Abstract
 
As being  experienced in many developing countries,  Nigeria has been  experiencing 
confirmed capital flight which has been a  problem believed  to have  adversely  affected 
domestic investment. The existence of this problem is further accentuated by the financial 
globalisation process which has enabled capital to flow more freely than before between 
countries of the world. This study examined  the  relationship between  capital flight in 
Nigeria and investment during the period of financial globalisation with data from 1970 to 
2007. The main variables used were exchange rates, investment, Kaopen, financial savings, 
external reserves and interest rate differential among others. Ordinary Least Square (OLS) 
technique is used in determining the significant variables in investment  and financial 
globalisation, while Vector Error Correction Mechanism (VECM) was adopted to determine 
the long-term relationship between investment and capital flight.  The study finds that the 
rate of exchange is significant in investment and financial globalisation but not significant 
in World Bank’s and Dooley’s estimates of capital flight. The different estimates of capital 
flight do  not significantly  impact negatively against  investment though it has a long-term 
negative impact on external reserves of the country. The Dooley’s definition of capital flight 
is  found to more significant in the Nigeria case than the World Bank’s as its impact is 
negative on the investment, though not significant. This signifies the role of errors and 
omissions in distorting  the estimates of capital flight in Nigeria.   The other determinant of 
capital flight  is the  interest rate differential in the co-integrating equation. Unusually, the 
Kaopen measure is significant in the Nigeria’s financial globalisation scenario, which calls 
for careful foreign exchange rate management to determine the rate of the exchange.  The 
study recommends a cleaner  floating of  the domestic currency to reduce capital  flight, the 
improvement of the business environment and an increase in the autonomous investment by 
both public and private sectors in the economy to induce other domestic investments, which 
will facilitate inflow of capital. 

TABLE OF CONTENTS 

Title and Cover Page ................................................      
Certification.......................................................i 
Authorization..........................................................ii 
Dedication........................................iii 
Acknowledgment.....................................................iv 
Table of Contents....................................................vii 
List of Tables................................................xii 
List of Figures...........................................xiii 
Abstract..................................................... .........xiv 

CHAPTER ONE: INTRODUCTION 
1.1  Background to The Study............................................1 
1.2  Statement of the Problem.......................................... ......5 
1.3  Objectives of the Study........................................... ....7 
1.4  Research Questions.................................................8 
1.5  Statements of Hypotheses...........................................9 
1.6  Significance of the Study............................................9 
1.7  Scope  of the Study ...............................................11 
1.8  Outline of the Study..............................................11 

CHAPTER TWO: REVIEW OF LITERATURE  
2.0 Introduction....................................................13 
2.1. CAPITAL FLIGHT...............................................14 
2.1.1 Conceptual and Definitional Issues in Capita.............................14 
2.2 CAUSES AND ROUTES OF CAPITAL FLIGHT...........................18
2.3 Capital Flight and Capital Flows....................................,...21 
2.3.1 Public and Private Wealth or capital...................................22 
2.3.2 Capital Flight and Wealth of a Country..................................23 
2.3.3 Capital Accumulation or Formation....................................24 
2.3.4 Portfolio Theory in Capital Flight.......................................26 
2.3.5 Risk and Uncertainty in Capital Flight....................................27 
2.4 LEGAL AND ILLEGAL CAPITAL FLIGHT..............................28 
2.5 RISKS AND CORRUPTION........................................31 
2.5.1 Macroeconomic Risks.............................................31 
2.5.2 Political Risks................................................ ......32 
2.5.2 Corruption and capital flight.................................... .......33 
2.5.3 IMF on Governance Issues and Corruption................................35 
2.5.4 Corruption Control and Freedom of Information (FOI) Law.....................36 
2.5.5 Private Banking Services for Flight Capital................................37 
2.6. INVESTMENT.......................................... .......38 
2.6.1 Definitions of Investment............................................38 
2.6.2 Domestic Investment......................................... ......39 
2.6.3 Review of Empirical studies.................................. .........45 
2.6.4 Sources and Determinants of Domestic Investments..........................47 
2.6.5 Measurements and Models..........................................51 
2.6.6 Foreign Private Investment...................................... .......52 
2.6.7 International Capital flows..........................................56 
2.6.8 Foreign Direct Investment Inflow......................................57
2.7  CAPITAL FLIGHT,  OPEN MACROECONOMICS AND BALANCE OF 
PAYMENT......................................................60 
2.7.1 Openness of Current Account.........................................60 
2.7.2 Openness of Capital account.......................................62 
2.7.3 Errors and Omissions............................... ...............64 
2.7.4 The Abuse of the Errors and Omission...................................65 
2.7.4 Requirements of Capital Account Liberalisation............................66 
2.8 CAPITAL FLIGHT AND FINANCIAL GLOBALISATION.....................70 
2.8.1 Definitions...................................................70 
2.8.2 Financial Globalisation and Integration.................................71 
2.8.3 Financial Globalisation Capital Flows and Volatility.........................78 
2.8.4 Financial Globalisation and Capital Account Liberalisation..................79 
2.8.5 Financial Globalisation and Financial Development..........................80 
2.8.6 Empirical Studies on Nigeria Globalisation................................81 
2.8.7 Models and Measurements of Financial Globalisation.......................82 
2.8.8 Nigeria’s Efforts at Globalisation and ECOWAS...........................85 
2.9 CAPITAL FLIGHT IN OTHER DEVELOPING COUNTRIES..................87 
2.9.1 China.......................................... .............87 
2.9.2 Russia......................................................88 
2.9.3Thailand............................................ ............88 
2.9.4 India.........................................................89 
2.10 CAPITAL FLIGHT AND RELATED ISSUES...........................89 
2.10.1 External Debt.................................................89
2.10.2. Aid........................................................89 
2.10.3 Brain Drain (Human Capital flight)..................................90 

CHAPTER THREE:  THEORECTICAL FRAMEWORK  AND  RESEARCH 
METHODOLOGY 
3.0 Introduction................................... .....................91 
3.1. Theoretical framework and Linkages....................................91 
3.2 APPROACHES TO MEASUREMENT OF CAPITAL FLIGHT.................92  
3.3 Balance of Payment approach........................................92 
3.2.2 The Bank Deposit approach........................................92 
3.3 MODELS SPECIFICATION.........................................94 
3.3.1 Techniques of estimation of Capital flight Variables .........................95 
3.4.1 CAPITAL FLIGHT MEASUREMENT.................................98 
3.4.2 Dooley Measure and Estimates.......................................99 
3.5 Domestic Investment Function.........................................100 
3.5.1 Variables of Investment.............................................102 
3.6 FINANCIAL GLOBALISATION.......................................104 
3.6.1 Kaopen Measurement............................................106 
3.6.2 Variables of Financial Globalisation.................................107 
3.7 SOURCES OF DATA..............................................108 
3.7.1 Limitation of the Study.............................................110 

CHAPTER FOUR: ESTIMATION RESULTS, HYPOTHESES TESTING AND FINDINGS 
4.0 Introduction......................................................111 
4.1 Unit Roots Tests...................................................111
4.2 Capital Flight ................................................. ..114 
4.2.1 Capital flight and Domestic Investment...............................115 
4.2.3 Equality Tests.................................................. ..116 
4.2.3 Regression Estimates.............................................120 
4.2.4 Co-integration Test........................................ ........125 
4.2.5 Vector Error Correction.............................................127 
4.2.6 Paired Samples Tests........................................... ..128 
4.2.7 Granger Causality Results.........................................129 
4.3 DOMESTIC INVESTMENT.......................................131 
4.4 FINANCIAL GLOBALISATION......................................134 
4.5 DISCUSSIONS OF EMPIRICAL FINDINGS ..............................140 
4.6 FURTHER FINDINGS............................................144 

CHAPTER  FIVE: SUMMARY  OF FINDINGS,  RECOMMENDATIONS AND 
CONCLUSIONS 
5.1 Summary......................................................146 
5.2 Conclusion ...................................................148 
5.3.1 Recommendations: Capital Flight.....................................149 
5.3.2 Investment.....................................................151 
5.3.3 Financial Globalisation.............................................153 
5.4.1 Contributions to Knowledge ........................................155 
5.4.2 Areas for Future Research........................................157 
References......................................................158 
Definition of terms.................................................174

Capital Flight Variables.............................................178 
 
LIST OF TABLES  
2.1 Private Wealth and Its Composition by Region ............................23 
2.2 Estimated Cross Border Flows of Dirty Money.............................30 
2.3 Nigerian Corruption Perception Index........................ ...............34 
2.4 Balance of Payment Crisis and Capital Flight...............................62 
2. 5 Nigeria General Globalisation Index....................................70 
2.6 Drivers of Financial Globalisation ....................................83 
2.7 Pre and Post Consolidations Assets Holdings of Selected Nigerian Banks..........84 
4.1.1 Unit Root Tests (ADF)..........................................112 
4.1.2 Hadri Group Unit Root test.......................................113 
4.3.3 Breuch-Godfrey Serial Correlation LM Test............................114 
4.2.1 Test of Equality between a series of Variables.............................117 
4.2.2 Capital Flight Regression Estimates.................................118 
4.2.3 Johansen Multivariate Co-integration Result ...........................123 
4.2.4 Vector Error Correction Estimates for Capital Flight.......................125 
4.2.5 Paired Samples Differences Results..................................126 
4.2.6 Granger Causality Test result........................................127 
4.3.1 OLS Regression Results for Investment...............................129 
4.3.1 Regression Results for Financial Globalisation............................133 

TABLE OF FIGURES 
2.1 Financial globalisation growth and development......................... ......77 
4.1 Pre Globalisation Investment Ratio and Capital Flight Ratio to GDP............115 
4.2. Post Globalisation Investment Ratio and Capital Flight Ratio to GDP..............116 
4.3 Capital Flight (World Bank) and (Dooley) Measures..........................119 
4.4 Divergence between Naira Real rate and Dollar Real savings rate.................120 
4.5 Capital Flight and Investment Ratio to GDP...............................121 
4.6 Capital flight (World Bank) and Domestic Investment ......................122 
4.7 Capital Flight (Dooley) and Domestic Investment ..........................122 
4.8 External Financial Asset and Liabilities...................................135 
4.9 Nigeria Financial Globalisation........................................135 

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