ABSTRACT
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.
TABLE OF CONTENTS
Title Page i
Certification ii
Declaration iii
Dedication iv
Acknowledgements v
List of Tables vi
List of Figures vii
Abstract x
CHAPTER
1: INTRODUCTION
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
CHAPTER 2: LITERATURE
REVIEW
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
CHAPTER 3: METHODOLOGY
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
CHAPTER 4: PRESENTATION
OF DATA, ANALYSIS AND DISCUSSION
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
CHAPTER 5: SUMMARY,
CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary
224
5.2 Conclusion
226
5.3 Recommendations
227
5.4 Contribution
to Knowledge 229
REFERENCES
APPENDIXES
LIST OF TABLES
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
LIST OF FIGURES
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
CHAPTER
INTRODUCTION
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.
1.2 STATEMENT OF THE PROBLEM
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.
1.3 OBJECTIVES OF THE
STUDY
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.
1.4 RESEARCH QUESTIONS
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.
1.6 SCOPE OF THE STUDY
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.
1.7 SIGNIFICANCE OF THE STUDY
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.
1.8 LIMITATION OF THE STUDY
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.
1.9 OPERATIONAL DEFINITION OF TERMS
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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