeria?

6)         How does the exchange rate (Naira-US Dollar) affect capital flows to Nigeria?

7)         In what manner does the monetary policy rate affect capital flows to Nigeria?

8)         To what extent does the domestic inflation rate affect capital flows to Nigeria?

1.5       HYPOTHESES

The following hypotheses stated in null form were tested:

HO1: Global liquidity does not have a significant effect on capital flows to Nigeria.

HO2: Global real GDP growth rate does not have a significant effect on capital flows to Nigeria.

HO3: Global risk aversion does not have a significant effect on capital flows to Nigeria.

HO4: Foreign interest rate does not have a significant effect on capital flows to Nigeria.

HO5: Domestic real GDP growth rate does not have a significant effect on capital flows to Nigeria.

HO6: Exchange rate does not have a significant effect on capital flows to Nigeria.

HO7: Monetary policy rate does not have a significant effect on capital flows to Nigeria.

HO8: Domestic inflation rate does not have a significant effect on capital flows to Nigeria.



This study covered the analysis of determinants of capital flows to Nigeria for the periods spanning from 1980 to 2020. The period 1980 - 2020 was chosen because it captures periods of diverse economic downturn occasioned by the economic recession in 1981-84, 1991 and 2016; 2007-2008 global financial crisis; political tensions due to several coup d’états in the 1980s coupled with the June 12, 1993, political tension, 2015 presidential election and the recent COVID-19 pandemic the crippled the global economy in 2020. There have been major swings in domestic macroeconomic fundamentals as a result of the aforementioned economic downturns coupled with financial liberalization in 1986, financial reforms (especially, the era of bank consolidation in 2004/2005) transition from military government to civilian government in 1999, the emergence of Boko Haram terrorist group, etc. which were said to have affected major economic factors which in turn might have influenced foreign capital flows into Nigeria within the sampled period.


This study will bring about recommendations that will stimulate foreign capital flows to Nigeria. Hence, the study will be of immense significance in the following ways:

1)         To the researcher: This study exposed the researcher to current trends in capital flows and their determinants. Thus, informing the researcher of a different perspective of the subject and broadening his knowledge base. 

2)         Policymakers: Policymakers such as monetary and fiscal authorities will view determinants of capital flows from the standpoint of this study. As such, they will consciously formulate policies that would not just aim at managing domestic macroeconomic factors but also mitigate the level at which Nigeria is vulnerable to global financial and economic fluctuations.

3)         Investors: This study will be of great benefit to both foreign and domestic investors as they would understand that investments are not only driven by the domestic macroeconomic factors (pull), also by global factors (push). Hence, investors would become careful to consider the possible effect of both pull and push factors when appraising the viability of investment opportunities.

4)      Academia: This study will serve as reference material to researchers and scholars who would develop an interest in the study of capital flows and its determinants.


The constraint of this study is associated with the selection of variables. This is because the literature on determinants of international capital flows identified a myriad of factors within the scope of pull and push factors. Hence, a model containing many of the variables would likely lead to multicollinearity which in turn results in spurious regression outcomes. As a result, the study focused on selected variables that best explain determinants of capital flows based on data availability and the usage of such variables in prior empirical studies. Specifically, to overcome this limitation, this study adopted the model used by Tellez-Leon and Ibarra (2019), to unravel the determinants of capital flows to Mexico. Again, the variables were tested for multicollinearity to ascertain their validity before the results are reported.


The intended meaning of some terms used in the study was given as follows:

1.9.1    Push factors: These are economic factors that are foreign to a domestic economy. That is, they originate from fluctuations in the macroeconomic environment of foreign countries, especially macroeconomic fluctuations in the U.S. which affect global capital flows.

1.9.2    Pull factors: Pull factors are macroeconomic factors that are peculiar to the capital importing economy. They connote fluctuations in domestic macroeconomic fundamentals that could affect capital flows in the host economy.

1.9.3    International or global banks: These are banks whose activities cover more than one country, that is, the home economy as well as foreign economies.

1.9.4    Interest rate differentials: Differentials in interest rate entail the gap between domestic interest rate and interest rate of a developed economy, like the U.S.

1.9.5    Growth of the global real economy: This connotes the economic growth rate of developed countries across the world. In fact, in most literature, it is defined as the economic growth rate of the U.S.

1.9.6    Global risk aversion: This refers to the behaviour of international investors who, when exposed to uncertainty or risk, attempt to lower that uncertainty or risk by diversification of investments across countries.

1.9.7    Host/recipient economy: This represents resource-scarce countries that receive capital or other economic resources from resource endowed countries.


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